Airlines of Hawaii

Location: Kailua, Hawaii, United States

Peter Forman is the author of Wings of Paradise, Hawaii's Incomparable Airlines, a 400 page hardcover available online at .

Sunday, January 20, 2008

Listening for Dings

A friend of mine who wrote a controversial book about dating taught me the concept of the ding. He said if the lady is not the person she's expressing to you, sooner or later she's going to say something that makes no sense. He calls this a ding. Never overlook a ding, because it gives you a glimpse into the active undercurrents.

In my previous posting, I mentioned that go!'s raising it's lowest price to $49 was a very significant development in the air war story. I continue to hold that opinion. My belief was that this fare increase showed that Mesa's CEO was under enough pressure to finally bow to the competition and raise fares as an act of damage control. This is certainly a possible explanation, but the more thought I give this matter, the more uneasy I feel with this explanation.

I regard Mesa's CEO Jonathan Ornstein as a person who views business as a chess game. His goal is to win, and he moves his pieces to exert pressure until he reaches his goals or is forced into defeat. He's a calculator much like Russsia's president Putin. What bothers me about the fare increase is that it takes most of the financial pressure off Aloha Airlines, yet it falls far short of relieving go! airlines of its losses. In other words, go! loses more than it gains with this move. I believe Ornstein is a better chess player than this, so I note ding number 1.

Do you remember go!'s pledge that its lowest fare will always be no higher than $39? It may be reasonable for go! to raise average prices, but by eliminating $39 fares on even the toughest flights to sell, it has reneged on its pledge to customers and in so doing loses credibility at a time it cannot afford to lose credibility. Ding number 2.

So, I believe there are undercurrents at work here, and I cannot tell you what they are. As more dings appear, I'll be listening though. Change is in the air.

Wednesday, January 16, 2008

Someone Just Blinked

So, what’s the big deal about go! raising its interisland ticket prices from $39 to $49? More than you might realize.

We’ve been watching a game of chicken in the Hawaiian skies during the past year and a half. Go!’s parent company set a well-below-cost ticket price which was matched by Hawaiian and Aloha Airlines. In time, the battle would force one of the competitors to swerve in order to avoid total annihilation. Guess who just swerved?

When go! entered Hawaii’s interisland market in the summer of 2006, they did so with a cost disadvantage. The Sabre study suggested that at a 62% load factor, Aloha needed $50 a ticket to break even, Hawaiian needed $55 a ticket, and go! needed about $67 a ticket to pay for the basic costs. Fuel prices have gone up since then, and by now the break-even prices are likely closer to $55, $60, and $70. What’s important is to take a look at the difference between the cost of a ticket and the revenue.

Aloha took a beating at $39 fares. If their costs are about $55 a ticket, then they were losing about $16 for every passenger carried. Some sources figured that Aloha was losing $6 million a month. With tickets at $49, though, the loss is more like $6 for every passenger carried. Thus, nearly two-thirds of Aloha’s losses disappear with the fare increase.

Let’s look at go!, though. They were losing about $31 a ticket in months with 62% load factors (December was about 65%), and with the higher fares they’re only losing about $21 per passenger. So, approximately a third of their losses disappear with the fare increase. That’s an improvement, but only half the improvement that Aloha realizes through the fare increase.

A fare of $49 is still a money loser, and Mesa is keeping the financial pressure on Aloha. Hawaiian is feeling far less pain, however, since the airline’s high systemwide load factors suggest that they’re filling more of their inter-island seats than either competitor. Go!’s parent company has kept some bargaining ability with this price, and the logical use of that bargaining ability would be to negotiate go!’s departure in return for a reduction in legal liability. Don’t hold your breath for logical behavior in this contest, however.

Besides the fare increase, go! has also reduced the number of flights it offers in Hawaii. Maui only sees seven go! round trips a day, for a total of 350 seats between HNL and OGG each day, each way. Thus, the superferry’s single roundtrip potentially makes it nearly double the player in this market than go!.

What does the future hold? If Hawaiian’s court victory stands, that airline can return to court in another year or two and request additional damages. Thus, Mesa may be liable for both go!’s losses and Hawaiian’s losses in the future. If Aloha is successful with their case, then Mesa could be liable for the losses of all three airlines. Such a burden would force Mesa into bankruptcy. Mesa’s core business showed disappointing results in the past year, even without the Hawaiian Airlines judgment. And now, go! has shifted its fare strategy from one of "victory at any cost" to one of damage control. Such changes often signal a significant shift in such a corporate war.