Airlines of Hawaii

2008-04-07T01:08:00.000-07:00

The Demise of Aloha Airlines- Part I

For all practical purposes, Hawaii’s second-largest interisland airline is dead. Rows of quiet 737 jets line the taxiway below the control tower at Honolulu International Airport, and the televised tears of once joyful employees tell the rest of the story.

Just how did such a tragic end come about? It began decades ago as Aloha Airlines lost its competitive edge over rival Hawaiian Air. Aloha President Joseph O’Gorman engineered Aloha’s most recent advantage in the marketplace by emphasizing no flight cancellations and great on-time performance. The addition of a first-class section on inter-island planes cemented Aloha’s lead. O'Gorman made a mistake, though. He brought old 737s back into the fleet and leased out the newer specimens, in an effort to combat Mid-Pacific’s low costs. One of these old jets was number 711, which lost the top of its forward fuselage in 1988 and resulted in the death of flight attendant C.B. Lansing. Aloha quickly recovered from the mishaps but carried a black eye that never completely faded.

O’Gorman’s replacement, Maury Myers, built upon O’Gorman’s tradition of quality and dependability. From the mid 1980s through the early 1990s, Aloha made more profits in the inter-island market than rival Hawaiian Air, and it often carried more passengers as well. The Myers years were good years indeed for Aloha and its employees.

Glenn Zander’s rein marked a turning point. Zander failed to recognize the importance of Aloha’s lead as the top-quality and dependable inter-island carrier. Hawaiian Airlines slowly took back the lead. Then came the turning point, Hawaiian’s introduction of new Boeing 717 jets into the inter-island market. Aloha needed to respond with a new jet as well, but it didn’t. Thus, Hawaiian gained a real advantage over rival Aloha, not from a cost standpoint, but from a revenue standpoint. Hawaiian’s plane flew with more of their seats full from this event forward.

Zander made a second mistake as well. Under his watch, Aloha was late joining the party of mainland to Hawaii flying. As other airlines started to fly directly to neighbor-island airports from the mainland, Aloha hesitated. Too soon it became clear that inter-island flying was decreasing and would continue to decrease. If Aloha wished to maintain a thriving business it needed to join the long-distance flying club. Here Zander made yet another mistake. He focused on modeling Aloha on the success of Southwest Airlines, and this model included using only one type of jet, the Boeing 737. Aloha leased 737-700 jets, which were just the right machine to fly between Orange County and Hawaii destinations, but came up short competitively on most other routes. The 737-700 only had two navigation sources for long-distance flying while the competition’s planes had three. If one navigation source became inoperative on the 737s, the airplane could not take off until it was fixed. The 737-700s were not really designed for such long flights over water, and their third source of electrical power, the APU, had to run all the time during flight, burning fuel but producing no thrust. For these reasons and because of greater size, operators with Boeing 757 or 767 aircraft enjoyed a cost and reliability advantage over 737-700 operators such as Aloha.

So, when the airline industry went into a tailspin after 911, Aloha lost money and headed for bankruptcy with everybody else, but did so with the wrong airplanes in the fleet.

David Banmiller came aboard as CEO and was soon tasked with saving Aloha from a dicey bankruptcy with only a few days of money in the bank. He pulled it off and should be congratulated for that effort. Something was wrong, though. Labor and Banmiller never grew to trust each other, largely because of labor’s impression that Banmiller was watching out for the “big money’s” concerns, not the long-range needs of the airline and employees. Such an impression hurt Banmiller’s effectiveness. Nonetheless, from the various bidders for Aloha one offer stood out, and that was an offer from Yucaipa, headed by Billionaire Ron Burkle. In September of 2005 Yucaipa was selected as the principle new owner. On the very day this announcement took place, an announcement by another bidder for Aloha raised eyebrows in Hawaii. This unsuccessful bidder would take it upon himself to ensure that the successful bidder found anything but success with Aloha in the years ahead.

To Be Continued.

2008-03-28T01:11:00.000-07:00

Aloha Airlines Bankruptcy, Questions and Answers

Q. How can Aloha Airlines survive this current cash crunch?
A. It needs to either merge with another airline or find a white knight with enough funding to carry it through the fare war which go! has initiated and sustained. Either long run solution should include a plan to upgrade the interisland fleet. In the short term, Aloha needs to find funding sources which will allow it to explore these options.

Q. Mesa’s figures for go!’s break-even costs differ substantially from the same figures provided by Aloha and other sources. Why?
A. Both the Sabre Study and statements by Aloha’s CEO’s assume typical load factors for each competitor. The Sabre Study calculates that planes would fly 62% full, because that was a close approximation to what was actually taking place. Figures supplied by Mesa’s CEO appear to be based either upon completely full airplanes or airplanes with unrealistically-high load factors. If Aloha used the same percentage of seats full to compute their costs, the longtime Hawaii airline would still retain a 20% to 30% cost advantage over go!.

Q. Shouldn’t our government stay out of the way and let competition determine who survives and who disappears?
A. In a properly-functioning free market, a company attracts customers by either offering a superior product or by being more efficient and offering the product at a lower price. The quality of Aloha’s product is certainly no less than the product offered by go!, as evidenced by go!’s inability to gain more than a small foothold in the market when Aloha and Hawaiian match fares. In terms of experienced pilots, comfort, on time arrivals, and schedule flexibility, Aloha’s product can be viewed as superior. Aloha’s cost structure has been 20%-30% below go!’s costs of offering the same product, according to the Sabre Study and recent comments from Aloha’s CEO. Thus, Aloha appears to be the superior competitor in a properly-functioning free market.

Unfortunately, Hawaii’s interisland market is anything but a properly-functioning free market. Mesa Air Group has sold its product well below its own cost of providing that product for the past year and a half. The free market model only works when companies actually seek profits. When one intentionally offers a product well below its cost, the competition becomes not survival of the fittest but instead survival of the wealthiest.

Q. Shouldn’t go! be subject to anti-trust prosecution, then?
A. Here we enter a grey area. The Airline Deregulation Act provided certain protections against prosecution for airlines which sell tickets below cost. A legitimate example of selling below cost includes sales during off-season to stimulate traffic, with the idea that the increase in travelers will more than compensate for the decrease in ticket price. Surely the architects of airline deregulation never envisioned the type of abuse which Mesa is currently employing, which is prolonged pricing at far below it’s break even point and the break even points of its competitors, as well.

At least two remedies are possible. First, Aloha could win a lawsuit against Mesa and establish a legal precedent which defines the limit of acceptable below-cost ticket sales in the airline business. If this solution is unsuccessful or cannot be accomplished quickly enough, the alternative is to refine the language in the Airline Deregulation Act so that legitimate below-cost pricing can continue but clearly anti-competitive abuse of this provision is prohibited.

Q. Has the U.S. government amended federal laws before because of abuse by an airline?
A. Yes, in the early 1980s Frank Lorenzo used federal bankruptcy laws to toss out the union contracts at Continental Airlines and slash pay in half. Such an abuse of the bankruptcy laws led to a revision of those laws which prohibited such actions unless the airline could persuade the judge that the contracts were a prime reason for the airline’s difficulties. A similar revision of laws may be warranted after a close examination of the Mesa vs. Aloha struggle.

Q. Couldn’t Hawaii just regulate airline fares within the state?
A. No. The federal government has deregulated airline pricing and does not allow states to overrule its methodology.

Q. What about asking the Justice Department to investigate this conflict?
A. That approach could be extremely important to Aloha’s survival. Mesa’s willingness to force prolonged losses is the 900 lb. gorilla in Aloha’s path to recovery. Defuse the fare war and 90% of Aloha’s troubles disappear. Suitors and lenders would respond appropriately.

Q. Aloha lost money after exiting bankruptcy and before go! entered the market. Isn’t this an indication that Aloha’s troubles are its own?
A. The amount of money Aloha lost prior to go!’s arrival was a manageable amount. Aloha’s new owners likely wanted to find a buyer for the airline and before tackling Aloha's weak point, which is its interisland fleet. Fleet changes are quite an expensive proposition, one to be avoided until the new owners are determined so that the fleet can match the purchasing airline’s fleet. Once go! entered the market with their $39, $29, $19, and $1 fares Aloha’s owners were stuck. No one but the largest airlines would want to take on Mesa with its “poison the waters” pricing, and the losses from the fare war with go! prevented Aloha from upgrading its interisland fleet to a more fuel-efficient type should Aloha wish to remain independent. Keep in mind that changing the interisland fleet affects not only the cost side of the equation but the revenue side, as well. Aloha’s load factors would increase if it introduced a newer interisland jet. This “new airplane” benefit to revenues is well-documented throughout the history of interisland flying. Unfortunately, go!’s fare war has prevented an interisland fleet upgrade by repelling potential suitors and by ensuring that Aloha does not have the cash needed to upgrade the fleet on its own. Since Aloha cannot shed its fuel inefficient fleet under the current pressure from Mesa, Mesa can be viewed as forcing Aloha to remain especially vulnerable to rising fuel costs.

Q. What about the rise in fuel costs? Isn’t that just as big a problem to Aloha as the go! fare war?
A. No. In a properly-functioning free market, airlines can raise their ticket prices to pass most of the fuel price increase to their customers. Not so in Hawaii’s interisland market, where go! is maintaining ticket prices that are well below the costs of all three competitors.

Q. Why are you so confident that Mesa intends to drive Aloha out of business?
A. For two reasons: Mesa’s words and its actions. When Hawaiian Airlines researched a recent lawsuit against Mesa, attorneys uncovered an email exchange between then-Mesa CFO Peter Murnane and Hawaii-based advisor Mo Garfinkle. Garfinkle stated that he believed Mesa’s go! Airlines would be unprofitable if Aloha remained in the market. Murnane responded that Mesa should enter the market anyway and give Aloha “the final push”. Emails between the two also indicated that Mesa planned to raise ticket prices once Aloha disappeared. These comments clearly indicate Mesa’s intentions in Hawaii, but its actions speak louder than words.

Let’s look at those actions. This past summer, during the busiest part of the travel season, Mesa unleashed $1 ticket sales at go!, and following this financial carnage with widespread sale of $19 tickets. Such sales make absolutely no economic sense any time of year, but especially during summer vacation. The fares were clearly designed to place the maximum financial burden possible upon go!’s competitors. Even go!’s $39 fares fell far short of the $67 which the Sabre Study indicated go! needed to charge if it wished to break even. Go! failed to test the waters and see how reasonable fares would be received by Hawaii’s traveling public. Go! surely would lose less money if it raised ticket prices, but it is reluctant to do so, because the airline wishes to provide the illusion that it can profitably offer these incredibly-low prices. If go! were to raise prices, it would lose less money in the interisland market. Since go! places punishing the competition as a higher priority than minimizing its own losses, it appears clear to me that go!’s actions accurately reflect its stated position of entering the market to give Aloha “the final push”.

Q. So, to wrap it all up, what must Aloha do to survive?
Short term financing is necessary, and a long-term owner or partner is needed to facilitate Aloha’s transition to an efficient interisland fleet. The biggest obstacle remains the interisland market’s unrealistically-low fares offered by go!. Should go! be forced or persuaded to discontinue this anti-competitive behavior, then Aloha’s chances of survival would improve dramatically. Perhaps we’ll see on March 31 what potential suitors are out there for Aloha. Stay tuned.

2008-03-24T01:24:00.000-07:00

We Wouldn't Tolerate This Behavior with our Gas Stations

Imagine the following scenario. A big mainland oil company has just lowered its gas prices in Hawaii to $2.00 a gallon, even though a selling price of at least $3.20 a gallon is needed to break even. The oil company has kept its mainland prices well above $3.00 a gallon and Aloha Gas station owners in Hawaii are screaming “foul!” At times the big oil company offers a “special” on gas and charges as little as 5 cents a gallon. Aloha Gas is in trouble and losing money fast. The big oil company’s CEO is quoted as saying “Aloha Gas need not match our prices. Their demise is their own doing.”

Shortly thereafter, Hawaii newspapers publish an article about emails intercepted between a top executive with the big oil company and a Hawaii advisor in which the two discussed “Giving Aloha Gas the final push” and then raising gas prices statewide once the competitor is knocked out of business.

Now, substitute “Mesa Air Group” for “big oil company” and “Aloha Airlines for “Aloha Gas” and the story is, for all practical purposes, the same. The primary difference is that in the gasoline price example, government officials would cry “Anti-trust violations” and remedy the situation immediately. Not so in the airline scenario, however.

Why the difference in the public’s and the government’s attitudes? For one, the public has become accustomed to long-distance flying at remarkably low prices. It cannot fathom that short range flying in recent years has not realized the same efficiencies as long-distance flights, but that’s indeed the case. As for the government’s response, wording in the airline deregulation act provides some immunity from prosecution for airlines which sell tickets at below cost prices. Surely the architects of that law never envisioned this wording being abused in the manner that Mesa Airlines is currently employing, but so it goes.

Thus, the fare war we’re seeing here in Hawaii is actually a classic case of anti-competitive behavior which is only tolerated by the government because of flawed language in the airline deregulation act. Should that wording be corrected to allow legitimate uses of below-cost ticket sales but prohibit the type of sustained anti-competitive behaviors exhibited by Mesa Air Group, the survival prospects of Aloha Airlines would improve dramatically.

2008-01-20T22:31:00.000-08:00

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.

2008-01-16T00:23:00.000-08:00

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.

2007-10-08T01:03:00.000-07:00

Schoolyard Bully

Mesa’s critics have previously used the analogy of a schoolyard bully to describe the company’s tactics in assaulting the Hawaii interisland market with its startup airline go! Little did I expect this comparison to play out so colorfully in the recent Hawaiian vs. Mesa trial.

The primary target for Mesa’s cut-rate entry into the market was Aloha Airlines, according to email statements brought into court as evidence. One communication stated that Mesa planned to finish off Aloha Airlines within 24 months and then raise fares to 105% of the pre-go! fares. According to the author, Mesa’s operation would be unfeasible if Aloha remained in the market.

Mesa’s attorney argued against any conspiracy to sink Aloha and claimed that the statements about Aloha were but one scenario in planning. He stated that Mesa also planned what would happen if Aloha remained in the market. Hmm, Mesa had two plans to choose from: one feasible and one unfeasible. Which do you think they’d pursue?

During closing arguments on the trial’s final day, Mesa’s attorney felt the need to explain the advantages gained by Mesa from its entry into the Hawaii market. According to Max Blecher, Mesa negotiates with large airlines for whom it supplies aircraft, crews, and other services. If Mesa can show these big airlines that it has the ability to take over these routes and operate them itself, then it gains a negotiating advantage. One problem with this argument is that Mesa never provided such a service for Aloha. Another problem is that what Blecher is actually doing is explaining the philosophy of the schoolyard bully (If I rough up a kid from time to time it’ll keep the other kids in line). For a supplier of airline services to demonstrate that it will turn against its host airline and inflict financial pain should negotiations go badly is not a smart tactic, Mesa.

Comments made so far in newspaper editorials suggest that go! has already taken quite a PR beating from this trial. Go! may choose to resort to its old tactic of giving tickets away for a small fraction of their cost once the judge issues his ruling. Such a tactic by Mesa will only highlight its willingness to trash the economics of the interisland market to punish its competitors. Once again, not a smart move, for the eyes of Hawaii’s residents have been opened wider than usual by this trial.

2007-09-28T23:58:00.000-07:00

Hawaiian's Day in Court

Hawaiian Airlines has reached it's court date with archrival Mesa Airlines. After just three days of pretrial motions, Hawaiian has prevailed on most issues. The only two issues remaining to be resolved by the court are 1) whether the thousands of pages of data provided by Hawaiian Airlines contain any confidential information and 2) what the damages will be in this matter. It's a safe bet that Hawaiian will indeed prove that the thousands of pages do indeed contain confidential information. Thus, the real issue before the judge is how much to award Hawaiian for Mesa's illegal and unethical behavior.

Hawaiian Airlines is asking for $173 Million in damages, plus interest, attorney's fees, and other considerations. An earlier report claims that Hawaiian also wishes to restrict Mesa's ticket sales at go! for a one year period. What are we likely to see? If Hawaiian receives a large cash award, the judge is likely to rule that this amount compensates Hawaiian for the losses due to Mesa's misuse of data. A large award and a one year restriction on Mesa's ticket sales are not likely to both transpire. So then, what is likely?

Mesa has competent legal representation, who will argue on enough areas of contention that the award is likely to be noticeably less than the $173 million asked for. The real drama will be answering the question, “How much less?”

Should Hawaiian be awarded a particularly large amount, It is quite possible that Mesa and Hawaiian may haggle on a settlement. In return for forgiveness on a certain amount of cash payment, Hawaiian could see Mesa pull up and leave the islands. In the long run, this approach makes more sense for both airlines than a prolonged fare war. Mesa may very well negotiate with Aloha for an end to its legal action as a prerequisite for go!'s departure, as well.

The amount awarded to Hawaiian may have a significant impact upon CEO Jonathan Ornstein and his management team. The activities of Mesa in this court issue showed blatant disregard for the law and for ethical conduct. At some point, shareholders at Mesa may recognize that such a management team is more liability than asset. Aloha's day in court is scheduled for April, and a victory by Aloha would bankrupt Mesa. There is little rationale for Mesa's foray into Hawaii's interisland market when you consider the cost versus likely payback.

A victory by Hawaiian is a further wakeup call to Hawaii residents regarding the truthfulness of statements made by Mesa officials. Mesa knows how to work the media for maximum spin factor, but such tricks don't work in a courtroom. Let me correct myself, they don't make any difference with the judge. Today in court I witnessed an interesting strategy by Mesa's attorney. He introduced snide statements about the intentions of Hawaiian Airlines which had absolutely no relevance to the matter under consideration. Why? I believe he is carrying out Mr. Ornstein's wish to continue the propaganda war. He's hoping that the newspaper reporters in the crowd will pick up on the comments and salt them into their articles. One can only get away with such strategies when one is spending tons of money on newspaper advertising (which Mesa is doing). It'll be interesting to see if the strategy works.

One thing is for certain, however. No matter how guilty the courts find Mesa to be, its CEO Jonathan Ornstein will continue to claim that Mesa is the victim.

2007-06-16T03:18:00.001-07:00

Year One Interisland Air War Victors: The Incumbents

That's right, Aloha and Hawaiian Airlines get my nod at the 12 month mark in their lively dogfight with newcomer go! Airlines. It's been one wild contest so far, but the incumbents have shown serious strength in repelling the invasion by newcomer go! Airlines. How objective is this conclusion? Take a look.

When go! entered interisland service in June of 2006, the startup carrier brought a fleet of 50-passenger regional jets to Hawaii and challenged the established carriers on routes from Honolulu to Kauai, Maui, and the Big Island. Go!'s plan was to win favor with Hawaii air travelers by offering low fares and sell itself as a lower-cost alternative to Hawaii's traditional carriers. Go!'s 50 passenger RJs would establish a beachhead in the islands, and once loads increased to a certain level, phase two would begin. That phase included the introduction of 90-110 seat jets prior to the summer of 2007. The larger jets are more comfortable and offer lower seat-mile costs than the 50-passenger RJs. If go! could bring in the larger jets and fill them up, Hawaiian and Aloha Airlines would have much to worry about. Well, we're less than a week away from the official beginning of Summer 2007, and no larger jets are in sight.

Here's a summary of what went wrong for go!

Go! management didn't understand the price elasticity of the market. If interisland ticket prices go down 20%, does the amount of traffic increase at least 20%? Nope, not even close. Startup carriers such as Southwest could actually generate more traffic than they took away from other carriers when they entered a market. Why can't that be done here in Hawaii? Because nobody is driving between the islands. That's a pool of potential travelers that's simply not available to win over. Furthermore, with hotel rooms running $200 a night, chopping $30 off the cost of an airline ticket doesn't make a neighbor-island trip a bargain. The net result is that with ticket price cuts well in excess of 50%, the market produced an extra 8% increase in passengers, at best.
Aloha and Hawaiian increased capacity, instead of decreasing it. Hawaiian Airlines has been flying with systemwide load factors approaching 90%. If an interisland fare war increased the number of travelers, Hawaiian would be turning away passengers on many flights unless it upped its capacity. Increased capacity meant that go! must earn its passengers, rather than receiving them by default because the competition was full. By turning the financial screws to the incumbents, management at go! expected Aloha Airlines in particular to cut capacity in order to slow the drain of cash. Aloha knew better than to reward such behavior.
The public reacted negatively to go!'s predatory practices. In a September 2006 legal action, an attorney for Hawaiian Airlines introduced emails between a Mesa Airlines executive and a consultant for Mesa. The consultant said that Mesa's Hawaii project didn't make sense as long as Aloha was still in the picture, and the Mesa executive replied that Mesa should enter the market so that no one else does and give Aloha “the last push”. Further, a document sent to Mesa investors showed that Mesa planned to raise prices at its go! unit once Aloha was out of the way. Mesa's CEO defended the email as just being a joke. Hawaii residents didn't buy that argument nor a number of other ludicrous claims, and the credibility of the airline's management plummeted. A year of $39 and below tickets has only confirmed the predatory nature of go! Airlines.
Aloha released the Sabre Study. This study, paid for by Aloha but conducted by a third party, concluded that with 62% of seats filled, Aloha needed $50 per ticket sold to break even, Hawaiian needed $55 per ticket, and go! needed a whopping $67 per ticket just to break even. The results of this study contrasted greatly with go!'s attempt to sell itself as the low-fare airline because it was the low-cost airline.
Profits at go!'s parent company have recently turned into losses. Mesa's market value has dropped 25% during the past year. Cash on hand has dropped significantly in the past year and Mesa may be experiencing a serious, long-term shift in its profitability. The parent company can no long afford a long-term experiment in trying to displace an established carrier from the Hawaii interisland market.

And what did the incumbent carriers do right?

Aloha and Hawaiian didn't cut capacity when threatened, and they matched fares. These were two critical moves to prevent go! from establish a beachhead here in the islands. If go! had succeeded in introducing 100-passenger jets and filling them up, the losses for Aloha and Hawaiian would become unbearable at some point.
The incumbent airlines took top national honors for on-time performance and customer satisfaction. In other words, both Hawaiian and Aloha ran dependable and passenger-friendly operations.
Neither Aloha nor Hawaiian have made any serious mistakes so far. Neither airline over-reacted to $9 or $1 fares. They've provided enough seats to match the competition, but they've shown restraint when prices were so low they were silly. Both incumbent airlines show that they are well managed and able to change course quickly to adjust to the market.
Hawaiian has racked up the highest load factors in the industry. High load-factors are an indication of either excessive discounting or significant popularity with the traveling public. In Hawaiian's case, it's the latter.
Aloha has shorn up its credibility as a survivor. Aloha's largest shareholder is now a savvy billionaire, airline legend Gordon Bethune has come aboard as Chairman, and United Airlines will be taking an equity position in the Hawaii carrier.

When Will the Fat Lady Sing?

There will be no peaceful coexistence in this battle. Go! came into the fight with a desire and need to sink at least one of the competitors, and its actions have consistently supported this aim. Losses are enormous at all three interisland operations, but seldom will an airline pull the plug on its operation during the summer months. These are the months with the greatest potential for profits. Lately go! has been trying creative ways to shake the competition, such as $1 fares and fare specials not released to the media. So far, Aloha and Hawaiian have been able to respond quickly and intelligently.

This autumn will be a critical time in this battle. In September, Hawaiian Airlines gets its day in court against Mesa. Most observers believe that Hawaiian has an excellent chance of proving that Mesa breached a confidentiality agreement with Hawaiian. Such an agreement should have prevented Mesa from using certain information against Hawaiian until an agreed upon number of years had passed. One remedy would be to require Mesa to cease their go! operation for a prescribed period of time. Large damage awards are possible as well. Aloha stands ready to have its similar claims heard in a future court hearing. Court action could well be the method for ending this bitter fight. Hawaiian and Aloha have prevented go! from bringing in the big jets, and both airlines will survive to see their day in court. This is a huge victory for the incumbents.

2007-05-29T15:44:00.000-07:00

$9 Fares Anyone?

Have you ever seen a fare war where the winner is the company that sells THE LEAST number of tickets? Hawaii's inter-island travelers are witnessing just such a sale over the Memorial Day weekend.

Go! Airlines, a division of Mesa Air Group (Nasdaq:MESA), has once again shaken up Hawaii's inter-island airfares with a $9 ticket, but this time it is during peak summer months. The airline cannot possibly make money with these fares, and the big question for this sale is Why?

The only way that the sale could have proven financially advantageous on its own merits is if the number of tickets sold was severely restricted and the sale drove consumers to go!'s website, where they might buy higher-priced tickets. Such looked like the case on Monday, when I took a look and could not find a single $9 ticket available. But wait, on Tuesday a new batch of $9 fares resurfaced on the website.

In theory, an airline can make money with a $9 fare if it sells these tickets only to customers traveling on flights which would have had empty seats anyway. The airline also steals customers from its rivals and inflicts financial pain. Unfortunately, the airline selling $9 tickets is stealing customers from itself, as well. Those who normally travel on go! will opt for a $9 fare instead of the $39 fare they planned to purchase in the near future. The net result? A loss in revenue even though more tickets are sold.

This fare war was a test of sorts for Hawaiian and Aloha Airlines, to see if they'd be sucked into the lunacy of selling $9 fares during the busy summer months. From what I can see, Hawaiian and Aloha only offered a limited number of tickets.

Why then is go! offering this sale? The sales team at go! has recently seen changes, and no doubt the new team wants to prove that they have something new to offer. Another incentive is that Mesa's attempt to break into the Hawaii inter-island market has not been going well. The airline has only been able to sell less than two-thirds of their seats at prices which would require more than a full load just to break even. By selling these $9 tickets, go! will likely experience an upward bump in traffic. Mesa's CEO can then go to his board of directors and say, “See, the numbers are picking up, Hawaii loves us!”. Never mind that the fare makes no financial sense whatsoever, these are non-standard business tactics we're witnessing. And of course there's the most obvious reason: Mesa is playing the spoiler, trying to weaken Aloha and Hawaiian Airlines by poisoning the fare structure of the year's most profitable months.

2007-05-04T15:27:00.000-07:00

Aloha's United Connection

The big news this week is that United Airlines has acquired a minority share in Aloha Airlines. United will receive a seat on Aloha's board and says it may increase it's holdings in Aloha at a later date. This development has huge implications for the interisland fare war.

Back in 2005 when Aloha Airlines struggled with bankruptcy and a small number of Hawaii families owned the company, Aloha was vulnerable. Mesa Air Group's entrance into the Hawaii market would likely have toppled Aloha within months, given the startup's far-below-cost pricing strategy and the financial resources of Aloha's owners. But oh, how things change. The new owners of Aloha Airlines, the Yucaipa Group, included billionaire Ron Burkle. Burkle has been around the block many times in the business world, and he wasn't likely to let an aggressive mainland airline sink his investment in Aloha. Sure enough, Aloha managed to come up with the funds to keep its operation aloft while Aloha and Hawaii's other interisland airlines experienced financial carnage as Mesa's go! Airlines punished the market with ridiculously low fares for months on end. Now Aloha has attracted another partner, United Airlines. The message could not be stated more clearly to Mesa Air Group: You are not going to displace Aloha Airlines from the interisland market by spoiling the market with far-below-cost tickets.

So, where does this leave Mesa Air Group and its go! subsidiary? Go! may be forced to actually try making a profit in a market that includes two large competitors. In a free market, there are two legitimate ways to attract customers: offer a better product, or lower your cost structure to the point where you can offer the same product profitably at a lower price than the competition. As long as Go! operates 50 passenger regional jets, its costs will not allow it to legitimately underprice carriers operating Boeing 717s and 737s. Go is unlikely to introduce larger aircraft, because it is having a tough enough time already filling two thirds of the seats of its smaller jets.

Could go! offer a better product than its competitors? In the minds of at least some consumers, it could. There will always be a portion of the market that is disgruntled at the longtime competitors and seeks an alternative. Then, too, there's the issue of the small terminal go! operates from at Honolulu International Airport. Many travelers find it more convenient than the large interisland terminal. Theoretically, go! could operate a small boutique airline in Hawaii. To be profitable, though, Go! would need to revise its ridiculously low fare structure. Do I believe a boutique airline is a long-term solution? No, Mesa was out gunning for bigger game. They won't be happy with such an arrangement, and it's highly questionable whether go! will ever be profitable.

So, why did United link up with Aloha? The two airlines have shared a frequent-flyer program since the 1980s when former United executive Joseph O'Gorman took the helm at Aloha and hammered out a deal. United's investment in Aloha, even with the financial pummeling from Mesa, signals that United finds significant value in Aloha, primarily because of its market position. An equity position in Aloha gives United a tool for retaining its competitive position in the mainland-to-Hawaii market. Although United still carries more mainland passengers to the 50^th state than anyone else, number two competitor Hawaiian Airlines has been gaining ground. United likely believes that a close connection with Aloha will allow it to better link the routes of the two carriers and combat Hawaiian Airlines more effectively. Make no mistake about it: the rivalry between Hawaiian and Aloha is still a lively battle and will likely remain so.

As for Mesa's change of course, it may well take place this fall when Hawaiian's legal action is decided in court. Until then, United's investment in Aloha allows all the players of this competition to remain aloft. We'll likely see this drama play out to a just conclusion. United's investment removes “money in the bank” as the primary determinant of who wins this dogfight. The battle now revolves around competitive prowess and matters of law. Don't miss it.

2007-04-13T00:19:00.000-07:00

Heading for the Fare War Doldrums

Spring is in the air and load factors are on the rebound. Hawaiian Airlines filled 91% of it seats in March, the highest load factor in the nation. Interisland competitor go! Airlines filled 64% of its seats, up from a dismal 58% the month before. What does it all mean? As with anything, the devil is in the details.

Hawaiian’s 91% represents both a positive endorsement by the traveling public and an aggressive effort by the airline to protect its routes from new competitors (the airline does not break down its load factors between long-haul and inter-island). Hawaiian’s routes to the mainland have come under increased competition lately, and Hawaiian has been willing to price aggressively in order to retain its customers. We have recently seen low-cost Canadian carrier Harmony call it quits in the scheduled Hawaii market, and others could follow. Hawaiian is following a similar strategy in its inter-island flying by matching the far-below-cost fares offered by Mesa (Nasdaq:MESA). Given go!’s poor load factors and increasing pressure on the parent company’s bottom line, a departure of go! Airlines from the market is a reasonable assumption by Hawaiian Airlines. The big question is when. The 91% load factors also validates Hawaiian’s decision to add interisland capacity prior to the arrival of go!

Go!’s 64% load factor came during a month with spring break traffic, $19 fares, and many, many, full-page newspaper ads. No doubt executives at Mesa are wondering why the loads weren’t higher, but I stick with my reasoning from early during go!’s arrival. Quite simply, Hawaii’s travelers haven’t bought the storyline which go! is trying to sell to them. Hawaii residents are a more fair-minded group than the mainland population. They don’t like the fact that good jobs will be replaced by marginal jobs should go! displace one of the existing carriers, and they don’t like the questionable ethics of Mesa’s management. News stories also announced that Mesa’s go! airlines may actually have a higher cost of providing interisland flights than the current carriers. The most damning of all revelations was the email exchange between a Mesa executive and a consultant that revealed a plan to put competitor Aloha Airlines out of business, to give them “the final push”, and then to raise fares. This revelation was in stark contrast to Mesa claims that go! was offering low fares because the airline just loves to see Hawaii families get together more easily. Mesa has underestimated the intelligence of Hawaii residents, and the airline is now paying a price for such myopic tactics. From Waianae to Waikiki I hear the same reactions.

Mesa’s lawsuit against Aloha Airlines pilot Mike Uslan is one of the few lively events in the fare war, at present. Uslan has been active in an organization of airline employees known as HERO, and he has been subjected to two lawsuits aimed at punishing him and forcing the website www.dontflygo.com to cease and desist. So far, neither the Honolulu Advertiser nor the Honolulu Star-Bulletin has published this story, presumably because both newspapers are vying for the ad dollars which Mesa has so lavishly been spending lately. Should the lawsuit actually go to trial, the media will need to cover the event and Mesa’s go! Airlines will feel an additional backlash by Hawaii consumers.

As for the fare war itself, Hawaii’s residents have mostly lost interest. Fares are already low and have been low for nearly a year. Airfares are such a small percentage of the total cost to visit another island that fare reductions are no longer exciting. The big story right now is the upcoming arrival of the interisland ferry service. Residents are enthused about new interisland adventure possibilities (we bring the SUV, kayaks, surfboards, camping equipment, etc.). If go! is looking for a sizeable rebound, this summer will be an especially-difficult time to do it.

The real juice in this competition between Mesa and Hawaii’s existing carriers is the legal action we’ll see this fall. Hawaiian Airlines has a strong case against Mesa, and the consequences to Mesa could be enormous. The fare war may be dull right now, no matter the price of a ticket, but don’t miss the action come September. It’ll likely be a zinger.

2007-03-22T14:55:00.000-07:00

The Other Interisland Fare War

Lately, go!, Aloha, and Hawaiian Airlines have been stealing the headlines with their fare war on the busiest interisland routes. There’s a spirited shootout shaping up at some of Hawaii’s less-traveled air destinations, though. Island Air has just announced $19 fares between Honolulu and Lanai, Molokai, Kapalua, Kahului and Hilo, plus some additional routings.

What’s interesting about this shootout is that the incumbent carriers have shown that they can be every bit as clever as the startup competition. Island Air has begun offering their $19 fares nearly a month before Mokulele enters the market. There’s always a bubble of pent-up demand to be harvested when introducing a new, significantly-lower fare, and Island Air has timed its fare offering so that most of that pent-up demand will be absorbed before Mokulele even enters the market. Moreover, Island Air deprives Mokulele of publicity, since $19 fares will be old news by the time Mokulele actually enters the market. Island Air also emphasizes that their planes are twin-engined, pressurized, have lavatories on board, and feature inflight service- features not available on the competition’s planes to smaller island destinations.

Actually, Island Air’s “Fares Gone Wild” campaign is the second salvo in the fight by incumbent carriers to resist market penetration by Mokulele’s go! express. In January, Pacific Wings introduced $29 fares to smaller island destinations. Moreover, Pacific Wings successfully went on the offensive, starting a new front to the war in Mesa’s backyard of New Mexico. With Hawaii routes likely to be unprofitable for some time to come, Pacific Wings reassigned some of its aircraft to newly-captured essential air service in Hobbs and Carlsbad, New Mexico, routes that were previously served by larger Mesa Airlines planes. Government officials in both communities voted unanimously for the routes to be moved from Mesa to Pacific Wings.

As for competition at smaller Hawaii destinations, two questions remain to be answered: How long will the fare wars continue in these markets, and how much expansion will we see in the markets due to lower prices? Dramatic price cuts to more populated islands have yielded minor 3-8% increases in overall traffic. Low fares to destinations such as Molokai and Lanai may prove to stimulate traffic considerably more, however, since these smaller islands lack the healthcare and shopping opportunities found on the larger islands. If the fare war to smaller islands proves to be a long one, the traffic increase will be an important factor in the survival of competitors. Mokulele does not have the deep pockets of Mesa Airlines, so the dynamics of this secondary air war may be quite different than what we're seeing in the larger markets.

2007-03-02T00:55:00.000-08:00

Mesa Air Group Sues Aloha Airlines Pilot Mike Uslan

Hawaii's interisland air war has taken a new twist with the parent company for go! airlines filing a lawsuit against Aloha pilot Mike Uslan. The lawsuit alleges that Uslan has illegally harmed the airline through Uslan's involvement in the website www.dontflygo.com . For a look at the charges and for Mike Uslan's point of view, visit www.mesavsuslan.com .

Two separate actions are underway against Uslan. The first is related to the Hawaiian Airlines vs. Mesa lawsuit which goes to court this fall. GCW Garfield Consultants, which has been working for Mesa (Nasdaq: MESA) , is attempting to require Uslan to turn over virtually all his emails which relate to an organization of airline employees known as H.E.R.O. Uslan has already replied that none of the emails are related to the HAL vs. Mesa litigation, and Uslan is working to limit the scope of the inquiry. Uslan believes that Mesa and its allies are attempting to use the HAL vs. Mesa litigation as an excuse to sift through his emails in the hopes of finding anything that can be used against Uslan or others who oppose Mesa.

The second legal action is brought by Mesa against Uslan and seeks punitive damages and an injunction to halt the www.dontflygo.com website. Through his invovlement with H.E.R.O., Uslan has been a vocal critic of Mesa. Uslan says that new owners now run the www.dontflygo.com website, and he is not responsible for its content. The Aloha pilot believes that Mesa is trying to put pressure on him personally in the hope that it will result in a court action or a voluntary effort to shut down www.dontflygo.com .

Mesa has previously used lawsuits against individuals to quiet contrary opinions. Airline analyst Holly Hegeman backed down after Mesa filed a threatening lawsuit, and most likely Mesa officials expected Uslan to do the same. For an individual to fight a wealthy corporation such as Mesa in court, the financial burden is usually so great that the individual eventually throws in the towel. The facts of the case never get heard and the large corporation wins through financial muscle. Uslan appears resolute that he will fight this legal attack, however. He previously flew as a pilot for Mesa, he didn't like the culture at that airline and left, eventually he landed his dream job flying for Aloha, and now his former employer is in town gunning to put his current employer out of business. Mike Uslan regards Mesa as a ghost he can't escape, and he's hopeful that with enough resistance from people such as himself, Mesa will eventually pack its bags and leave the Hawaiian Islands for good.

Uslan and his nemesis at Mesa, CEO Jonathan Ornstein, ironically share a common characteristic. Neither likes to back down from a fight. For this reason, we can expect a rocky road ahead as the two sides ratchet up the pressure. Mesa will threaten financial doom, and Uslan will make the fight as public as possible, giving Mesa even more embarrassing publicity. Stay tuned.

2007-02-18T01:59:00.000-08:00

Selling The Myth

Here we go! again with another $29 fare war on Hawaii interisland routes. This time it’s different, because we better understand the story.

When go! entered the interisland market in June of 2006, this division of Mesa Air Group offered introductory $39 fares, claiming that Aloha and Hawaiian Airlines had been overcharging the good people of Hawaii. To prove its point, go! dropped the fare even lower and vowed that it would always offer a $39 price tag on at least some of its tickets. The airline sought to convince consumers that long-term savings awaited them if they embraced the new airline, and this enormous discrepancy in before and after fares would drive home their point. Nonetheless, a series of revelations soured customers to go!’s claims.

First came the veracity issues. The airline operates many routes on the mainland, but it has never been known as a low-fare airline. Further, during court actions, emails between a top Mesa official and their advisor spoke of not being able to turn a profit unless Aloha Airlines was eliminated and that Mesa should enter the market and give Aloha the final push. After that, fares would be elevated. Mesa no longer looked like the benevolent airline they made themselves out to be.

Economics became an issue as well. Most consumers realized early on that the $19, $29, and $39 fares were below cost. What really raised eyebrows was a report by Sabre Airline Solutions (commissioned by Aloha Airlines) reporting that with 62% of seats full, the cost of providing a typical interisland ticket were $50 for Aloha, $55 for Hawaiian, and $67 for go!. Here was go! not only selling tickets below cost, but trying to eliminate Aloha, the lowest-cost provider in the market.

Other issues also began to dog go!. For years, Hawaiian Airlines held the spot of honor as this country’s most on-time airline. In the past two months, Aloha not only displaced Hawaiian from the top spot, but also won accolades for having the lowest rate of consumer complaints. So, if go! eliminated Aloha, it would be taking out not only the lowest-cost carrier in Hawaii but also the airline offering the most reliable service in the United States. It didn’t make sense. Other airlines such as Island Air began laying off workers and the extent of the damage to Hawaii’s air carriers began to sink in.

There is another reason for Aloha’s resilience, and it is something which Mesa Air Group officials likely never anticipated. When Aloha began service in 1946 as Trans Pacific Airlines, it was a big player in a social revolution. Most businesses in the early 1940s treated Hawaii’s Japanese, Chinese, and Filipino residents as second-class citizens. Aloha was founded by a local businessman of Chinese descent who offered an airline where every customer was treated as an equal. Aloha’s success played a crucial role in reshaping Hawaii’s social fabric, and many older residents of this state have never forgotten Aloha’s place in history. Consequently, when Aloha and Hawaiian match fares with go!, each of the two established carriers can outsell this newcomer by a factor of about four to one. Go! could lower its costs by introducing larger jets, but right now that move makes no sense because go! cannot even fill its smaller jets.

When it came on the scene in 2006, go! boasted enormous staying power. Much has changed there as well. At the time, Mesa expected an annual profit of some $100 million dollars. Profits are now a pale fraction of that amount, owing to losses in Hawaii and, more importantly, to reduced profits on the mainland operation. Mesa makes the vast majority of its money by contracting with large airlines to provide regional aircraft and crews to operate them. The turmoil in the airline industry following 9/11 worked in Mesa’s favor, because aircraft and crews could be obtained at less expense than during good times. The airline industry in the U.S. has finally pulled itself together at a time when many Mesa crews are jumping ship to fly for higher-paying airlines or abandoning the airline business altogether. The net result is that Mesa’s core business has serious issues to deal with in the coming years, Mesa will see upward pressure on its costs, and the company no longer has the luxury of funding its losses in Hawaii indefinitely.

Go! has once again lowered ticket prices to $29. Since it has offered this price before, the company already knows that demand will not increase sufficiently to offset the price cut. At this point, the cut is mostly a means of sliding bamboo under its competitors’ fingernails. Will Aloha pack up and give go! the opening it’s looking for? Not likely. Go! will continue to sell the myth of long-term, ridiculously-low fares to a small number of Hawaii residents, but the majority aren’t biting. Hawaii residents are a more akamai group of consumers than Mesa Air Group anticipated. Ultimately, the facts outweigh the hype.

2007-01-22T23:37:00.000-08:00

Smaller Airlines Strike Back

The Hawaii interisland fare war has recently expanded to include smaller islands Molokai and Lanai, served by mid-sized airline Island Air and smaller carriers such as Pacific Wings. Pacific Wings has just announced plans to create a low-fare division and offer $29 fares on all nine seats of its Cessna Caravan aircraft. And away we go with another fare war!

What would motivate Pacific Wings to cut its prices on these routes? The most likely answer is that it sees someone else preparing to offer lower fares on those routes, and it wants to be first out of the blocks with the discounted air travel. Let’s face it, the first airline to announce lower fares gets all the press coverage. Those who match fares only get a few words of newsprint. Perhaps Go! Express is the most likely airline to press for lower fares when they introduce their own nine-passenger Caravans. Your comments on this competition are welcomed since I hope to gain a better grasp of the dynamics.

Meanwhile, Island Air not only has been jostled by the go! fare war, it now must deal with a fare war on its bread-and-butter routes, as well. Island Air responded with a slightly lower fare (after taxes and fees are figured in) for nine seats of each aircraft serving those destinations. This is probably a reasonable response given that many travelers will still prefer the larger, twin-engined, two-man crew Dash-8s, even at a somewhat higher price. Island Air can use this model to gauge the market and make adjustments later, if necessary.

As for Pacific Wings, it has been a rather lively player in this invasion of Hawaiian airspace by go! and the pending arrival of go! express. Pacific Wings has announced plans to fly certain Hawaii routes to smaller communities such as Hana without a federal essential air service subsidy. This strategy removes the ability for other airlines to request subsidies for the same service. Now Pacific Wings has announced plans to provide air service to various New Mexico communities in the heart Mesa Air Group country. If Mesa is going to unleash devastating below-cost fare wars in Hawaii, then Pacific Wings sees that a little turnabout is fair play. Its nine-passenger Caravans can serve cities without the subsidies that larger aircraft require, such as Mesa’s Beech 1900s. So, Pacific Wings plans to remove a few potentially-profitable destinations from Mesa’s backyard. Stay tuned.

2007-01-16T02:04:00.000-08:00

Just Don’t Call It Free Enterprise

For more than half a year now, a traveler need pay no more than $39 for a hop between the Hawaiian Islands, and at times fares have nosedived to half that amount. These aren’t just promotional fares, either: you can snag a cheapo fare from the airline of your choice just about any hour of the traveling day. There’s no excuse for paying more. The problem here is that the fares are well below the cost of providing the service. In a study commissioned by Aloha Airlines, “Sabre Study” researchers concluded that Aloha’s costs were $50 for providing the service, Hawaiian could fly for $55, and newcomer go! needed $67 a ticket to break even. The study assumed a 62% load factor, which is close to what go! has been carrying these past few months. Go! has disputed those figures, but the overall point of the study remains intact: go! does not have a cost structure which allows it to offer such ridiculously-low prices in the long haul.

By cutting interisland fares by 50%, and sometimes by 50% again, the new carrier has increased overall travel by a mere 3% to 8%. If the airlines actually paid customers to ride their planes we might see another 8% increase in travel, but in this market deep discounting clearly does not lead to profits. So, what’s going on here?

In most any U.S. business, a competitor cannot routinely dump its products on the market at below-cost prices. In the last century, oil-industry robber-barons used below-cost pricing to eliminate the competition, then they jacked up prices afterwards. Such behaviors inspired anti-trust laws which prevent anti-competitive mayhem. Not so in the U.S. airline industry, though. No U.S. airline has ever been found guilty of predatory pricing and received penalties for such anti-competitive behavior since airline deregulation was enacted. It’s a tough case to prove. Now we have a carrier which is pushing the envelope, seeing just how tolerant the judicial system will be of its below-cost pricing. If go!’s parent company Mesa Air Group (Nasdaq: MESA) loses its bet, it might have to pay triple damages and that is enough to plunder the parent company’s treasury. If Mesa wins in court, it earns the right to continue losing millions each month in an effort to decimate a long-time Hawaii company. Either way, it’s a nasty fight.

The travesty here is that the consumer has only a minor impact on who wins this contest. Losses are so great on interisland flying that the loser is the airline which runs out of money or blinks first. Customer preference and cost of providing the service take a back seat to cash in the bank. The dynamics of the free-enterprise system give way to financial wheeling and dealing.

So, please don’t call this conflict “free enterprise at work”. Call it testing judicial limits, call it survival of the wealthiest, or call it any of a number of things, but don’t confuse this conflict with an economic system that has produced better and lower-cost goods. This conflict is quite a different animal.

2006-12-23T21:29:00.001-08:00

The China Factor

The big news this week in the Hawaii interisland air war is that Mesa Air Group, parent of go!, will begin a cooperative air service in China within the next twelve months. This new service will require an investment by Mesa of over $30 million, but the upside potential of the new service is huge. Congratulations to Mesa for this achievement.

Ironically, the U.S. airline that has worked the hardest to begin air service within China is none other than competitor Aloha Airlines. Aloha was founded in 1946 with the purpose of connecting China with the mainland U.S. Aloha (then known as Trans Pacific Airlines) failed to secure needed rights in China, but in the 1980s Aloha’s guiding light, Hung Wo Ching, nearly secured an intra-China air service. Alas, timing is critical in this business, and Mesa scored the China connection.

The China deal will have a significant impact on Mesa’s go! Airlines for several reasons. On the cost side of the equation, we can expect the lease fees for 50-passenger regional jets to increase as this type is introduced in China. Mesa gained its jets for go! at exceptionally low lease rates due to a glut of this aircraft type in the market, but the upcoming China service may eliminate much of that glut. Labor costs should also be heading northward for Mesa as the China service begins. The airline has had difficulties filling some pilot positions already, and pay requirements will have to go up if Mesa expects to attract qualified pilots for a base in China. Such upward pressure on pilot wages would have a spillover effect for Mesa’s Hawaii operation.

The China flying will also require considerable attention and brainpower. This challenge comes at a time when Mesa will be negotiating a difficult new contract with its pilots. The complications of go!’s struggles in Hawaii will be most unwelcomed, particularly when legal action begins.

The contrast between Mesa’s Hawaii flying and its upcoming China flying could not be greater in terms of risk versus potential reward. Hawaii’s go! operation has consumed more than $30 million of Mesa’s funds and the small airline is likely losing a million to two million dollars a month at present. Competitors Hawaiian Airlines and Aloha Airlines have given no indication that they’ll succumb to go!’s below-cost pricing. The potential legal liabilities are enormous, and if Aloha can prove violations of anti-trust laws, the penalties could deplete Mesa of cash at a most inopportune time. The upside potential of replacing one of Hawaii’s interisland airlines is quite limited, since the market has been shrinking for the past decade. A new competitor, the high-speed ferry, is set to enter the Hawaii market this summer and it will likely inflict even greater losses on the airlines. On the other hand, China offers enormous potential for growth and profits just as Mesa’s abilities to sustain profits on the mainland U.S. are floundering.

If Mesa could shed some of its legal liability in a deal which includes leaving the Hawaii market, it would be wise to choose this option. Mesa stands to enjoy a bright future if it can properly leverage this introduction to flying in China. On the other hand, Mesa’s go! subsidiary is an anchor restraining Mesa’s potential and could carry the company to the bottom if things go poorly in court. In terms of risk vs. rewards, it’s clear that a prolonged battle in Hawaii for Mesa makes little sense as its China options open. Mesa’s CEO is most unpredictable in his actions, however, so there’s no telling what to expect in the coming months. Stay tuned.

2006-12-06T01:35:00.000-08:00

The Cause of Cuts at Island Air

A year ago, Island Air was flying high. Now the fast, sleek Q400s are gone and 65 employees are hitting the street. How much is new airline go! responsible for these reductions?

Few will argue that go!’s below-cost fares have hurt Island Air’s operation on routes where the two compete directly. But there’s more to the story. Remember that Aloha Airlines jumped into two traditional Island Air Routes, Kahului to Lihue and Kahului to Kona, as a means of escaping the financial bleedfest on routes served by go!.

Go!’s Joe Bock suggests that his airline isn’t the culprit since three of the five routes that Island Air is dropping involve Kapalua, which isn’t even served by go!. I’m not buying that argument. West Maui’s Kapalua Airport is a rather short drive from Kahului Airport, where $39 and often $29 fares are available. Would you take a short drive to fly at less than half the price? Many travelers to Maui apparently did, and that’s the reason why flights into Kapalua are coming up short on passenger counts. This is the second time we’ve seen this effect on Maui. More than two decades ago when Mid Pacific offered $25 interisland fares, Royal Hawaiian Air Service saw a reduction of travelers at its Kaanapali Airport on West Maui. History repeats itself.

One issue which cannot be directly linked to go! is the acquisition of the Q400 planes. Would they have been successful if go! hadn’t entered the market? Frankly, I haven’t studied the situation closely enough to know the answer.

With the exception of the employees losing their jobs, why is trouble at Island Air such a big deal? For thinner routes throughout the state, Island Air is the premier carrier. The new breed of competitors for Island Air, including go! express, will use single-engine, single-pilot planes in an effort to minimize costs. Personally, if I’m flying over the playground of the tiger sharks, I prefer two engines, thank you very much. I want to have this choice in the future, and I suspect many other travelers do too.

2006-11-24T22:28:00.000-08:00

Stealth Fare Sale?
If you check the website of Hawaii's interisland airlines, you'll see little mention of a $29 fare sale, yet there's one presently underway. Visit the websites of Aloha, go!, and Hawaiian, and you'll discover that most interisland tickets are priced at $29.

So what's going on? This is probably a case of one carrier (take a guess!) trying to slip under the radar screen with lower prices. The other airlines aren't asleep at the switch, though, and they've matched prices.

The significance here is that ticket prices are now routinely going for less than half the cost of providing the service. Mesa Airlines surely does not expect Aloha or Hawaiian to allow go! to gain a price advantage. Allowing go! to sell cheaper tickets would be suicidal for both of Hawaii's traditional interisland airlines. What we're seeing is a continued cash bleedfest in this market as Mesa tries to force Aloha closer to a cash crisis, and to inspire the traditional interisland airlines into settling their legal actions with Mesa. Ironically, the harder Mesa pushes, the larger the company's potential legal liabilities become, and the more likely it is that Mesa will be found guilty of illegal behavior.

There are times when offering tickets at below cost makes economic sense for airlines. Unfortunately, such a blatant and consistent dumping of seats onto a market at far below cost might inspire laws which could clip the wings of legitimate fare sales. Go!'s behavior here is not in the long-term best interests of consumers.

Note: By Wednesday, Nov. 29, the $29 fares had disappeared again. Who knows when the stealth fare war will strike again?
pf

2006-11-21T04:31:00.000-08:00

Go! vs. H.E.R.O.

If there’s one lesson to learn from the interaction between go! airlines and a Hawaii airline employee group known as HERO, it is that hatred is a bad ingredient in most any enterprise.

HERO came on the scene with legitimate concerns. Evidence strongly suggests that MESA Air Group (Mesa:Nasdaq) created their go! airlines unit with the specific purpose of putting Aloha Airlines out of business and replacing them. Because of the seniority system used in so many airline jobs, the loss of an employee’s airline is pretty much the end of his or her dream career. Evidence also indicates that MESA is using unethical and illegal tactics to achieve its goal. Any wonder why these employees feel strong negative emotions toward the architects of this invasion?

With such inspiration, HERO managed to become a major thorn in the side of CEO Ornstein, because so much of HERO’s efforts were directed specifically at the man. Ornstein cooperated by contradicting himself constantly, and HERO’s www.dontflygo.com website listed these contradictions with embarrassing regularity.

What really irks HERO members, though, is that the story Ornstein is selling to Hawaii’s traveling public, the reason for go!’s existence, is basically untrue. “They'd rather continue to gouge Hawaii,” said Ornstein of go!’s competitors recently in Pacific Business News, “but they'll have to get used to us providing affordable fares." The problem here is that by lowering prices from around $80 to $39 and sometimes even $29, go! is reinforcing in the consumer’s mind that the original interisland fares must have been gouging. Yet what go! is not telling consumers is that it is losing a considerable amount of money with every $29 and $39 fare it sells. Ornstein’s argument appears convincing if you just look at past and present fares, but if one examines the cost of providing interisland flying, the myth becomes apparent. Many travelers want to believe that myth, though, and go! capitalizes on this phenomenon.

HERO’s efforts culminated in a rally beside the state capital. Over a hundred employees showed up during the event, waving their banners and calling out “Don’t Fly Go!” and other slogans. Judging from the response by motorists, many passersby supported the group’s actions. Then someone began passing around a T-shirt and many attendees signed it. Unfortunately, one of the signers used the adjective “Jewish” in his comment. An even bigger mistake, though, came when organizers of the event failed to properly scrutinize the T-shirt for over-the-top comments before it was sent to Ornstein. The hatred many of these people feel towards the recipient of the shirt likely clouded their judgment. Those ill feelings certainly weren’t based on anti-Semitism, though, because a large portion of HERO’s leaders are Jewish themselves.

Nonetheless, HERO made a mistake, they gave Ornstein a tool to use, and he ran with the opportunity. His lawyers managed to intimidate the new www.dontflygo.comwebsite operator to shut the site down at a critical time. The future of HERO is now questionable, which is a shame because they have an important perspective to deliver. If this employee group is to pull itself back together, it must control its negative emotions and reinvent itself with a more positive emphasis.

Hatred is a two-edged sword, though. Those who inspire hatred are seldom successful for long. Frank Lorenzo wins the prize as the most hated airline executive of the past fifty years, and he left behind a financial crater to the tune of billions when he finally went down in flames. Richard Ferris and Stephen Wolf also generated feelings of hatred among their employee groups later in their careers, and both leaders fell short of achieving commendable results during these periods. Powerful negative feelings toward Mesa’s CEO largely stem from the perception that he uses unethical means to achieve his goals and that his goals are brutally self-serving.

Unfortunately for Ornstein, the negative feelings aren’t restricted to employees of his competitors. He is dealing with a revolution at home as 90% of Mesa’s pilots recently gave a vote of “No Confidence” to his management team. The Mesa pilots cited poor operational performance, but the problem is wider than that. These pilots see that the promises made to them are unlikely to be realized. They agreed to work for less because of promises of growth and future prosperity, but growth is slowing and prosperity looks questionable as the airline fails to provide the pilots with the resources they need to take pride in their work and keep the customers satisfied. Moreover, the dreams of many pilots to use a regional airline such as Mesa as a stepping stone to reach a a major airline job have become hollow, as price competition from regionals chip away at both the quantity and quality of jobs with the majors. Most airlines begin with a honeymoon period in which employees are optimistic and hope can be substituted for larger paychecks. Once that hope diminishes, the employees want more pay if they are to be enticed to stick around. Mesa’s honeymoon is over, and rising labor costs will become a significant issue before long.

A most disturbing event took place on November 20, as one of go!’s most outspoken critics lost the front wheel to his truck due to the loosening/removal of that wheel’s lug nuts. If the failure took place 5 minutes later, he would have been on Oahu’s H-3 freeway, cruising at highway speeds, and the truck sat so high on its enormous wheels that it would almost certainly have rolled. That critic of go! is lucky to be alive tonight. I traveled to the scene of the accident and spent an hour speaking with the individual. He convinced me that he had recently tested the lug nut security. We discussed the possibility that a wheel theft was interrupted, and it is not as plausible an explanation as a sabotage theory for a variety of reasons. There is no way that such a single occurrence can be pinned upon go! or one of its sympathizers, but let’s hope this is not the beginning of a series of “accidents” which befall those who speak poorly of go!. That would be a form of hatred far worse than the mailing of a T-shirt with disagreeable names upon it.

2006-11-10T15:17:00.000-08:00

Why $29 Fares Again?

Mesa Air Group’s (Mesa:Nasdaq) go! Airlines has once again announced a $29 fare sale for interisland tickets in the state of Hawaii. The big question is why?

According to Mesa’s CEO, the fare war is to honor veterans as the Veteran’s Day observance approaches. If Mesa truly wanted to thank these people, it could have extended a special price for the active military, veterans, and their families. Instead, it offered reduced fares to everyone, suggesting a different motivation and indicating that this tribute was disingenuous. Shame on you, Mesa, veterans deserve more respect than that.

One explanation for this new fare war? Months ago, go! extended a special price on tickets when an employee group known as HERO launched its inflammatory www.dontflygo.com website. This week HERO’s website resurfaced after an absence of several weeks, HERO members held a rally on the steps of the state capitol in Honolulu, and the group formally requested that Hawaii’s Attorney General investigate go! for unfair trade practices. Go!’s timing of its new fare war suggests that it is once again trying to diminish the efforts of HERO by punishing the airlines of its members whenever the group pushes forward with its agenda.

What about the economics of offering $29 tickets? Short-duration fare sales do generate immediate income for the instigator airline, and this tactic has been used in the past by cash-strapped airlines. Mesa, though, has hundreds of millions of dollars at its disposal, and this explanation clearly doesn’t fit here. In the long run, such sales typically hurt the income of the instigator and its competitors. If the sales happen often enough, consumers learn to hold off their ticket purchasing until another short-term sale comes along. A substantial increase in ridership fails to materialize, but a drop in income per ticket sold becomes inevitable. Furthermore, previous discounts in excess of 50% have only expanded the interisland market by about 3%, making further price cuts clearly uneconomical. Seeking profits or at least minimizing its losses is not compatible with this latest fare offering by Mesa. Their actions continue to strongly suggest predatory behavior.

This latest effort to put price pressure on its competitors may in fact be aimed at forcing Hawaiian and Aloha to settle their lawsuits with Mesa. That company’s potential liability is huge now, but go!’s competitors may be so ready to see this airline leave their market that they may be persuaded to cut a deal. Another possible explanation is that Mesa is searching for an exit strategy, and a government agency or court decision could likely provide the answer. The battle to gain a footing in Hawaii’s interisland market is not going well for Mesa. Their hard-charging CEO is known for not backing down from conflicts, and to do so may injure his negotiating stance with other companies in the future. If a government agency or court clips go!’s wings, however, Mesa can claim to be the victim as it departs the interisland market. The CEO retains his tough-guy reputation, and Mesa gets itself out of this money-losing experiment. The longer that go! continues offering ticket prices which are far below its costs, the more likely this conflict will be ended in court or by a government order.

2006-11-09T01:54:00.000-08:00

They’re Back

For more than a week in late October and early November, the www.dontflygo.com website has been stripped of content. Had the sun finally set on this anti-go! airlines website? All that remained visible was a link for donations and a message that the site was in the process of being sold. Apparently that transition is now complete because the website is active again and fully engaged in its previous task of making life difficult for go! airlines and the CEO of its parent company, Mesa Air Group.

Along with new content, the website also announced that HERO, a group of Aloha, Hawaiian, and Island Air employees, has sent a letter to Hawaii’s Attorney General, requesting an investigation of go! airlines for activities which allegedly violate state law. Specifically, the letter cites go!’s continued sale of below-cost air tickets and statements by Mesa Air officials which back up HERO’s contention that go! came to Hawaii with the specific purpose of putting Aloha Airlines out of business.

To publicize HERO’s request for a Hawaii State investigation of go!, the employee group held a rally in Honolulu on November 8. Employees from all three pre-go! Hawaii airlines took part in the late-afternoon rally by lining Beretania Street in front of the Capitol Building and sharing their message with passing motorists during rush-hour traffic. For photos of the rally, visit www.airlinesofhawaii.com/rally.htm. Within six hours of the event, the HERO group had produced a smart and entertaining video of their rally, which demonstrates the power of new media to get a message out.

Hero's new message is noticeably more palatable than their previous efforts. They're now saying "give us a fair fight and we'll take you on by running better airlines than you. Give us an unfair fight by selling tickets at below cost to drive us out of business and we'll take off the gloves in our response." This is one group which Mesa should not underestimate.

2006-11-01T17:43:00.000-08:00

High Stakes Poker

Visit the websites of Hawaiian, Aloha, or go! airlines during November, you’ll discover that a traveler can snag a $39 fare for departure times throughout the day. He can lock in one of these fares the night before travel. Why pay more?

The problem for go! is that this prolonged fare war is beefing up the arguments of its competitors that go! is dumping below-cost tickets on the market in order to force one of the established airlines out of business. Go!’s parent company Mesa Air Group (Nasdaq: MESA) has more money in the bank than the other two airlines, and since the vast majority of its revenue originates on the mainland, Mesa has a reduced exposure to these losses in Hawaii.

An argument by Mesa that it is trying to find profits by expanding the market simply does not hold up under scrutiny. For the third quarter of this year, go!’s lowest prices were 50% below pre-go! ticket prices (and sometimes much deeper), yet this discounting yielded a meager 3% increase in interisland traffic. The bottom line: there’s no way that such deep discounting will generate enough extra traffic to compensate for the revenue lost by discounting. If go! wanted to minimize its losses, it could offer fewer $39 tickets, but the airline is apparently not interested in taking that approach.

In the past, Mesa has pointed out that a majority of tickets sold during the fare war have been at price points higher than the lowest advertised fare. Yet in November we see almost across-the-board $39 fares. Few travelers are paying more.

So, what does Mesa hope to gain by this pricing behavior? It certainly is causing interisland losses over at its competitors. The discounting will not likely result in Hawaiian and Aloha giving go! a price advantage, however. Both long-time interisland airlines made that mistake in 1981 with Mid Pacific Airlines, and they know enough to avoid repeating it. Perhaps Mesa is hoping that one of the airlines will draw down its number of flights. This behavior is more possible than gaining a fare advantage, but it is still unlikely. To give go! a better foothold in the market is a long-term mistake for either of the two long-time interisland airlines. Mesa spoke of inroads when Aloha moved capacity out of its Honolulu hub and into direct flights from Maui to Lihue and Kona. This move may not have been a mistake by Aloha, however. It prevented go! from entering these potentially-profitable Maui markets first. Remember, this is a chess game, and it’s necessary to think several moves ahead.

Aloha and Hawaiian are feeling serious financial pain. They do, however, possess strong legal cases which are becoming stronger with each passing month. This is a classic game of chicken as airliners are rushing down the runway at each other. Someone has to flinch and nobody wants to be that someone. One solution might be a court decision which clips go!’s wings. Another solution could be a legal settlement between the parties.

As the bets get higher, so do the consequences. A continued fare war of this intensity could well lead to the disappearance of one or both of Hawaii’s longtime airlines. As for Mesa, the airline would likely survive even the largest of monetary damages, but a damaging legal decision would mean a financial bath for Mesa stockholders and could prove to be CEO Ornstein’s Waterloo. Instead of backing down from the legal threats, he keeps turning up the pressure on his competitors and ultimately on himself. If you like suspense, keep your eyes on this battle.

2006-10-26T02:12:00.000-07:00

Change in Flight Plan

Have you noticed a lack of verbal dogfights in the interisland air war lately? No truce is in order; instead we’re witnessing the next stage of this battle.

The cause for this change? Looming legal battles that lay ahead. Although Hawaiian Airlines fell short of grounding go! with an injunction, evidence revealed in the courtroom indicates that go! may well be found in violation of the law and face significant damage payments ahead. More recently, Aloha has filed suit after learning that emails between a Mesa adviser and a top official revealed a plan to force Aloha out of business. The parent company of go!, Mesa Air Group, has become more aware of its potential liability. What we are seeing right now are changes in market strategies which are byproducts of upcoming legal strategies.

In a recent Wall Street Journal article, “Mesa says that the email reflected a plan to go into the island markets with 10 airplanes; it decided that wouldn't work and instead launched in June with only five planes -- a plan it thought would work without killing Aloha.” Unfortunately for Mesa, their go! subsidiary has made multiple announcements of a planned expansion of 8-10 larger jets after the beginning of service, and the process of reselling itself as a non-predatory airline will be difficult if not impossible to pull off. There also remains the rather sticky point about go! being unable to turn a profit as long as Hawaiian and Aloha remain in the market. If the legal challenges of Hawaiian and Aloha have at least temporarily scuttled go!’s expansion plans, this is good news for the two long-time interisland airlines.

The Wall Street Journal article also mentioned negotiations between Mesa and Aloha in which Mesa would provide some interisland service for Aloha with its smaller jets. In other words, Mesa offered Aloha a chance to buy services from Mesa or face a bloodbath of losses as Mesa aggressively competes against Aloha. What’s particularly interesting about this revelation is that Mesa was originally looking to introduce their usual business model into Hawaii: providing aircraft and crews to an established airline. Only when this option failed did Mesa press ahead with plans to create a competing airline. The significance here is that Mesa likely remains keen on the idea of following the business model which presently accounts for over 90% of its operations. Should go! succeed in replacing one of Hawaii’s present carriers and profitably establish itself in the market, we should not rule out the possibility that Mesa may offer the go! operation to a larger airline. You would then see the surviving legacy interisland carrier competing against a United Express, Delta Express, or airline with a similar flavor. Such an arrangement would require a significant rise in airfares to support it.

Hawaii’s interisland market has now entered its fall doldrums when empty seats are plentiful. If you visit the websites of Hawaiian, Aloha, and go!, you’ll find $39 fares available on most flights. Visit national travel sites such as Orbitz.com or Travelocity.com and the $39 fares are nowhere to be seen. Instead, you find prices ranging from $72 to nearly $100. This is a significant strategy change from a few months ago.

In terms of potential legal settlements, Mesa must keep its go! unit operating in Hawaii so that it retains a bargaining chip. Hawaiian and Aloha meanwhile are unlikely to significantly draw down their schedules during these doldrums because to do so would improve Mesa’s argument that it can achieve a profit without putting either of the competitors out of business. Expect legal strategies to continue to heavily influence market strategies of all three airlines in the months ahead.

2006-10-13T18:09:00.000-07:00

Interisland Dogfight Heading for Court

On Friday the 13^th of October, Aloha Airlines filed suit against Mesa Air Group (Nasdaq: MESA) claiming that its rival breached confidentiality agreements with the carrier. Mesa considered the purchase of Aloha during the Hawaii airline’s flight through bankruptcy court, and Aloha alleges that Mesa illegally used confidential knowledge of the carrier’s operation to compete unfairly. Aloha specifically names predatory pricing as a complaint. This lawsuit is similar to one filed by Hawaiian Airlines against Mesa Airlines for breach of a confidentiality agreement.

In early October, Bankruptcy Judge Robert Faris denied Hawaiian’s request for an injunction to ground go! Airlines in anticipation of a full trial set for April, 2007. Hawaiian needed to prove that “irreparable harm” would take place if go! was allowed to continue operations, and the judge felt that Hawaiian Airlines did not meet this test. Judge Faris’s ruling did not exonerate Mesa Air Group, however. In fact, Faris commented that Mesa “probably breached the confidentiality agreement”.

Not surprisingly, Mesa’s Chairman put his best spin on the news and called the ruling “a big win for the people of Hawaii and for low fares.” Such tactics by Jonathan Ornstein highlight the difficulties that may lay ahead for Mesa. Ornstein is a master at using the media to best advantage. He has been known to make statements that fly in the opposing direction to available evidence. A smile, a denial, and a positive spin have served his airline well so far in this battle. Such tactics don’t work in court, however. Several observers of the hearing in Judge Faris’s courtroom commented on how poorly Mesa’s defense faired when subjected to the evidence and arguments presented by Hawaiian’s attorney. Most likely, only the high standard of “irreparable harm” saved Mesa from defeat during the early October hearing. Such a standard will not need to be met in Hawaiian’s April 2007 trial or with Aloha’s trial.

So, what can we expect from the upcoming legal action? The evidence presented so far suggests that Mesa will be found guilty of at least some misconduct concerning the confidentiality agreements. Aloha and Hawaiian should have no trouble proving that the extremely low fares forced upon them by go! have resulted in millions of dollars in losses for their interisland markets. Aloha and Hawaiian will most likely seek monetary damages along with an interruption to Mesa’s interisland operations.

The game now is in settlements before the trials begin. The potential downside for Mesa is enormous: adding damages realized by Hawaiian and Aloha to its already expensive venture into the interisland market. Aloha’s lawsuit makes the whole bargaining process just that much tougher now that two plaintiffs would need to be satisfied. The stakes have been raised in this poker match and no one yet appears ready to fold. The next year should be interesting indeed.

2006-09-25T00:19:00.000-07:00

The Dogfight Rages

The interisland air battle between Mesa’s go! Airlines and Hawaii’s longstanding air carriers heated up considerably during the past week. In court, Hawaiian’s attorney quoted emails between Mesa officials which revealed a plan to topple Aloha Airlines then raise fares afterwards. Shortly thereafter, an organization known at H.E.R.O. (Hawaii’s airline Employees Repelling Ornstein) www.dontflygo.com announced its existence. HERO is a collection of Hawaiian, Aloha, and Island Air employees who wish to see go! Airlines pack up and leave the 50^th State. To further this goal, HERO announced plans to offer public rebuttals to statements made by go!’s CEO Jonathan Ornstein. For the most part, the media has not challenged the most misleading of Ornstein’s quotes, and the group wants to level the playing field. Most recently, go! announced $19 interisland fares which were quickly matched by competitors. Study the contrails in the sky as each contender maneuvers for best position, and you will discover the pattern of how all these actions are related.

First, consider the court hearing. Mesa Air Group signed a confidentiality agreement with Hawaiian Airlines after reviewing sensitive information during a time when Mesa claimed interest in purchasing that airline. Mesa then went into business against Hawaiian before the release date from the agreement. Additionally, Mesa claimed to have destroyed the documents in question, but the air group somehow managed to use wording from one of those documents at a later date. Hawaiian’s attorneys feel they have a strong case against Mesa and will seek significant damages during the upcoming April 2007 trial.

The purpose of last week’s hearing was to request a court action to prevent go! from selling tickets between now and the April court date. This is a tough challenge, because Hawaiian must show that irrecoverable harm may result if Mesa’s go! continues selling tickets. Perhaps the strongest scenario favoring an injunction against Mesa would be the potential demise of Aloha Airlines. Should go! muscle out Aloha prior to the court date, then the competitive tapestry of interisland travel would be forever changed. Mesa would then argue that to maintain competition it should not be expelled from the market, using a logic similar to the young man who murders both his parents and then asks the judge for leniency because he is an orphan.

As this piece is being written, Judge Faris is deciding which way to rule. Mesa’s chairman Jonathan Ornstein did his cause no favor by announcing the $19 fares during this critical period. The newest fare war only supports the contention of Hawaiian’s attorney that go! needs to be stopped before irrecoverable damage is done.

As for the $19 fares, how close to break even are they? Go! would need a load factor of about 205% to pay the most basic bills with these fares. To picture such a load, imagine one of go!’s 50 passenger jets with every seat full. There’d be an additional 20 passengers on the left wing, 20 passengers on the right wing, and about 11 passengers on top of the fuselage and tail in order to generate break even revenue on a typical interisland flight (using the $2000/flight cost claimed by go!). Nonetheless, Mesa’s Ornstein continues to push the argument that Hawaiian and Aloha were overcharging interisland customers and go! is here to bring fair ticket prices back. Go! named the new fares HERO fares as a slap at the employee coalition.

How are we likely to see this dogfight concluded? Quite likely legal action may be the deciding factor. Mesa’s Ornstein is crafty in working the media to best advantage, but the legal process of discovery and testimony do not allow such freewheeling tactics.

Should market forces rule this dogfight, the established airlines retain an altitude advantage associated with aircraft comfort, flight crew experience, and established records of reliability. The battle will also involve two opposing philosophies. Mesa’s Ornstein is betting that Hawaii air travelers will buy go! tickets to extend the fare war as long as possible and that the average traveler will remain unconcerned with the full scope of this conflict. Ticket prices rule. The opposing camp represented by HERO and the established airlines will benefit if Hawaii’s air travelers react negatively to predatory practices and misinformation. They gain if the consumer still has a conscience. This is a losing proposition in many parts of the country, but maybe not in Hawaii. There’s still an aloha spirit here, and you only need to look at the campaign strategies of Hawaii’s politicians compared to their mainland counterparts to realize how different Hawaii really is from the mainland culture.

Ornstein’s Mesa Air Group blasted out of the blocks in June with a rather spectacular 82% load factor. Those numbers decreased to 64.5% in August, signaling that go! was already losing some of its steam. Right now, the average Hawaii resident is not aware of the extent of go!’s predatory practices, but HERO and the established airlines are beginning to make inroads. The September 23 Star-Bulletin article by Dave Segal was a milestone of sorts in that it allowed go!’s opponents such a rich opportunity to express their concerns about the new carrier.

Who will win this contest of wills? It’s one of the most intriguing business stories of recent years. The action will likely make the aerial scenes from FLYBOYS appear tame. Stay tuned.

2006-09-08T01:44:00.000-07:00

The Chess Match

The analogy of a chess game works well to explain the current battle for survival in Hawaii’s interisland market. On one side of the board is Jonathan Ornstein, who’s go! airline is a subsidiary of mainland-based Mesa Air Group. On the other side are the investors and managers of Aloha Airlines and Hawaiian Air. This is a fight to the finish, a game where checkmate is the objective. If Ornstein loses, his go! airline leaves the Hawaii market. A loss for either Aloha or Hawaiian Airlines likely means the end of that company’s existence. The surviving legacy carrier then gains a strengthened go! as a long-term competitor, not a desirable outcome either.

In this conflict there’s hand-to-hand combat amongst the pawns in the front lines, but the real game takes place in the backfield as the major players maneuver for advantage. The match may appear dull to a spectator unfamiliar with the subtleties of the game, and yet a master will practically hold his breath as he watches the pieces align and the lines of power develop.

The fare skirmishes, the addition or deletion of a plane or two, and the PR successes are each relatively minor moves in this game. In order for Ornstein’s go! to claim a checkmate, he must bring one of his competitors to its financial knees. If that airline enters bankruptcy, cannot find funding, and goes out of business, Ornstein will have succeeded in making room in the market for go!. Without the departure of a competitor, go! is unlikely to find profits. For Hawaii’s traditional interisland airlines to win, they must convince the directors of Mesa to override Ornstein’s enthusiasm for this venture into Hawaii and cut their losses through retreat.

Sometimes a competitor will perceive a weakness on the left or right side of the board and concentrate his attack there. Ornstein likely felt that Aloha’s corner provided the best opportunity for a victory, because he announced Mesa’s venture into Hawaii on the same day that Aloha publicized the names of its chosen investors for bringing the airline out of bankruptcy. For this reason, developments in the Aloha corner of the board will have a particularly strong impact on the outcome of this game. If Ornstein’s opponents announced that a grandmaster of Bobby Fischer’s caliber had joined forces with their team, then this would be a significant development indeed.

Aloha recently announced the appointment of airline heavyweight Gordon Bethune as Chairman of the Board. Bethune is primarily responsible for Continental’s stunning turn-around, and many consider him the most capable airline executive available today. Surely his experience will aid Aloha’s cause. There’s a much bigger implication here, though. By bringing Bethune onboard, we learn much about the positioning of Aloha’s major pieces. No airline executive wants to have a company go belly up during his watch, especially one with 60 years of proud history. No doubt Bethune and billionaire shareholder Ron Burkle discussed Aloha’s prospects prior to Bethune’s decision to come aboard. If Bethune believes there’s good reason Aloha will succeed in repelling Mesa’s invasion, then we can expect that Aloha’s major pieces are positioned better than meets the eye of the casual observer.

So, grab a chair and make yourself comfortable. The game is livening up.

2006-08-20T01:30:00.000-07:00

Build It and They Will Come?

Go!, the Hawaii subsidiary of Mesa Airlines, plans to introduce up to a dozen large jets into the interisland market next year. The ten million dollar question is where will passengers come to fill the jets and allow a profit?

A CEO or marketing expert needs to know the relationship between the price of his product and consumer demand for it. In some cases, there’s not much change in demand as prices fluctuate. For example, ticket prices on the last flight off an island before a hurricane strikes are not likely to have much an effect upon the demand for that service. On the opposite extreme, if one airline offers tickets at a lower price than its competitors, that airline is likely to see a very significant increase in demand for its product.

Now, let’s look specifically at air travel. Underpricing your competition is not a realistic strategy because the competition is almost certain to match fares. Therefore, we need to instead look at the overall increase in demand for air travel on a route as fares decrease. The low-fare airline is counting on two mechanisms to increase available customers: generating more total travel on that route, and pulling traffic away from other forms of transportation. Southwest Airlines is renowned for increasing demand when it enters a market. Unfortunately, an airline is heading for trouble if its decision-makers expect a similar response to low prices here in Hawaii.

The answer to this disparity in consumer response is quite simple: nobody is currently driving their car from Honolulu to Maui. An interisland carrier cannot use the same strategy that works for Southwest on the mainland because there are no drivers to convert to air passengers. In fact, we’re likely to see just the opposite effect next summer as the high-speed ferry converts some flyers to travelers who bring their Dodge Neon along on the Maui trip.

Thus, an airline must generate more total travel on a route to fill up more of its seats, and this strategy has severe limitations. Hotel rooms priced at $200 a night put a damper on travel even if the interisland fares were $1 a ticket, and your auntie on Kauai will lose enthusiasm if you show up at her dinner table too often.

Go!’s CEO Jonathan Ornstein is quoted in news articles as saying that his airline could be profitable if its load factors and fares remain constant once it introduces its new jets. Unfortunately, the arrival of the new planes will increase the number of interisland seats by some 24%, and we can expect load factors to plunge accordingly. Can we realistically expect to see the fares and load factors of June throughout the year once a massive number of seats have been added to the interisland market? No way, not even close. Losses on interisland routes will be huge if this massive addition of seats ever takes place.

2006-08-14T16:06:00.000-07:00

The Battle Ahead

So, how are we likely to see the inter-island airline battle shape up? Two months of competition give us a pretty good clue.

Of all the previous startups that took on Hawaiian and Aloha, the current battle most closely resembles the conflict brought about by Mahalo Airlines. The main reason for this parallel is that both Mahalo and go! entered the inter-island market during years of negative or slim growth in the market. In order to be competitive, the startup airline must offer a substantial number of flights to each destination. Therein lies the rub, for by expanding the number of seats in the market, load factors for all inter-island carriers drop and profits become difficult to achieve. Go! advertised heavily in June and offered fares as low as $19. These fares were matched by the competition and brought in enough extra travelers so that in June go! filled 82% of its seats and the other carriers flew with heavy loads as well.

Come July, some of the novelty of the new airline dissipated and go!’s load factor fell to 73%. With such loads, go! needs to bring in about $55 for each ticket sold in order to break even (it averaged about $41 per ticket in June). Keep in mind that this $55 figure does not include taxes and other fees tacked onto tickets. When these additional fees are considered, a customer must pay go! over $60 a ticket on average for go! to break even with a 73% load factor, and it’s hard to generate much excitement at such a price point.

Go!’s response was to offer a brief $29 fare sale. This tactic will help raise its load factor, but its average income per ticket falls. We once again see a repeat of the Mahalo years: efforts to raise ticket prices to profitable levels cause load factors to drop off, and efforts to raise load factors through fare wars cause the average ticket price to fall short of what’s necessary. It’s a frustrating seesaw for an airline trying to break into the market, and these are the robust summer months. Things get leaner once September arrives.

To remedy this seesaw effect, go! proposes to introduce 8-12 larger regional jets into the inter-island market by late 2007. The larger jets provide better economy per seat/mile, but they also greatly expand the number of empty seats flying between islands. The net result is that go! and its competitors fall even farther away from profits compared to the current competition.

In order to come up with a combination of load factor and income that prevents losses, go! must find some way to fill a higher percentage of its seats than the competition. Such a feat is not easily accomplished. Let’s look at particulars…

Aircraft- The advantage here goes to Aloha and Hawaiian. Both fly jets with plenty of room for luggage and decent seat-space for each passenger. Go!’s 50-passenger regional jets fall significantly short in both areas. Larger 90 or 110 seat regional jets would be an improvement over the 50 seaters, but the new jets still would not provide an equivalent experience to Boeing 717s and 737s.

Service- Likely a draw. With its smaller jets, go! may indeed get the baggage to the customers faster. Is this enough? Both Aloha and Hawaiian are operating reliable airlines at the present time. Hawaiian holds the nation’s on-time record for more than 30 months in a row, and Aloha recently received accolades for the lowest complaint record in the country. These are tough airlines to out-serve.

Mileage Programs- Aloha and Hawaiian lead here. Aloha has teamed up with First Hawaiian Bank on a VISA card which provides Aloha miles, and Hawaiian has a similar agreement with Bank of Hawaii. The incumbent airlines hold an advantage here because participants would rather fly for free on credit card miles than buy a ticket.

Contracts- Wild card. Will go! capture a significant number of inter-island contracts with large travel groups? This scenario is unlikely until after spring of 2007, due to litigation filed by Hawaiian Airlines which has the potential to halt go!’s service for a prolonged period of time. Most observers believe it is not a frivolous lawsuit and has a chance of success. Travel companies do not like to take chances with such matters.

Price- A dead end. As go! offers more cheap tickets, so do its competitors. The overall increase in traveler does not make up for the decrease in revenue per ticket sold.

So, how can go! succeed in profitably penetrating Hawaii’s inter-island market? It’s primarily a matter of staking its claim to become heir-apparent to a piece of the market should one of the incumbent carriers falter. Go! then helps these competitors falter by carrying on a prolonged interisland fare war.

The inter-island competition really depends upon the overall health of each company. Keep in mind that go!’s parent company Mesa Airlines makes the vast majority of its income from contracts with other airlines rather than from airline operations itself. If fuel prices go through the ceiling, if a Hawaii-to-the-mainland fare war erupts, or if passengers travel less because of a terrorism disaster, Hawaiian and Aloha take a significant hit, but Mesa does not. These are scenarios in which go! stands the greatest chance of replacing one of Hawaii’s traditional carriers.

Similarly, Mesa has its vulnerabilities. Its profits may fall well short of the projected $100 million this year due to problems with a Delta Airlines deal and other surprises. As profits drop at Mesa, the stockholders become less tolerant of a Hawaii subsidiary which shows no promise for profits anytime soon. To understand this interisland battle, you need to keep your eyes on the broader health of the parent companies. This is a war of attrition.

How is the battle likely to change over time? Previous interisland startups found their best success early on, as consumers equate inexpensive tickets with that startup company. Over time, the consumers become accustomed to all interisland airlines offering the same low fares, and that link lessens. The consumer is then likely to choose the airline he prefers to fly on, rather than the airline which brought the fare wars in the first place.

If the startup airline threatens to bring financial ruin to one of the traditional airlines, expect to see the target airline’s labor groups jump into the fray. Airline management is positively pleasant to deal with compared to the barbs that labor can throw. Most likely, you would see the pilots of a traditional airline buy newspaper space pointing out the downside of flying on a startup airline. The startup pays less for pilots and can operate less expensively for this reason, but what are the costs? Since traditional airlines pay double the startup’s captain’s wages and more than triple the copilot wages, we can expect that the startup’s crewmembers will be far less experienced than crews at the traditional airlines since the startup airline is used by many pilots as an experience-building transitory job, rather than as a career. Pilots of the traditional airline will emphasize this difference in experience levels and the implications towards flight safety. They're also not shy about bringing up issues such as near accidents, Mesa's flight cancellation rate on the mainland, and Mesa's mainland ticket pricing. Labor is a tough customer to deal with.

In conclusion, when a startup airline enters the interisland market during times when the market is not growing, its arrival creates a surplus of seats in the market, which leads to lower load factors and losses for all parties. These lower load factors can temporarily be addressed through deep fare wars, but the dismal income from each ticket sold does not allow profits. The game becomes one of displacing an incumbent airline, rather than peaceful coexistence. Don’t underestimate the staying power of the incumbent airlines. This is a life-or-death struggle for them, and they’re not likely to go away quickly.

2006-07-28T19:46:00.000-07:00

Flying on Thin Numbers

This week, Mesa Air Group released figures regarding go!’s performance during June. The Hawaii startup airline brought in approximately $1700 on each flight, needed about $2000 a flight to break even, and filled 82% of its seats. Go!’s competitors have been counting passengers on the new airline and claim that 75% of seats filled is a more accurate figure. In any event, we can distill some important data from these numbers. Go! brought in about $41 a seat in June and needs to bring in about $50 a seat if it fills 80% of its seats. If you believe the competitor’s figure of planes flying 75% full, the break-even ticket price rises to $53. This is an important concept to grasp, that as the planes fly less full, the break-even fare rises.

Mesa’s CEO went so far as to say that if go! can maintain the same load factors (percentage of seats filled) when it introduces larger jets next year, it will be breaking even. This is a taller order than it sounds. Let’s take a look.

Presently, go! provides about 8% of the interisland seats. Its expansion plans to larger jets would result in a nearly 300% addition to its current service, and this move would increase the total number of interisland seats by about 24%. How go! plans to keep its current load factor after flooding the market with airline seats remains a mystery.

Now, consider the effect of the high-speed ferry service which is coming next year. Let’s say the ferry captures 10% of inter-island traffic, not a particularly tough number to imagine. You therefore see a 10% drop in air passengers on inter-island routes, and a corresponding drop in percentage of seats filled. By the end of 2007, if you consider the effect of seats added to the market by go! and by the ferry, you could see inter-island jets flying with 60% load factors instead of the present 82%. This glut of seats would be devastating to all competitors.

We have witnessed a shrinking interisland market for several years now. The trend is likely to continue, but a fare war and good economic times may give us a temporary reprieve. Can we expect the same level of flying throughout this year that we’ve witnessed in June? Hardly. Summer is prime tourist season, and June was the first opportunity for islanders to take advantage of $19 and $39 fares. The $19 fares are gone now and some of the pent-up demand has dissipated with it. The rest of the year will provide more challenges for all three airlines.

Here in Hawaii, we’ve seen one other example of a startup airline introducing a large number of airline seats to the interisland market during a time of no growth. This was during the 1990s when Mahalo Airlines challenged Hawaiian and Aloha Airlines. The results were not surprising. Mahalo brought in several ATR-42 turboprops and took losses. Over a period of five years it tried high fares, low fares, and everything in between, but nothing brought profits. Eventually Mahalo folded its wings.

Hawaii’s interisland market is small enough so that additional seats provided by a new entrant become a major obstacle for that same competitor to ever achieve profitability. In other words, the seats added by the new entrant lower the load factors far enough so that the break-even fare climbs out of reach. If the airline raises fares, load-factor drops, and the break-even point remains elusive.

Go!’s expansion plans only make sense if Aloha or Hawaiian Airlines vanish from the interisland market. Otherwise, we’re looking at a market flooded with empty seats by the end of 2007 and lots of red ink to be shared by all three airlines.

2006-07-22T00:36:00.000-07:00

Understanding Go!

Don’t try to figure out Hawaii’s newest interisland airline by examining that company under a microscope. To understand go!, you need to broaden your view and study its parent company, Mesa Air Group. That task completed, go!’s role becomes evident.

Mesa began as a regional airline in 1982, but at some point the business evolved into a less glamorous but considerably more profitable enterprise. It began providing regional aircraft, crews, and maintenance to large airlines such as Delta, United, and America West. The idea is that the big airlines sell the seats under their own names to take advantage of their marketing clout, but Mesa provides its services, taking advantage of a lower cost structure. The big airlines end up absorbing most of the risks: fuel price fluctuations, fare decisions, competition, etc. Mesa charges for its services by the flight-hour. Some 98% of its revenues last year came from agreements with such code-sharing partners.

What you need to realize is that Mesa Air Group provides services that it customers could perform for themselves. Accordingly, negotiations become a huge part of Mesa’s operation. It must keep aircraft leases and employee costs low enough so that it can tack on a profit and still offer these items at a price that is attractive to the big airlines. It needs to gain every advantage possible to convince big airlines to continue the agreements at suitable price points. Mesa sinks or swims according to the success of its negotiations.

Come 9/11, the U.S. airline industry went into a tailspin, losing more than $23 billion and not showing real signs of recovery until this past year. Such a dreadful business environment actually worked in Mesa’s favor. With demand for aircraft and personnel at a low, Mesa succeeded in keeping its costs comfortably below the rates it charges other airlines. As many airlines now show battle-damage from the past five years, Mesa is riding high. It has acquired several other regional airlines, expects a profit of $100 million this year, and it has access to nearly $300 million in cash.

All is not smooth flying at Mesa, however. The big airlines have extracted significant cost savings from their employees, to the tune of 30% and higher. These giants are now more capable of profitably operating 100-seat aircraft themselves. They also have laid-off employees wanting to get back to work. Mesa has a tougher job ahead when it comes to negotiating sweet deals with the big airlines. On the labor front, the Air Line Pilots Association now represents Mesa pilots, and there’s pressure to raise pay rates on Mesa’s property. While it’s new Hawaii airline go! may eventually turn a profit, in the short run go! addresses Mesa’s needs in the negotiations department.

Take its negotiations with big airlines, for instance. Mesa Air Group’s announcement to begin interisland service came within hours of Aloha’s announcement that it had chosen other partners with which to exit Chapter 11. This timing indicates that Mesa was some type of player in Aloha’s bankruptcy dealings. If Mesa could enter the Hawaii market and prevail over Aloha, this action would serve notice to other airlines that there are consequences to turning Mesa down. The ability to recover from a failed negotiation by entering that market and eventually dominating it would give Mesa an ace up its sleeve in future negotiations. Notice that Hawaii’s newest airline go! has a name which can be used anywhere in the country. Perhaps what we’re seeing here in Hawaii is Mesa’s blueprint for dealing with unsuccessful negotiations it might encounter on the mainland as well. This may be the reason why Mesa is announcing a massive increase in go!’s capacity well before it has had time to properly assess whether such an expansion will be profitable.

Go!’s arrival in Hawaii also addresses Mesa’s cost side of the equation. When negotiations for a new pilot contract begin again, Mesa will want to have as many pilots as possible in the “don’t rock the boat” frame of mind. To do this, Mesa needs to show its pilots that life is pretty good at the airline even without significant pay increases. Keep in mind that a second year copilot on a 50-seat regional jet makes only about $2300 a month. For a pilot with a 4-year college degree plus years spent gaining flight credentials and experience, this is a tough pill to swallow. Mesa wants its copilots to see plenty of expansion ahead and look beyond the dismal pay at the prospects for upgrading to captain. Captains make more than double what the copilots make, and the experience gained in the left seat of a regional jet makes a Mesa captain quite marketable with major airlines once they start hiring again. Also, many pilots like the idea of flying from Hawaii, and this is yet another reason not to rock the boat.

What happens if Mesa stops growing? There will be upward pressure on pilot wages because advancement will be greatly slowed, and the copilots become interested in making a livable wage if they’re going to spend a substantial amount of time in that position. An increase in wages decreases Mesa’s ability to cut a deal with larger airlines, and the whole business model is threatened. The “young airline growing quickly” honeymoon is a phenomenon we’ve seen before at many airlines, and once it’s over the employees demand higher wages. In the case of Mesa, higher wages present a greater than normal threat to the company’s ability to flourish.

So, if you want to understand go!, realize that it is a subsidiary of a company that’s all about cutting the deal. Mesa realizes nearly all of its revenues selling the components of airline travel to airlines. That’s a tricky business and the parent company may make decisions which are inconsistent with your expectations about a startup airline. The interactions between go!, Hawaiian, and Aloha Airlines are sure to be anything but dull.

2006-07-18T15:35:00.000-07:00

The Predatory Skies

To call an airline “predatory” is a bold accusation. Nonetheless, it’s difficult to reach any other conclusion regarding Hawaii’s newest interisland airline, go!. The actions of this newcomer don’t tell the whole story. One must also consider the timing of those actions.

First, let’s look at go!’s announcement to enter the interisland market. It came while Aloha Airlines was involved in delicate negotiations with potential investors aiming to bring the airline out of Chapter 11. This timing was, of course, more than coincidence. Go! took on the job of spoiler, the villain intent on scaring away investors and then profiting from Aloha’s demise. The tactic didn’t work, and Aloha’s financial backing came through anyway. Go! chose to make good on its threat and it entered the market quickly thereafter.

Next, consider the $45 fares ($39 plus fees and taxes) which go! has brought to the interisland market. Airline analysts agree that neither go! nor its competitors can break even with such low fares. It is reasonable for a new entrant to come into a market with a low fare to capture the media’s attention and build a customer base. At some point, however, the airline needs to move on and make a profit. Go!’s insistence that these low fares remain is an indication that a prolonged period of losses will plague Hawaii’s interisland carriers.

Go!’s announced plans to acquire 8-12 large (90 seats or more) jets for the Hawaii market is noteworthy for a couple reasons. First, the startup airline has only been in business for a month and a half during the busiest tourist season, giving it no real opportunity to properly assess the potential for profitability. Second, go!’s announcement came just a few days after Israel’s invasion of Lebanon. Why in the world would an airline announce a major investment in aircraft immediately after news that unsettles financial markets and drives oil to new highs? The answer can only be that the purpose of the announcement was to undermine one or more of its competitors.

Keep in mind that Hawaii’s interisland market has been shrinking for years now. The reasons are obvious. Airlines have increased direct flights to neighbor islands and thereby eliminated many connection flights. Medical and shopping facilities on neighbor islands now eliminate many needed trips to Honolulu. As for Oahu residents taking vacations on other islands, island hotel room rates exceeding $200 a night put the kibosh on many such plans, even if air fares are reasonable. With low airfares to the mainland, a week in Las Vegas is noticeably less expensive than a week on Maui. Why then is go! planning to add an enormous number of seats to the interisland market? Such a plan only makes sense if at least one of its competitors is eliminated, and go! appears hell-bent on making this happen. Stay tuned.

2006-07-18T01:57:00.001-07:00

What’s Different This Time Around?

A subsidiary of Mesa Airlines named go! has entered interisland competition against Hawaiian and Aloha Airlines. Can we expect a replay of past conflicts with would-be third carriers? Certainly there will be similarities. All newcomers announce their arrival with a stunning fare war. A few days before the new airline begins operations, it’s not uncommon for a brief super-far war to take place. Mahalo offered $10 fares to ensure that its planes had plenty of passengers on them for the media coverage and for minimizing losses during the first month of service. Go! used a $19 fare for the same purpose but was trumped by Aloha’s surprise free-ticket giveaway.

Nonetheless, what lies before Hawaiian and Aloha is a battle like they’ve never before encountered. For one thing, go!’s parent company Mesa is the first mainland company to enter the market. The interisland market is a minor percentage of the parent company’s overall operation, and Mesa has over $300 million at its disposal. Thus, Hawaiian and Aloha will need to outmaneuver Go!-- they cannot depend upon a war of attrition.

Probably the greatest difference between go! and previous contenders is the aim of the newcomer. Go! has taken a predatory stance right from the start. More so than any conflict that Hawaii’s long-standing interisland airlines have faced before, this is a battle for survival. This doesn’t mean that Mesa will be willing to spend $300 million to capture a place in the market. It means that Hawaiian and Aloha must convince the decision makers at Mesa that the cost of entering this market exceeds the benefit. This is a challenge which will test the resolve and resourcefulness of Hawaii's longstanding airlines.

2006-07-17T02:02:00.000-07:00

Previous Interisland Air Wars

Hawaii’s two longtime interisland carriers, Hawaiian and Aloha Airlines, have battled startup air carriers before. Each skirmish brought unique lessons.

A renegade airline named Skybus challenged Hawaiian and Aloha Airlines during the summer of 1963 by employing a single, tired DC-4 transport. The plane was a flying dinosaur by the standards of the day, but it’s owner, a longtime pilot named Walton Wood, proved that islanders would fly on just about anything if it was big and the price was right. A combined effort of the FAA and CAB clipped the wings of Skybus.

When Mid Pacific Air became airborne in 1981, the two incumbent airlines gave in and allowed the newcomer to enjoy a $5 price advantage after a bruising fare war brought standby ticket prices as low as $10.95. It was a huge mistake. Mid Pacific climbed into the catbird’s seat and expanded at will. As Aloha’s Maury Myers later explained, “You can match the competitor’s price cuts and lose money, or you can resist the cuts and lose even more money.” Mid Pacific was finally brought under control after Aloha and Hawaiian matched fares and found other methods of leveling the playing field.

Discovery Airways rekindled the air war in 1991with four-engined BAe146 jets. This time, the startup met its end when Aloha and Hawaiian discovered that a majority of the new airline’s ownership belonged to a foreigner. Laws prohibited such an arrangement, and the battle was won by attorneys and political pressure. Never again would this defense be ignored.

In 1993, Robert Iwamoto (of Roberts Hawaii) and other investors brought Mahalo Airlines into existence. Although its ATR-42 turboprops were efficient, they couldn’t provide the speed and aura of safety that jet aircraft offered. Aloha and Hawaiian matched Mahalo’s ticket prices, and eventually won a slow war of attrition. If the competition offered a less attractive plane again, the incumbent carriers knew how to neutralize the threat.

During challenges by third carriers, the established interisland airlines tightened their belts and devised creative tactics in order to survive. Quick-thinking management and a healthy relationship between management and labor is essential for each established airline to maximize its chances of surviving the ordeal.