Airlines of Hawaii

Location: Kailua, Hawaii, United States

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

Friday, March 28, 2008

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.

Monday, March 24, 2008

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.