Questions and Answers
Why were interisland fares so high before go! entered the market?
Through charting interisland fares over time,
we see that, when corrected for inflation, recent interisland fares were
similar to fares charged during the past 30 years. Further, mainland
airlines typically charge more for flights of similar distances.
Still, there's a perception here that interisland fares were too high.
There are two reasons for that view. First, Since 9/11, Hawaiian and Aloha
did away with coupon books and most Kamaaina fares. At the time, both
airlines were heading for Chapter 11 reorganizations, and they needed
to quickly improve the bottom line. Unfortunately, a rather uniform fare
structure left few discounts for those islanders who needed a price break
in order to travel.
The other problem has to do with fares charged on routes from Hawaii
to the mainland. When Hawaii residents visited the website of either Hawaiian
or Aloha Airlines expecting to pay about $65 for an interisland flight,
they encountered airfares to the mainland advertised at $150. The $150
fare was the bottom of a whole range of fares to the mainland, but it
was the one the website visitor remembered. How can the airline make money
flying passengers to the mainland for a mere $150 (a trip that covers
20 times the mileage)? It can't. When someone purchases a trip to the
mainland, they typically spend twice as much as this teaser fare. Fortunately,
the fare to the mainland is not as far removed from the costs of providing
this service as you might imagine. The recent introduction of two-engine,
efficient jets on the Hawaii to mainland routes mean that these planes
burn less fuel than we ever thought possible on these routes. Conversely,
the inter-island jets still operate at low altitudes and never achieve
their potential efficiencies. Most labor tasks, such as loading and unloading
the plane, seating passengers, parking the plane, etc., are similar in
cost for both a long flight and a short flight. Thus, Hawaii's established
airlines have two problems to contend with. By advertising low teaser
fares on flights to the mainland but not on interisland flights, the interisland
flights appeared overpriced. Secondly, the cost of providing service to
the mainland has dropped relative to the cost of providing interisland
service, only exacerbating this perception problem.
Go!'s $39 fare certainly is an improvement, though, isn't it?
It's an attractive price, but unsustainable. Airline analysts agree that
neither go! nor Hawaii's other airlines can break even charging $39 fares
for interisland hops. The airline wants to give the impression that its
cost structure allows such a noticeable cut in ticket prices, but in actuality
go!'s cost of operating the flights is fairly similar to those of Hawaii's
two long-time carriers. Go! has a labor cost advantage, but it loses much
of that advantage by operating smaller jets. Go! also conveniently leaves
off the other fees when announcing its price. You have to pay $45 to enjoy
this $39 fare.
When you make reservations at go!, chances are that $39 fare will not
be available on your desired flight. You'll more likely be offered a $59
fare for a time similar to your desired itinerary or a $79 fare for the
exact flight you wish to catch. Don't forget to add the other fees to
get the final price, though. In sales, this technique is called a loss
leader, and it's an effective tool for bringing in more money than the
consumer originally intended to spend. It's the same concept as the teaser
fares offered by go!'s competitors on Hawaii to the mainland flights.
What advantages has go! brought to the inter-island market, then?
There are two, both short-term. Travelers get to take advantage of discounted
tickets during this fare war, no matter who they fly on. Over time, the
discounts tend to become less generous as the new entrant tries to make
a profit. Secondly, go! introduced a range of fares to the inter-island
market, something many residents wanted to see. If you plan ahead or are
flexible enough, you can snag one of the lowest fares. On the flip side,
since the average ticket price can not change substantially with the cost
structures of these three airlines, someone has to pay more for some of
the tickets. That somebody will likely be last-minute and holiday travelers.
Chances are that Hawaiian and Aloha would have introduced a range of ticket
prices next year to better compete with the high-speed ferry, but go!'s
arrival has sped up this process.
What problems might go!'s arrival bring to Hawaii's existing airlines?
When the dust settles, we're unlikely to see all three airlines still
flying here in Hawaii. The interisland market is a shrinking market for
the airlines, and it will shrink even further when a high-speed ferry
begins operations next year. This means that go! must pull passengers
away from Hawaiian and Aloha instead of depending upon growth in the market.
Since the interisland market is the lifeblood for Aloha Airlines, and
it's a major part of Hawaiian's network as well, both established carriers
can be expected to vigorously defend their market share. This is what
they have done with every new entrant in the past.
Do you think go! intends to drive one or more of the existing airlines
out of business?
Absolutely. First, profits will be difficult for go! while the other two
airlines are still in business. Second, go! began their push for Hawaii
service with a predatory move. They announced intentions to enter the
interisland market while Aloha Airlines was involved in delicate negotiations
for an investor to bring itself out of Chapter 11. Go!'s parent company
played the role of the spoiler, but that tactic didn't work. Instead,
go! entered the interisland market shortly after both of Hawaii's traditional
interisland carriers exited from bankruptcy. Third, go! has announced
plans to retain its $39 ($45) fare, a price point which is clearly unprofitable
to all three carriers. Fourth, go! announced its decision to add larger
jets to the fleet just a couple days after Israel invaded Lebanon and
oil prices started heading sky high. The timing of this announcement makes
no sense for a strictly profit-oriented company but makes plenty of sense
if go! is trying to persuade bankers and investors to abandon one of its
competitors. Fifth, If go! follows through with its plans to add 8-12
jets with over 100 seats apiece to the interisland market, the market
will either be wallowing in empty seats flying between the islands, or
one of the competitors will be out of business by then.
Isn't go! a small airline, the underdog in this competition?
Not at all. Go!'s parent company is Mesa Airlines, the thousand-pound
gorilla of the regional airline world. Last year Mesa brought in revenues
of over a billion dollars and it expects a profit of nearly $100 million
this year. Mesa has some $300 million in cash at its disposal and can
afford to lose money in the Hawaii market until one of the other competitors
disappears. Once Mesa gets firmly established here in Hawaii, nobody is
going to muscle them out. The reason for Mesa's success is that they haven't
run airlines so much as providing regional aircraft, crews, and maintenance
to established airlines. Some 98% of Mesa's income comes from providing
these services to big airlines United, Delta, and U.S. Air. You're likely
to see the Big-Airline, Little-Airline Scenario here.
What is this Big-Airline, Little-Airline Scenario?
In a nutshell, it is the ability for a big airline to use its financial
resources in order to prevail over an airline with fewer resources. One
of the best examples of this scenario took place in the 1980s when Aloha
Airlines acquired a DC-10 and began service between Hawaii, Guam, and
Taipei. At the going ticket prices and with expectations of carrying substantial
amounts of cargo, Aloha's plan looked viable. Unfortunately, one of the
competitors on that route was Continental Airlines. Continental responded
to Aloha's entry by upgrading it's plane to a larger model and cutting
fares to the point where Aloha couldn't make a go of it. This was a huge
crisis for Aloha, since the rest of its system couldn't support such losses,
but Continental could afford to take losses on that route until Guam froze
over. Aloha had no choice but to pull out of the service.
Isn't such behavior illegal?
Many decades ago, the U.S. government enacted laws to prevent the huge
oil companies from putting the independent service stations out of business
with money-losing prices and then jacking up the prices after the competition
was gone. This type of behavior isn't so easy to enforce in the airline
business, however. Empty airline seats are like empty hotel rooms: they
lose all their value once that flight or day is gone. For this reason,
it sometimes makes sense for an airline to sell tickets at less than the
How can I learn more?
to read up-to-date perspectives about this competition between the three
To read about the epic battles that Hawaiian and Aloha waged against
Mid Pacific, Discovery, and Mahalo Airlines, buy a copy of Peter Forman's
Wings of Paradise, Hawaii's Incomparable Airlines.
It's available in most Hawaii bookstores and online.