"In the long run, peaceful coexistence is not really an option. I think you're going to see the shootout at the OK Corral."
Peter Forman's comment on TV show PBN Friday with Howard Dicus.

Bold words? Perhaps, but based upon careful observations and historical precedent. Join Peter in this revealing look at the interisland dogfight now in progress between Hawaiian, Aloha, and new entrant go! For a more up-to-date look at the fare war, check out Peter's Blog.

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 break-even price.

How can I learn more?
Visit http://airlinesofhawaii.blogspot.com/ to read up-to-date perspectives about this competition between the three airlines.

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.








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