Airlines have trouble making a profit in paradise
— -- The collapse of Aloha and ATA airlines has removed thousands of seats each week from the Hawaii air travel market, but don't expect the price of a plane ticket to rise much in the near future.
High fuel prices already had pushed up fares for U.S. mainland-Hawaii and inter-island travel even before Aloha, Hawaii's No. 2 local carrier, ceased passenger operations on March 31, and ATA pulled the plug on its few remaining West Coast-Hawaii flights on April 3.
Yet, a slowly shrinking inter-island market — and the continued presence of an aggressive price cutter, upstart Go Airlines, that already stands accused of predatory behavior — could help keep the lid on fares between the islands. Meanwhile, ATA's withdrawal from the heavily served Hawaii-mainland routes will hardly make a dent in the huge number of cheaply priced and free tickets.
Aloha's exit did take about 88,000 seats a week out of the Hawaii inter-island and Hawaii-mainland markets. But together, Hawaiian and Go already have added about 56,000 seats to fill the void.
"Hawaii is incredibly well served," from the mainland, says Mark Dunkerley, CEO of Honolulu-based Hawaiian. "We've seen a 30% increase in trans-Pacific seats in recent years, so the impact of Aloha's demise on that market will be pretty minor."
Nevertheless, he says, Hawaiian is now in the market for more planes to capture some of the business spilled by Aloha and ATA.
Six of the USA's seven largest carriers fly to Hawaii, mostly to give frequent fliers the opportunity to cash in mileage points for free trips to one of the top vacation destinations in the world. That's on top of Hawaiian's service to the mainland.
The lone big carrier that doesn't fly to Hawaii, Southwest, sold seats to the islands on its partner, ATA. Now it's looking for a new partner.
Tough environment
Hawaii is called the Aloha State, but aloha's definition — "welcoming and hospitable" — doesn't describe the airline business there.
"That market has never been very profitable" for airlines, says Jim Corridore, an airline equity analyst at Standard & Poor's in New York. "There's so many leisure travelers who buy the cheapest fares, and so many frequent fliers who go there for free, or who buy cheap tickets and use their points to upgrade" into first class."
Aloha failed to attract a buyer as potential investors concluded that the market may not support even two competitors.
"Our market has been characterized by a completely uneconomic environment for the last two years," Dunkerley says. "Aloha says they lost money every single month since Go came into the market. So this situation could not have been sustained long term, even at much lower fuel prices."
Still, he doesn't predict higher fares now that Aloha is gone.
"If Hawaiian or any other competitor in the marketplace is to cover their costs, then average prices will have to rise. But ultimately, we don't set prices; the market does," Dunkerley says.
The history of airline operations to and within Hawaii is a difficult one. A half-dozen carriers have failed in the last 40 years trying to serve the Hawaiian market. Neither Hawaiian nor Aloha ever made much money doing it. Aloha was privately owned from 1986 until it emerged from Chapter 11 bankruptcy in 2006, so its financial performance was always a guessing matter.
But government filings show that its passenger air operations earned a profit twice in the last 10 years; $5.3 million in 1998, the best year in industry history, and $1.3 million in 2003, the year before it entered Chapter 11 bankruptcy. The larger Hawaiian earned $7 million in 2007, its first profit since 1998, when it made $8.2 million.
Similarly, the big mainland carriers gave up years ago on earning profits from their flights to and from Hawaii. They view service to the islands as a marketing expense — something they must offer to make their frequent-flier programs attractive to business travelers who buy premium-price fares on other flights and are key to overall airline profitability.
A local market
The inter-island air market has changed in the last 15 years. As carriers launched non-stop service from the mainland to resorts on other islands, the number of vacationers connecting to inter-island flights at Honolulu dropped. That left the inter-island market mostly to local fliers.
Aloha's exit from the passenger business won't change the competitive landscape. Go, a unit of Phoenix-based Mesa Air Group mesa that started in 2006, has no intention of raising prices much, says Mesa CEO Jonathan Ornstein. "We think we can make money in our $49 to $89 fare structure. We're not selling every seat at $49 one way."
Hawaiian, which had nearly 50% of the local market before Aloha's shutdown, and Aloha, which had about 30%, both sued Go, saying it used information that Mesa officials obtained from the two island airlines in exploratory merger and investment talks with both carriers during their runs through Chapter 11 between 2004 and 2006.
Ornstein vehemently denies the allegations. But Go and Mesa were hit with an $80 million judgment last fall when a judge ruled that Mesa's since-fired chief financial officer destroyed evidence that could have proved Hawaiian's case. Go is appealing the ruling and the amount of the judgment. Aloha's lawsuit, which includes an allegation that Go engaged in predatory pricing, goes to trial next fall.
Ornstein concedes that skyrocketing fuel prices — jet fuel recently has sold for as much a $3.40 a gallon, up from about $1.20 a gallon three years ago — could force Go to raise fares a bit above its original prices. But, he argues, had Hawaiian and Aloha not both dramatically increased their capacity and matched Go's prices on a huge percentage of their seats, Go would have been profitable by selling a small percentage of its seats at $49 and most of its seats closer to $89, as originally planned.
Now, even with oil prices above $100, Go is unlikely to raise fares significantly because of the predatory pricing allegations.
Proving predation is extremely difficult because the courts have held that to be found guilty, a company has to raise prices enough after the demise of its competitor to recover the losses it absorbed while running its competitor out of business, plus earn a reasonable return on its "investment" in those losses. Raising prices substantially now would give legal ammunition to Aloha's attorneys.