Joining forces


POSTED: Wednesday, October 14, 2009

Mesa Air Group, parent of go!, is getting more lift in Hawaii's tough airline market, and it's taking struggling Mokulele Airlines along for the ride.

In a merger announced yesterday, Mesa and Mokulele's majority investor, Republic Airways Holdings, agreed to combine the two interisland rival carriers into go! Mokulele, which will compete head to head with the much larger Hawaiian Airlines.

Mokulele and Mesa, who were once code-share partners, had been at odds since late last year when Mokulele formed an alliance with Indianapolis-based Republic Airways to fly three Embraer 170 jets between the islands.

Despite Republic's infusion of capital and equipment, Mokulele continued to struggle, prompting rumors that it would close by year's end. Airline analysts reported that Republic, which owns Chautauqua, Frontier, Lynx Aviation, Midwest, Republic and Shuttle America airlines, needed six to nine aircraft by January to replace Midwest's leased Boeing 717s.

As part of the merger, Republic is taking the three E-170s back to the mainland by next month.

“;The short story is that Republic had higher and better uses for its Embraer aircraft,”; said Robert Mann, president of R.W. Mann & Co., an airline industry analysis firm. “;If the joint venture had failed, Mokulele probably would have had to park their planes.”;

In the end it came down to necessity, said Scott Durgin, Mokulele's interim president and chief executive officer.

Durgin said he and Paul Skellon, the highest-ranking Mesa executive in Hawaii, hammered out the deal over nearly four weeks, talking sometimes 15 times a day before finally reaching agreement yesterday.

“;We knew this had to happen. It is one of those times when rational minds need to prevail, and Paul and I got past a war and we're very competitive, but I think we have been working very well together,”; Durgin said.

Passengers can continue to book travel on both carriers, and existing reservations will be honored, the companies said, adding that customers will check in at the co-branded go! Mokulele ticket counters.

Mesa and Mokulele also will look to create greater efficiencies, but Mesa Chairman and Chief Executive Jonathan Ornstein said few jobs will be lost.

“;I don't think that the labor piece will be as big a piece as people think,”; he said. “;The vast majority of Mokulele employees will continue to have jobs.”;

About 40 percent of Mokulele's roughly 160-person work force are former employees of Aloha Airlines, which went out of business in spring 2008.

The merger is effective tomorrow and preserves operations for Mokulele, which analysts reported was losing as much as $6 million a quarter. But Mann said it is clear from the terms of the deal that Mesa ended on top.

“;There's no misunderstanding; they are just along for the ride,”; he said.

The merged carrier has been re-branded as go! Mokulele. And, according to the terms, Mesa will own 75 percent of the company, Republic will own 22.5 percent and Mokulele shareholders will own 2.5 percent.

As part of the deal, Republic will forgive Mokulele's $3.1 million in debt. Mokulele shareholders will fund up to $1.5 million to capitalize the merged company.

“;During this period of economic stress within our industry, it is especially important to closely match capacity with demand, and this arrangement allows Mokulele to right-size the aircraft within its network,”; Bryan Bedford, chairman, president and CEO of Republic Airways, said in a statement.

While consumers might not like the loss of seat capacity and the higher prices that come with the merger, and it could mean layoffs for some Mokulele personnel, Mann said the venture benefits Mesa, Republic and Mokulele.

Initially about 3,700 seats a day will be lost to the merger, he said. The drop in capacity will help all Hawaii's interisland airlines on pricing airfares, and even lessen some of the strain for niche carrier Island Air, Mann said.

“;This is the end of $10 tickets,”; he said, but added that with smaller planes, go! Mokulele will have a pricing advantage over Hawaiian. “;It's easier to break even when you have smaller planes,”; Mann said. “;This will definitely increase the annoyance factor for Hawaiian of go!”;

Hawaiian Airlines executives declined to comment specifically on the announcement but said that it would remain focused on its operations and continue to offer customers “;the most competitive services and fares.”;

Ornstein said go! Mokulele will position itself as Hawaii's lower-cost interisland air carrier.

“;We have smaller crafts so we have lower costs. And all businesses, if they are to remain in business, have to charge something more than what it costs them,”; he said.

;[Preview]    Mokulele, Go Airlines Announce Joint Venture

Mesa and Republic Airlines, the parent companies of Go and Mokulele airlines, announced that they will be merging.

Watch ]


Mesa will also benefit from accessing Mokulele's bookings and keeping other competitors from going after the spoils as they would have if the carrier had collapsed, Mann said.

“;They were boarding 50,000 passengers a month. We would like to keep that brand and their passengers and market alongside Mokulele,”; Ornstein said. “;By being able to combine our volumes, we'll do better and compete more efficiently against the dominant carrier (Hawaiian).”;

Ornstein said the strategic alliance increases the likelihood that the merged brand could move into long-haul service.

“;Mesa on its own would have never contemplated it, but with Republic's equipment it's a possibility,”; he said.

The deal also benefits Republic by allowing it to stem its losses and redeploy three E-170 aircraft to its mainland network, Mann said.

“;Mokulele was underperforming,”; he said. “;This is about cleaning the stables.”;


Star-Bulletin reporter Erika Engle contributed to this report.






        Where to look if you have questions:

        » mokuleleairlines.com/FAQ.html


        » www.iflygo.com


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