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Mokulele and go! merger is a good move — for now


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POSTED: Friday, October 16, 2009

I was always a little skeptical about the arrival into the interisland air market of Mokulele Air. Some people were saying that we didn't need more competition in Hawaii. I, of course, disagree. Every market, small or big, needs competition. Competition is good for the consumer.

However, I must say that I had mixed feelings about Mokulele/Republics' entry. The part of me that believes in competition and in consumer choices hoped for Mokulele Air to succeed and prosper. But the other part of me believes that the odds are against one of the weaker competitors and, as a result, one of them will fail. Which one, I didn't know, although analysts seemed to have predicted Mokulele Air.

When I started Discovery Air back in the '90s, the interisland scenario was completely different. Honolulu was the hub for major transpacific airlines and the departure point for interisland air travel. Now most major carriers are flying directly to the other islands from their originating points and, as a result, the interisland connecting traffic has diminished considerably. In addition, this severe economic downturn eroded it even further.

Today, 20 years later, it is a totally different ball game. Until now we had four competitors jostling for a piece of what is left of a fast shrinking air market. At the top there is Hawaiian Airlines, the dominant carrier with huge capacity and frequency advantages. This gives it the ability to match any low fares that the new entrants or existing competitors will come up with and still leave it enough seats to sell at a higher price. Its costs are spread among a bigger fleet, the revenue stream is not solely dependent on interisland traffic and it offers a variety of services and amenities that the smaller competitors cannot offer. Frequent Flyer programs secure it the loyalty of customers.

At the other end we have Island Air, a small airline operating turboprop aircraft. Because its operating costs are much lower than those of the jet operators, if it keeps its niche and flies below the competitors' radar, it should be able to get by.

The airlines' main tool for competition is frequency and capacity. Mokulele and go!, with their small fleet of aircraft, are unable to offer either of them. Hawaiian Air has the lion's share of the transpacific traffic that is fed directly into its interisland service. Mokulele and go! are largely dependent on a small section of the point-to-point local interisland market, not enough to make it a viable business proposition.

As a result, Mokulele and go! were both faced with the classic dilemma: Stay as they are, a no-win option; or increase capacity, offer more frequencies and better amenities with the goal to stimulate traffic and capture some from the other competitors. A very risky proposition in this small, shrinking market. With visitor arrivals in sharp decline, a sluggish economy and costs rising, the odds are stacked against them. This merger, at least for the time being, seems a reasonable, face-saving solution.

The question is, will Mokulele Air keep all its current aircraft in service here in Hawaii or will it take them back and operate them in other markets?

If the latter, would go! then replace the departing aircraft? Otherwise, regardless of what the new entity's name is and who owns what, it will be back to square one. In the end Hawaii will be left with an airline that has a lower seat capacity than the two merging ones, too small and weak to be really competitive, with a very confusing name.

These are the realities of today's interisland air market — but let's hope that air competition will be kept alive and that the consumer will continue to have choices.

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Franco Mancassola, the founder of Discovery Air and Debonair Airways, also was vice president of international operations for Continental Airlines and World Airways. He lives in Hawaii.