Talk Story
The Hawaiian-Aloha
airline merger’s off,
but don’t expect
business as usualTHE "ATTABOYS" are still echoing around the state Capitol as legislators give each other credit for halting the Hawaiian and Aloha airline merger. Perhaps legislative hearings did affect the decision to call the whole thing off, but more likely it was $32.6 million in federal bailout cash. Hawaiian got $24.9 million and Aloha $7.7 million.
Now, economists and industry experts are having second thoughts about the $5 billion industry bailout that followed the Sept. 11 terrorist attacks, a bonanza that was intended to send the message that terrorists can't easily knock out a major U.S. industry.
It worked. No major airline has filed for bankruptcy during the last six months and none appear to be on the brink. Last week, in fact, United announced an expanded flight schedule, although its current system capacity remains about 16 percent below last year's.
An unintended consequence, however, is that the bailout relieved the financial pressure that might have instigated fundamental change, such as bringing airline wages into line. Union workers are now using the bailout to resist wage reductions and other concessions.
Although painful, change was needed. The airline industry was in trouble before Sept. 11, posting losses of approximately $3.5 billion for the year preceding the attacks on the World Trade Center and the Pentagon.
After Sept. 11, airlines slashed fixed costs, laying off as many as 100,000 employees, slashing schedules and switching to smaller planes. However, experts now say a shakeout with one or two major bankruptcies and consolidations -- such as the Hawaiian-Aloha merger -- would have left the surviving carriers in a much healthier condition.
RICHARD McCORMACK, who used to manage the Dole pineapple plantation near Waialua, once explained to me that, given optimum growing conditions, a pineapple plant will not bear fruit. To make a pineapple the plant must be stressed.
In the wild, a heat wave, cold snap or drought will do the trick. On the plantation, growers apply a gas, using a tractor-drawn boom to stress the plants and trigger an entire pineapple patch to fruit simultaneously. That's how ripe pineapple can be available all year round. Without stress, however, there would be no fruit.
In the same way, industries under stress -- such as an economic recession -- find ways to become more efficient. Prosperity breeds complacency -- why change when everything is going great? Recession, on the other hand, triggers efficiency, productivity gains and finding innovative ways to do things better and cheaper.
Well-intended or not, government interference, such as regulation, taxation, managing interest rates or doling out subsidies, always runs the risk of making things worse by postponing what's inevitable or necessary.
Efforts to keep two competing interisland airlines were aimed at preserving convenient schedules, low fares and quality service. Unless a new competitor quickly entered the market, an Aloha-Hawaiian merger would create a monopoly that could call the shots -- customers be damned.
Monopolies restrict quantities to reduce costs and increase prices to improve profits. Accordingly, anybody who took Econ 101 would expect a merged airline to eliminate flights -- especially marginally profitable ones, such as those to smaller airports or at off-peak hours -- and to raise ticket prices, especially during the busiest times of day.
High ticket prices and lots of customers who want more off-peak flights and service to more airports are an open invitation to a new airline. So is a single, expensive or arrogant, monopoly competitor. In the past, however, government has raised barriers to keep newcomers out.
It stepped in when United and other mainland airlines wanted to pick up passengers in Honolulu and fly them to the neighbor islands, reserving the interisland business exclusively for interisland carriers. It also placed limits on foreign ownership, which helped pull the rug out from under Mahalo Airlines, which went bankrupt in 1997.
Recently, direct flights to the neighbor islands from mainland and foreign airports have led to a decline in passengers switching to interisland flights at Honolulu International. As a result, both airlines rely more and more on trans-oceanic flights, charters and air cargo.
The merger is off but, with both interisland and trans-oceanic markets shrinking in a post-Sept. 11 world, it appears something's gotta give.
It wouldn't surprise me if the practice of selling fare coupons at a single price for any flight, regardless of demand, distance or cost falls victim to the new economic reality.
In the past, if either airline had forsaken coupons, the other might have had the resources to hold out and build a commanding market share.
Today, it's a whole new ball game.
John Flanagan is the Star-Bulletin's contributing editor.
He can be reached at: jflanagan@starbulletin.com.