One year flying Hawaii
Despite local losses, Mesa Air Group says it will stay
It's not Jonathan Ornstein's nature to back down from a fight.
And despite an interisland fare war that collectively has cost the market's three main carriers millions of dollars in losses, the head of Mesa Air Group's go! shows no signs of letting up as Hawaii's newest airline approaches its one-year anniversary on Saturday.
"My whole life I've been competitive," said Ornstein, the chairman and chief executive of Mesa. "I was always small and I was always active in sports. I play basketball. I played football in college. I race cars. And an environment like this (in Hawaii) is what makes coming to work fun."
What might be fun for Ornstein, though, hasn't been exactly revelry for Hawaiian Airlines and Aloha Airlines, both of whom have railed against go! for the money-losing low fares that they've felt compelled to match in what has become an unstable interisland market.
The two incumbent carriers, who later this year will mark 78 and 61 years of service, respectively, in Hawaii, also have ongoing lawsuits against Phoenix-based Mesa for allegedly using proprietary information gathered as a prospective bidder during their bankruptcies.
But Ornstein said he's in it for the long haul.
"It takes a long time in a market to become profitable and we're willing to stick it out," he said. "In the meantime, we're adding frequent fliers, adding people to e-mail, selling goods and services on our Web site and generating good will by our low fares and excellent service. You don't build a brand overnight."
go!'s entry into the market on June 9, 2006, certainly has had more than its share of fanfare.
Its recent $9 one-way fare special -- matched by rivals Hawaiian and Aloha -- is just the latest zinger in a series of marketing moves that have brought go! widespread attention and given consumers the airline version of a lottery ticket.
Could the fares go even lower?"
"It could ... possibly," Ornstein said coyly.
But at least one airline expert questions the logic of Ornstein's determination to stick it out in the islands against two entrenched carriers.
"The third guy in any market has never been successful -- whether it's been Chicago's O'Hare or the Hawaiian islands," said airline industry analyst Robert Mann, president of Port Washington, N.Y.-based R.W. Mann & Co. "I think it would be a difficult proposition. If you assume that go! is always going to be the third guy in the market, then they're always going to be the one that's always on the bubble deciding whether to continue or not."
Hawaiian, which emerged from bankruptcy in June 2005, is backed by Chairman Larry Hershfield and his San Diego-based investment firm, Ranch Capital LLC. Aloha, which came out of bankruptcy in February 2006, has the financial support of billionaire Ron Burkle of Yucaipa Cos. LLC. But Mesa, with a market value of more than $215 billion, has a big war chest, too, and had more than $198 million in cash and equivalents at the end of last quarter.
"Mesa certainly has deep pockets, but if they have better uses of their assets (the aircraft), I think what you'll see is a graceful exit," said Mann, who briefly served as a consultant to former Hawaiian Airlines trustee Joshua Gotbaum during the carrier's bankruptcy.
"Their decision to stay in the Hawaii market at this point is a manifestation of their ego rather than financial rationale, so I think what eventually will happen is their financial rationale will run out and the assets will move to places where they have better returns, like China and other situations like that," he said.
Aloha, which some insiders have said is the most vulnerable of the two incumbent carriers, is in better financial shape since emerging from bankruptcy and disputes Ornstein's oft-repeated contention that Aloha and Hawaiian were gouging customers before go!'s arrival.
"Mr. Ornstein wants everyone to believe that prior to go!'s entry, both Aloha and Hawaiian airlines were reaping profits," said David Banmiller, president and CEO of Aloha. "He ignores the facts that both airlines went into bankruptcy and that Ornstein misused the bankruptcy processes to gain confidential information to compete unfairly, by charging a price that is clearly predatory so that now every interisland airline is losing money. You have got to wonder just what is his real hidden agenda.
"Today, the restructured Aloha has the lowest operating cost per seat of the three interisland jet operators. However, with go!'s predatory prices destabilizing the Hawaii interisland marketplace, all airlines are struggling."
Aloha had a net loss of $41.6 million in 2006 while Hawaiian's net loss came to $40.5 million. Mesa, meanwhile, had a net gain of $34 million in its fiscal year ended Sept. 30, 2006, but lost $24 million last quarter during a period in which it said go!'s operating income came in $650,000 below plan.
Analyst Jason Kremer, who covers Hawaiian Airlines for Caris and Co., said the low fares are weighing on go!'s operations.
"It was expected to increase the traffic and I don't think it's boosted traffic quite as much as Mesa expected," Kremer said.
None of the carriers break out their interisland financial data, but Banmiller said Aloha's estimates show that go!'s flights, which constitute about 2 percent of Mesa's capacity, accounted for about 20 percent of Mesa's systemwide losses last quarter.
"And we notice that Mesa's market capitalization has dropped 50 percent in the last year since go! entered Hawaii," Banmiller said. "We wonder if Mesa's shareholders are questioning the wisdom of the company's senior management."
But Ornstein said go!'s entry in the Hawaii market has the backing of Mesa's board of directors and shareholders and that's he's pleased with the airline's acceptance in Hawaii.
"In the local market, there's no doubt we carry far more than our share," he said. "We have 8 percent of capacity and 10 percent of the market. And we do it with no (mainland airline) code share, no marketing agreement and literally no significant amount of wholesale business. And if you assume that the market is half connect traffic and half local, what that tells you is we have 20 percent of the local business, which I think is outstanding, far more than our seat share would suggest we have."
Even though reducing excess capacity may be the key to any of the airlines' financial success, Banmiller said Aloha isn't going to give in to go! and cut back its level of frequency.
"Aloha is not about to change the way we do business," Banmiller said. "We will not reduce service to our customers at the request of an interloper who primarily seeks to disrupt the stability of Hawaii's interisland air transportation system."
Likewise, Hawaiian spokes-man Keoni Wagner said Hawaiian will remain steadfast.
"The market is unstable, but Hawaiian is in the strongest position of the three carriers and we will continue to focus on offering our customers the best service and value in the marketplace," he said.
Ornstein, who several times had talked about bringing larger aircraft into Hawaii in time for this summer season, now says he has decided against that move.
"The problem is there's just a question of availability of the aircraft, and our partner, Delta, has asked us to fly 14 more (CRJ) 900s for them," Ornstein said. "Given that, we decided to hold off (bringing larger aircraft into Hawaii). There's no question our competition has been very tenacious and we're right now satisfied with the aircraft that we're flying."
