Hawaiian to raise fares if Mesa leaves market

Mesa's lawyer predicts a disaster for local airline consumers

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Interisland airfares, which have been driven as low as $1 in the past year, would rise to a more "rational" price if Mesa Air Group's carrier go! were to leave the market, said Hawaiian Airlines' chief executive.

Mark Dunkerley, Hawaiian's president and CEO, told a federal bankruptcy judge yesterday that the company would return to pricing air tickets reasonably to cover the actual costs of transportation.

However, he would not specify how much the company would increase fares if Hawaii returned to a two-carrier market dominated by Hawaiian and Aloha Airlines.

Hawaiian is seeking a one-year ban on go! selling tickets in the islands, in addition to $173 million in damages, plus interest and attorneys' fees.

Mesa attorney Maxwell Blecher told the court that Hawaiian's lawsuit is part of its plan to drive Mesa out of the market, which would be "disastrous" for local consumers because it is helping to drive air prices down.

Without Mesa, Hawaiian would likely charge the highest price the market would bear, leaving consumers with no other choice, he added.

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By Kristen Consillio
kconsillio@starbulletin.com

The chief executive of Hawaiian Airlines told a federal judge yesterday that interisland airfares would rise if Mesa Air Group's carrier go! were to leave the market.

The market, which has seen interisland air prices driven as low as $1 since Phoenix-based Mesa entered Hawaii in June 2006, would get back to "pricing rationally" in order to fairly compete in the low-margin business, said Hawaiian Airlines President and CEO Mark Dunkerley.

"I don't think anybody believes that $1 and $9 fares for one second represents a reasonable price that covers costs," he said. "It's clearly the case in a world in which each competitor is trying to compete fairly ... fares would rise from where they are currently."

However, Dunkerley would not specify how much his company would increase prices if the state reverted back to a two-carrier market dominated by Hawaiian and Aloha Airlines, saying that he could not generalize pricing because fares are sold through a variety of different sources including wholesalers, travel agents and other airline partners.

"The market will establish the fare levels," he said. "The notion of a single lowest fare doesn't exist."

Hawaiian is seeking a one-year injunction to prevent go! from selling tickets in the islands, in addition to $173 million in damages, plus interest and attorney's fees.

Bleeding red ink

Since Mesa Air Group started operating go! in June 2006, Hawaiian and Aloha airlines have lost nearly $80 million.

Quarter	Hawaiian	Aloha
Third quarter 2006	+$7.760 million	-$9.851 million
Fourth quarter 2006	-$9.630 million	-$8.532 million
First quarter 2007	-$11.892 million	-$24.265 million
Second quarter 2007	-$3.941 million	-$18.758 million
TOTAL	-$17.703 million	-$61.406 million

Source: Hawaiian and Aloha financial reports

Dunkerley also said that if Mesa were to leave the market, air capacity would not necessarily decrease as a result because Hawaiian would keep the same flight schedules as long as there was customer demand.

During questioning in the second day of the high-stakes trial that could determine go!'s future in Hawaii, Mesa attorney Maxwell Blecher asked whether Dunkerley believed if a one-year injunction to prevent go! from selling tickets would be the death knell for Mesa in Hawaii.

Dunkerley responded only that it would be for most businesses.

"The purpose of this lawsuit is to drive Mesa out of the market," Blecher said. "It would be disastrous for the consumers. Mesa is the equalizing force driving the prices down."

Peter Ingram, Hawaiian's chief financial officer, estimates the company has lost between $40 million and $50 million from October 2006 through last month due to Mesa's presence in the market, because Hawaiian was forced to extend hours to match Mesa's schedule and artificially lower air prices to maintain its market share.

Bankruptcy Judge Robert Faris ruled last week that Mesa misused Hawaiian's information when it decided to enter the Hawaii market and that the data was a substantial factor in Mesa's decision to come here.

Janette Freeman, Hawaiian's manager of legal affairs during its bankruptcy, who was responsible for monitoring a Web site for potential investors, testified that Mesa downloaded Hawaiian's restructuring and business plan, budget and list of contracts, in addition to other information, at least a dozen times when it was a first-round bidder for the company.

$173M penalty could be deadly blow

By Dave Segal
dsegal@starbulletin.com

Mesa Air Group Inc., which has yet to make a profit on its go! interisland airline since starting service in June 2006, would take a substantial financial hit if forced to pay even most of the $173 million that Hawaiian Airlines is seeking in its lawsuit.

An injunction that would prevent Mesa from selling tickets as go! for one year also would be damaging.

Hawaiian has accused Mesa of misusing confidential information that Mesa obtained as a potential investor during Hawaiian's bankruptcy.

The $173 million would represent nearly all of the $197.7 million in unrestricted cash that Phoenix-based Mesa had on its books at the end of its fiscal third quarter, which ended June 30. It would be nearly half of the $355.9 million in revenue that Mesa generated during that quarter and would far exceed the $2.6 million in profit that Mesa made in the period.

For Hawaiian, $173 million would exceed the $152.8 million in unrestricted cash it had as of June 30 and represent about two-thirds of the $244.2 million in revenue that Hawaiian earned for the period. Hawaiian had a net loss of $3.9 million in the quarter.

Mesa's interisland carrier go! represents only about 2 percent of the company's overall business. But a penalty anywhere close to the $173 million requested by Hawaiian could force Mesa to rethink its presence in Hawaii.

"It would depend how deep are Mesa's pockets," said airline industry analyst Robert Mann, of Port Washington, N.Y.-based R.W. Mann & Co. "The cash they have is required to run their business, so they couldn't pay the fine out of working capital. They would have to look to alternative sources, whether it's insurance or having to bond it out. They could raise capital in the public markets by selling equity or selling bonds, and then use the proceeds to pay the fine."

Mann theorized that Mesa could move its five CRJ-200 jets in Hawaii to China for Mesa's new operation there if it is forced to stop flying as go!

"(An injunction) would clearly create an untenable situation for go! to maintain its operations with no method of generating revenue," Mann said. "The question is, Is there any better use of their assets? My view has always been that they've been looking to move these assets to another fast-growing market where regional aircraft is in demand. They did that arrangement in China, and that's indicative of where I thought the assets would be eventually destined."

Another aviation industry consultant, George Hamlin, does not think Mesa would take the bankruptcy route if hit by a substantial penalty.

"If most or all of the cash went to settle a lawsuit, they'd need to do one of two things: either raise the money or go into bankruptcy," said Hamlin, a managing director at Airline Capital Associates, an aviation consulting and aviation firm based in New York City. "Bankruptcy typically wipes out the equity, which I don't think Mesa's management would find as a palatable alternative."

In the months since go! began flying, Hawaiian has lost $17.7 million, and Aloha Airlines, which separately sued Mesa for misusing confidential information obtained as a potential investor during Aloha's bankruptcy, has lost $61.4 million. Aloha, which also has sued Mesa for conducting predatory pricing with go!, is scheduled to go to trial in April.