Hawaii's interisland fare war continues with another challenger

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A bonanza for consumers. A deadweight for airlines. A nonissue for many travel agents. That's the simplest way to describe the fare war that's been raging among Hawaii's interisland air carriers since June 2006, when Mesa Air Group launched Go, a low-cost carrier, into the intensely competitive interisland market.

From the start, the new entrant deeply undercut competitors' fares, setting published fares at $39 to $79 one-way. Some sales advertised fares as low as $19 one-way. Aloha Airlines and Hawaiian Airlines matched, and the fare war was on.

That consumers love the low fares comes as no surprise.

That the fare war is excruciating for Aloha and Hawaiian, both of which emerged from Chapter 11 within the last two years, also is no surprise.

"Competition is fierce. Everyone's losing money," said Thom Nulty, Aloha's senior vice president, marketing and sales. 

According to Hawaiian Airlines CEO Mark Dunkerley, "It's clearly been painful for both of the incumbent airlines."

The pain has manifested as red ink on the balance sheets for both Hawaiian and Aloha. Hawaiian Airlines reported an $11.9 million net loss for the first quarter of 2007. Dunkerley attributed the loss to low interisland fares and excess capacity in the transpacific market.

Aloha Airlines posted a $10.6 million operating loss in the third quarter of 2006, the last time the privately held company disclosed results.

The fare wars are of far less consequence to travel agents. Several said that the interisland fare war is of little concern to them.

"It doesn't affect anything," said Judi Chaitman, vice president of Great Getaways Travel in Leawood, Kan. "The flights between the islands are the least important of anything [travelers] do, as far as cost."

Chaitman said she tells her Hawaii-bound clients about the published and discount fares, which are considerably lower than the $80 to $100 fares she gets through her wholesalers, but most can't be bothered.

On the West Coast, the availability of nonstop service to Maui, the Big Island and Kauai makes the interisland fare war a nonissue for clients of Teri Sherman, co-owner of Pleasanton Travel in Pleasanton, Calif.

"They want to go and come back; it's more one island, one week," she said. "That's the trend from the West Coast. The only time we would book a connection would be if we can't get the cheapest fare on the nonstop, and it's a family of four."

Another challenger

Starting later this summer, clients who do want to travel among the islands will have yet another option: traveling by sea. Hawaii Superferry plans to launch daily service between Maui and Oahu and six-days-a-week service between Kauai and Oahu later this year.

A 350-foot ferry, which will carry 866 passengers and 282 vehicles, will make the crossings in three hours. One-way fares have been set at $44 off-peak and $54 peak for adults, and $59 and $69 for cars.

Gene Ebanks of Carrousel Travel/American Express in Richfield, Minn., said she thought her clients might be interested in the ferry, until she learned that the schedule doesn't allow roundtrips in one day.

Sherman said, "It might be a fun thing if you have kids, maybe one-way."

On second thought, she added, "People are so rushed now. They want to get there. The trend is shorter vacations, which means they don't have time to spend on the ferry."

Hawaii residents are said to be excited about the ferry service.

"I can't wait," said travel agent Wendy Goodenow, owner of HNL Travel Associates, Honolulu. "Look at how [ferries] work in Seattle, how they work anywhere."

Goodenow said she thought the ferry would appeal to local families who wanted to take their cars on interisland trips. "They're making it affordable," she said.

Residents and businesses are precisely the markets the Superferry is targeting, according to director of business development Terry O'Halloran. He projected that residents -- including school groups, sports teams and cultural groups -- and business freight would constitute about 70% of traffic. Visitors will make up the other 30%.

Air wars rage on

Exactly what impact, if any, the new ferry service will have on the battle between interisland carriers is uncertain.

Dunkerley said the ferry interjects "an element of the unknown.

"I think there will be an element of competition and an element of complementary activity," he said.

Jonathan Ornstein, CEO of Mesa Air Group, wondered if today's low air fares would make the ferry less viable than when originally conceived.

"The Superferry was designed under the economics of being charged $100 one-way [by air]," he said. "Now the question you have to ask is, if you're getting charged $39, is there really a need for a Superferry?"

O'Halloran responded by saying that the ferry is a "different value proposition."

"You really can't compare our fares with airline fares," he said. "You've got to look at the whole experience. We like to say we're bringing the fun back to travel," a reference to the comfort and amenities of the ferry.

"For people making multiple-day trips and bringing their own cars, even at today's price-war fares, it becomes very affordable."

The impending launch of the Superferry has echoes of the past. In the 1970s, several companies proposed interisland ferry service. A hydrofoil operated for several years before ceasing operations.

But history reverberates much louder on the interisland air front, where new entrants have challenged Hawaiian and Aloha unsuccessfully several times over the years.

Goodenow said her agency's safe contains plates of four airlines that sought but failed to find a foothold in the contentious market.

Robert Mann, an airline industry analyst and consultant in Port Washington, N.Y., is among those who said there was no way all three interisland carriers could survive.

"If you look at the history, you can go back five or six challenges and see where a third guy has disrupted [the market], created a consumer bonanza but ultimately failed," he said. "It didn't matter who it was. It's never been a three-carrier market."

For now, none of the airlines is backing off, even though the long-term trend in interisland air traffic is down, due in part to increased nonstop service from the mainland to the Neighbor Islands.

"Nobody is bleeding to the point where they're willing to say, 'Enough,' " Mann said.

Earlier this month, Aloha's staying power was bolstered considerably when codeshare partner United Airlines acquired a minority stake in the carrier and indicated that it might expand that stake in the future.

Hawaiian Airlines "remains focused on our long-term strategy of providing quality air transportation service," Dunkerley said.

Mesa has no intention of leaving the fray, Ornstein said.

"We intend to stay in the marketplace," he said. We're not going anywhere."

Apart from seeing its Hawaii service as "a very good long-term opportunity," the move has other implications for Mesa, he said.

"This could be a model for us in other cities," Ornstein said. "That's why it's strategically very important for us that this works."

A significant unknown in the interisland air battle is the outcome of lawsuits that both Hawaiian and Aloha filed against Mesa last year.

Both suits accuse Mesa of misusing confidential business data it obtained when each airline was in bankruptcy.

Also at issue is Mesa's pricing, which the rivals charge is below-cost and predatory.

"There is a clear agenda by one of the competitors to drive another out of business by pricing below cost," Dunkerley said.

Ornstein declined to comment on the lawsuits, but he did say, "We are trying to break into the market, and it's not unusual to have lower pricing."

Responding to charges that the fares set by Go are unsustainable, he said that the carrier's structure of one-way published fares between $39 and $79 "will in fact work for us."

Whether that's true remains to be seen. But one thing Ornstein said is certain: "It will definitely be interesting."

To contact the reporter who wrote this article, send e-mail to [email protected].

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