Aloha-Hawaiian | End of a 55-year rivalry
Analysis
Merged airline must strike tricky balance
By John Duchemin
Advertiser Staff Writer
Hawaiian and Aloha's planned merger will end an intense 55-year rivalry noted for spirited competition that kept interisland fares low, flights plentiful and quality high.
Bruce Asato • The Honolulu Advertiser
From the companies' point of view, the merger makes sense. The airlines have struggled for years to make money in the interisland market, their profits hurt not only by competing with each other but also by other carriers' increased nonstop flights to the Neighbor Islands from the Mainland and Japan.
Given current conditions, an end to a half-century of competition makes sense for Aloha and Hawaiian. Big questions remain about what it means for everyone else.
This year also saw higher fuel prices, a slowing economy and the culminating disaster of Sept. 11, which caused many consumers to postpone travel plans and devastated airlines worldwide.
To shore up their weakened positions, Aloha and Hawaiian are becoming one — and while that may help them, there are big questions about what it will do to everyone else.
"This may be the wisest solution, but I'm just hoping we won't all suffer as a result of it," said Chuck Gee, former dean of the School of Travel Industry Management at the University of Hawai'i. "One healthy carrier is better than no carrier at all, but I'm not thrilled that we won't have market forces working on our behalf."
Company officials say the combined airline will be far healthier than Aloha, which has lost millions in recent quarters, or Hawaiian, which reached profitability only recently after years of losses. The new carrier would be about the 10th-biggest in the nation, making it a legitimate regional role player, though still dwarfed by giants such as United and American.
Inevitable trend
The move is one of the first major consolidation efforts by ailing airlines in the wake of the Sept. 11 terrorist attacks. Airline companies are losing billions this quarter, and have already burned through most of a $5 billion federal bailout designed to keep them afloat in the low-traffic post-Sept. 11 environment.
In such circumstances, a merger can only benefit Hawai'i, said John Garibaldi, former chief financial officer for both Aloha and Hawaiian.
"You'll end up with a very financially strong carrier — a dominant carrier that will have the resources to improve and expand its routes," Garibaldi said.
But mergers often have unpleasant side effects — and Hawaiian and Aloha say this one will be no different. They acknowledge consolidations, layoffs, the elimination of excess jets, and fare and flight changes are on the way.
Higher fares
Many observers say a dominant interisland carrier inevitably will jack up fares — particularly because the airlines have both struggled to keep interisland routes profitable at current prices — and get rid of many unprofitable head-to-head flights.
"I don't know if it would serve the state well to have only one interisland carrier," said Fredrick Collison, professor of transportation and marketing at the University of Hawai'i School of Travel Industry Management. "With one carrier, where's the price competition?"
The airline certainly would be in a position to control pricing. There is only one other interisland airline: tiny Pacific Wings on Maui, which runs a few dozen daily propeller-plane flights between all the islands. Pacific Wings is hardly in a position to grab significant market share, because many of Aloha and Hawaiian's passengers are time-conscious tourists who don't want to waste a minute, Gee said.
Aloha and Hawaiian are flying about 250 daily flights within the state, and both have interisland connecting agreements with major carriers. The combined airline would control almost all of the interisland air cargo business as well as the mail — Aloha has a multimillion-dollar contract with the U.S. Postal Service.
But any fare increases would ultimately harm the visitor industry, several observers said. While visitor demand for Neighbor Island trips isn't going to fall because fares increase, kama'aina travel is likely to drop off, said Mary Lou Lewis, owner of Carl Erdman Travel and former Hawai'i chapter president of the American Society of Travel Agents.
Lewis said the combined airline is likely to severely curtail issuing interisland kama'aina discount coupons, which have given good deals to residents but cut into the airlines' ticket income.
Even if visitors still make interisland flights, they're going to spend less on the ground if they have to pay more in the air, Gee said.
"Visitors tend to spend a certain amount, so if you raise the costs of one thing, they adjust their consumption elsewhere," he said. "They may do less shopping, eat cheaper food, go to McDonald's more."
The airlines have agreed to cap one type of fare, unrestricted inter-island tickets, for two years, and to link increases for the next three years to inflation. Airline officials said they also would try to ensure fair prices for other consumers — but some are skeptical about this claim, particularly since the airline hopes to increase profits.
"We all know that will fall by the wayside," said Bob Hall, former Hawaiian Airlines pilot and founder and owner of Island Airlines Hawaii, an air cargo company that competed head-to-head with Aloha and Hawaiian in the 1960s and '70s.
Hall said the new airline would also have a disturbing ability to control air shipping rates — something that could have an even bigger effect on life in Hawai'i than costlier tickets. For Neighbor Island residents, that would mean higher prices for medicine, food, machine parts and everything else shipped by air.
"Cargo rates may be even more important than the other rates, because the whole economy is built on cargo," Hall said.
Threat of rival
With all these concerns, one major long-term challenge for the airline could be keeping service up, fares down and customers happy so a challenger doesn't enter the market and try to capitalize on dissatisfaction, observers said.
That's not going to be an easy balancing act for a monopoly, said Stuart Klaskin, an airline consultant in Miami, Fla. The airline will be challenged to get consumers to "buy in" to the idea that higher fares are necessary for survival.
"One of the problems is that interisland travel has been very well served for a long time," Klaskin said. "Therefore, any reduction in service is likely to be perceived as anti-consumer."
If the combined airline falters, Garibaldi said, the door will be open for another airline to come in — possibly using the same no-frills, used-plane strategy of Mid-Pacific or Mahalo Airlines, two airlines that attempted to compete with Aloha and Hawaiian in the past.
Those airlines faltered — the market was unable to support a third or fourth interisland airline — but partly because they presented a third and fourth option. With only one airline here, a new airline would have a better chance, Garibaldi said.
Aloha and Hawaiian doubtless realize that and are likely to keep rates in check, Garibaldi said.
"If they can provide a cost-effective product to tourists and residents, maybe the need for a second carrier is mitigated," he said.
But no matter what the combined airline does, Garibaldi said he would not be surprised to see a startup interisland airline in a few years. Given the travails of the airline industry, there are plenty of unused planes, plus former airline executives, pilots and workers, with which to form a new company, he said.
"I think people are somewhat naive to think that Hawai'i will be a one-carrier market for very long. I think it's a ripe market, and very large for just one carrier," he said. "It wouldn't surprise me if someone says, 'Geez, if this merger goes through, maybe there's an opportunity out there.'"
Advertiser staff writers Susan Hooper and Katherine Nichols contributed to this report.
