Island Air, the state's third-largest airline, said yesterday it is offering $12 return flights for customers who buy a roundtrip ticket to the Neighbor Islands, making it the first airline other than startup go! to initiate a lower price in the current fare war.

Island Air, which laid off 15 percent of its workforce on Dec. 1 and cut five flights, said the cost-savings from those changes made the $12 fares possible.

"Our 'ohana has absorbed the pain of adjusting our cost structure to meet the new market realities," said Rob Mauracher, Island Air's chief executive officer, in an e-mail. "As a result we are in a better position to offer more competitive fares on all our routes and to all our customers."

The discount tickets must be purchased by tomorrow for travel through March 15. Customers must pay the regular fare for the first leg of the trip and then will be eligible for the $12 return ticket.

The move comes after competitor go! airline lowered one-way fares on Sunday to $29 for interisland travel through Jan. 31.

The state's two largest airlines — Hawaiian Airlines and Aloha Airlines — matched go!'s $29 fare but said they will not match Island Air's $12 special. go! also said it will not match Island Air's $12 return fare.

When the $12 special is combined with Island Air's lowest one-way outbound fare, it becomes the cheapest interisland fare currently available.

According to Island Air's Web site, its lowest one-way interisland fare is $31. With the $12 return fare, a roundtrip on Island Air could cost as little as $43, and that includes fees and taxes. Two one-way tickets at $29 on go! airline would cost $58 and doesn't include fees and taxes, which could add more than $10.

Aloha Airlines spokesman Stu Glauberman said only a limited number of Island Air tickets are sold at $31, so in most cases, the combination of two $29 fares is less costly than Island Air's roundtrip package.

"It's very hard to beat the $29 fare," Glauberman said.

Founded in 1980 as Princeville Airways, Island Air is a niche-player in the interisland market. The company, owned by San Francisco-based Gavarnie Holdings LLC, operates 75 daily interisland flights.

On Dec. 1, Island Air announced it was laying off 65 of its 415 employees as a result of the new low-fare environment. The company also eliminated five of its 17 interisland routes and said it will take two of its 37-seat De Havilland Dash-8 aircraft out of service.

At the time of the layoffs, Mauracher said go!'s launch this year destabilized the interisland fare structure, causing the local carrier to reduce its expenses.

Go!, a unit of Phoenix-based Mesa Air Group, triggered a fare war when it opened for business on June 9 with an introductory $39 one-way fare.

Mauracher said other airlines in the state have Mainland routes that subsidize their operations in Hawai'i. "We earn our money in Hawai'i; our employees live in Hawai'i; and the money we make goes to pay people and businesses right here at home," said Mauracher. "So this is our special way of giving back to the community during the holidays and beyond."

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.