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The Honolulu Advertiser
Posted on: Sunday, October 21, 2007

COMMENTARY
We're unlike previous airline competitors

By Jonathan Ornstein, CEO of Mesa Air Group

Hawaii news photo - The Honolulu Advertiser

Jonathan Ornstein CEO, Mesa Air Group.

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THIS WEEK

Editorial and Opinion Editor Jeanne Mariani-Belding puts state Sen. Mike Gabbard, who switched political parties midterm, on The Hot Seat for a live blog chat Wednesday from noon to 1 p.m. at www.Honoluluadvertiser.com/opinion.

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Have you checked out The Hot Seat? It's our opinion-page blog that brings in your elected leaders and people in the news and lets you ask the questions during a live online chat.

On The Hot Seat last week was Jonathan Ornstein, the CEO for Mesa Air Group, parent company of go! Airlines. Below is an excerpt from that Hot Seat session. To see the full conversation, go to The Hot Seat blog at www.honoluluadvertiser.com/opinion and click on "On The Hot Seat: Mesa Air Group CEO Jonathan Ornstein." (Names of questioners are screen names given during our online chat).

William: How do you make any money, flying small CRJ aircraft, with fares of $39, $29, $19 and $1? What does Mesa do to earn a profit when their costs exceed revenues?

Jonathan Ornstein: All airlines, when developing markets, use promotions and understand that profitability is not immediate. At my old company, Virgin, it took years for the company to become profitable. In no small part due to the competitive response of British Airways and other incumbent carriers.

Mark: You claim that you can make a profit in the Hawaiian Islands by charging $1, $9, $19, $29 and $39 fares but on the Mainland, where you are federally subsidized, you are pulling out of those markets claiming that you can't make money? But you're willing to subsidize the interisland market with all of Mesa's other income, but not these federally subsidized markets?

Ornstein: The markets are entirely different. Under EAS we fly in rural markets, often with only a few hundred passengers a month with 19-seat turboprop aircraft. The economics are also entirely different. We have reduced our 1900 fleet from 122 aircraft eight years ago to 20 today. We have chosen to focus on markets like Hawai'i, that are not dependent on government subsidies and will provide long-term profitability as an independent operation.

Mike Johnson: I've personally seen a CRJ 900 in go! colors. When are you planning on bringing them online?

Ornstein: At this point no Mesa 900 is painted in go! colors ... yet. As the market develops (and our load factors have been higher year over year) our long-term plan is to introduce more cost effective, larger aircraft.

John K: We know that your air fares are really low right now, but how long are you planning on keeping it this low? What will the average fare be in one year? And lastly does go! really want to be in the islands for the long haul, let's say for 25 to 50 years, like Aloha and Hawaiian?

Ornstein: Unlike what our competitors would like you to believe, our business plan submitted to and approved by our board of directors has average fares ... of approximately $41 and rising to approximately $54 in five years. Please remember that our average fare in five years would still be over $30 lower than the lowest fare offered by our competitors the day before we entered the interisland market. I have also said that our fare structure from $39 to $79 would remain unchanged for the foreseeable future and that we could operate quite profitably in that structure. Again our highest fare in that structure would be lower than the lowest fare and half of the highest fare charged by our competitors prior to our entry.

Scott: Do you think that go! Airlines broke any laws in Hawai'i? If go! did break any laws, what do you think is a fair punishment for the laws that were broken? Is the court case with Hawaiian finished yet?

Ornstein: No, I do not believe go! or Mesa broke any laws. In addition I believe the lawsuit is all about eliminating competition in order for the incumbent carriers to maintain their duopoly and the pricing power they had before our entry into the market. To listen to the CEO of Hawaiian say that this "is not about eliminating competition" is patently absurd.

JR: With such a drastic decrease in fares, why did interisland passenger traffic increase so little (8 percent I believe)? Doesn't this mean the the incumbent carriers were serving the market with an economically "correct" price? Also, what happened to the larger 90-seat aircraft you promised (CRJ-900 or EMB-190)?

Ornstein: Before our entry traffic had fallen consistently for years. With our new service that trend has been reversed bringing benefits to businesses and families across the islands. In addition the four markets we serve were the only markets in the top 25 U.S. domestic markets that had only two carriers. Not surprisingly they also had the highest average yield of those markets.

BobS : Why are your flight attendants picketing in Phoenix now and is it true Mesa said they would be fired if they picketed?

Ornstein: Contractually the company and our flight attendants have an agreement that on one hand bans picketing and other "concerted activity" and on the other hand the company agreed not to "lock out" flight attendants in any labor dispute. I believe our flight attendants live up to their agreements and would hope none are picketing today. There are non-Mesa flight attendants posing as Mesa employees a very sad situation.

Cory: Regarding the money that HAL is asking for, how do you plan on paying, cash or check?

Ornstein: Unlike our competitors we are fortunate in that we have never been in bankruptcy and have been profitable for the last 10 years. We have never cut our employees pay, eliminated their pensions and with the exception less than 100 of our 5,000 employees immediately following 9/11 never furloughed any of our people. As a result, we have ample financial resources.

Franco Mancassola: Starting an operation with 70 percent less seats than the two competitors is already a handicap. How do you plan to remain competitive when the other airlines will match go!'s low fares seat by seat and still have plenty capacity left to adjust their fares and increase their yields?

Ornstein: Interestingly, in spite of their public comments about "too much" capacity in the market and its effect on lowering fares, both incumbents added significant capacity upon our arrival. In Hawaiian's case they actually added more capacity than our entire operation. Given their lamenting over low fares it is hard to understand why they would add capacity other than to do to us precisely what they have claimed we are trying to do to them.

Brian: Aloha, Hawaiian and Island Air have maintenance facilities (hangars) where their mechanics work. go! does not appear to have any such facilities. Where does your maintenance take place?

Ornstein: We have full maintenance capability located at the airport in HNL. The aircraft have been incredibly reliable. We have gained tremendous experience in remote operations which has been very helpful in the development of our Chinese operation, which is currently flying two aircraft with eight slated to be in service by the end of the year.

Ryan: Here's your chance to sell your product. Besides the low fares go! offers, tell me why I should fly on go!? And don't mention anything about the "Aloha spirit" because we can find that on both Hawaiian and Aloha.

Ornstein: One reason to fly go! is to support our continued service to ensure low fares remain available. Additionally from a service standpoint our passengers tell us that our service is more convenient, faster with far less hassle avoiding the main terminal. If that does not sell you, our drinks are half price! Lastly we have been inundated with positive letters about the spirit, professionalism and enthusiasm of our people.

Lee: I hope, Mr. Ornstein, that you don't let the duopoly run go! out of town. I once worked for Mahalo Air and we were sued by Aloha because the type of aircraft we operated was not approved for over water. They were wrong and the case was thrown out; then they had some of their people with hand-held clickers observing passenger counts from the upper deck of the H-1 freeway. Eventually Mahalo ran out of money. They have been very successful in preventing competition by ganging up on any new startup that tries. Don't let them push go! out of Hawai'i.

Ornstein: This will be our final question for the afternoon. I appreciate the opportunity to respond to your questions and dispel some of the rumors and misinformation that might be out there. To the extent any of my responses were forward-looking in nature, my attorneys want me to remind you that: Any forward-looking statements are based upon information available to us today and are subject to change. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. (They are wordy, huh.)

Lee, in a memo to employees the CEO of Hawaiian said it best when he stated that Mesa is unlike any competitor that Hawai'i had faced before, noting that Mesa was "well organized" and "well financed." Unlike the other carriers who attempted to compete only to be sued and have the same tactics used against them (ultimately driving them out of the market), Mesa has the operational and financial wherewithal to remain in the market and carve out a niche for itself.

Please know that in spite of the aggressive campaign waged against us and the personal attacks against myself, we remain dedicated to the market and continuing to serve the people of Hawai'i. We respectfully ask you for your continuing support and thank you for giving us a chance to serve your most beautiful islands.