Saturday, April 5, 2008

HI Superferry: It's about the fuel, guys

Mahalo to The Maui News for publishing today an edited version of a letter related to this on 4/6/08:

There have been at least a couple of interesting articles in the past few days that consulted intellectuals regarding HSF and Aloha Airlines. First, to the most recent one in the Star Bulletin,, here were my comments:

"This whole article contains a number of unrealistic assumptions by people who should know better. This will become apparent if not by this summer, then by next fall, no later then when the next winters swells roll in.

Their "Break Even Point" to cover all costs is not "400 passengers," it is more like:

"BEP: 644 passengers at $39 per person and 218 vehicles at $65 per vehicle [this BE analysis was one in Nov. '07, the vehicle dollar figures work in favor of HSF in lowering the BEP threshhold, so I leave it intact, otherwise even higher BEP passenger and vehicle counts would be required to break even] assuming a $17 fuel surcharge on each vehicle =$82 per vehicle." See:

The "400" number was originally "400 to 500" in Superferry statements in early 2007. The 2 to 3 times increase in cost of fuel since then has pushed that figure up above their "500."

I think the Aloha Airlines CEO had it right, their business model is broken too.

It's about the cost of fuel guys. HSF burns fuel per person even faster than Aloha did."

And then there was the following outstanding article and quotes,, by Harry Eager of the Maui News quoting Bank of Hawaii Chief Economist Paul Brewbaker extensively. This is some good stuff. A few key quotes from that:

"Aloha’s departure leaves interisland market muddled"
Higher fares, fewer flights among the possible outcomes
By HARRY EAGAR Staff Writer
POSTED: April 3, 2008

"The islands continued adjusting furiously Wednesday to the failure of Aloha Airlines....

For the longer term, Bank of Hawaii Chief Economist Paul Brewbaker said the new interisland air traffic regime could come to a new equilibrium at any one of several levels...

In comments Brewbaker sent to The Maui News, he said the departure of Aloha presents a different set of alternatives for economists to analyze than in earlier events when Mahalo or Discovery airlines failed...

But after Sept. 11, 2001, Sen. Dan Inouye arranged an antitrust exemption for Aloha and Hawaiian, and that allowed them to reach a new equilibrium, because it made it less likely that a new third, outside threat would arise. The new equilibrium settled at $90 a trip. Mesa Air Group’s Chairman Jonathan Ornstein decided he saw an opportunity...

Leroy Laney, professor of business and finance at Hawaii Pacific University, said Tuesday...The market is so small (and has been shrinking) that fixed overhead costs made it difficult for either of two airlines to get enough business to get into profitable territory...

Ornstein upset the apple cart, or what Brewbaker calls the Cournot-Nash equilibrium. The Cournot-Nash equilibrium is now dead, and the interisland airline business has become what economists call a Stackelberg game. Instead of two equally matched contenders warily circling each other, the remaining unevenly matched contenders will try to exploit their differences. In this Stackelberg game, Hawaiian enjoys some market power — it’s bigger and neither Go! nor Island Air can exactly duplicate the vanished service...

The exit of Aloha “removes the principal source of rivalry that disciplined Hawaiian by undermining the market power it otherwise has from product differentiation,” said Brewbaker. “The game is afoot, literally, and we should not be surprised by outcomes perverse and otherwise.” Economic theory allows for a number of balancing points, which include:
• Higher fares and fewer seats.
• Similar or somewhat higher fares, with the entry of a major carrier in the Hawaii interisland market...

Guarantees (loan or debt) might have been required, but the state Legislature finally accepted the idea of loan guarantees, although a day late and about $120 million short. Meanwhile, Hawaiian pulled a backup Boeing 767 into line to provide hundreds of seats on six daily Oahu-Maui trips, Island Air added flights between Maui and Hilo and go! nearly doubled its daily legs."

Since this article ATA has failed too, adding more to the change in equilibrium. I heard a figure that ATA alone accounts for 1 million visitors to/from Hawaii a year. As I recall Hawaii receives 7 to 8 million visitors a year. With ATA and Aloha combined that is at least 12 to 20% of the air capacity to and from Hawaii disrupted. That is shocking.

As an aside, a long-time close friend of mine is a former high level hotel manager for the Sheraton chain. He maintains contact with many of their hotel general managers. He was speaking last week with one of those general managers in Ka'anapali and that person mentioned that one of the hotels in Ka'anapali had over a 1000 cancellations after the Aloha failure alone. Think about that, that is just one example. HSF won't matter worth a squat in this big picture.

Aloha, Brad

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