Inside the mind of the CEO of go! parent company Mesa Air Group
CEO of Phoenix-based Mesa Air Group (NASDAQ:MESA) Jonathan Ornstein gave a dry smile. He had just been asked how low go! Mesa’s low-cost inter-island carrier, would go with its air fares. Two days later, go! offered $1 fares, on its one-year anniversary. However, Ornstein, is anything but coy when talking about his upstart local carrier.
On being unprofitableOn go!’s first year in business
We are only 8 percent of the capacity in the marketplace, yet we are carrying about 10.5 percent of the traffic. Then if you look at the make-up of our traffic – we don’t have any marketing agreements with any major airlines, no code shares, we don’t really do business with wholesalers. If you exclude that part of the traffic, which is about half the traffic, we are getting about 20 percent of the local market. Given we are up against a very powerful duopoly, I think it is an incredible achievement that we’ve been able to penetrate the market so rapidly.
We realize it just takes time to build a brand. I mean, I worked for Virgin, and Richard Branson knew, and he explained to me, where I thought walking into Belgium with the Virgin brand [success] would be instantaneous, it took years to develop. And the nice thing about Mesa, compared to some of the other third carriers that have been here and ultimately succumbed, we have a very profitable operation on the Mainland and we have deep pockets. We are able to take that time to develop.
On coming to Hawaii
We saw an opportunity because we saw incredibly high fares and inefficient carriers. We also felt the interisland market was one where we could make a very immediate presence, because it is so isolated. It was not like we were going into New York and had to advertise for five years before people knew our name. I think the fact that we carried 650,000 people last year is proof that our analysis was right.
On go!’s low fares
Some of the most successful carriers in the world, like Ryanair, charge almost nothing for 20 percent of their seats. They get people on their Web site and they get them to try their product. It is invaluable the amount of promotion we got out of that [$9] fare. (The lowest go! fare at the time of the interview.) We added 6,500 people to our frequent flyer program in two or three days, triple the number we would normally get.
As our competition is pointing out, we are only filling 65 percent of our seats. So getting $9 is better than getting nothing. At the same time, people are buying round-trip tickets, so they are getting one for $9 and another for $39 or $59. No offense to the newspapers, but it was probably more successful than our print advertising.
You know the other carriers, the duopoly, have said we are trying to run them out of business. But Wal-Mart comes in and builds 500,000-square-foot stores and puts little business guys out of business. We have 8 percent of the total capacity. There is no way anyone would tell you that at 8 percent we are trying to do anything but carve out a niche for ourselves.
Yesterday, they called us an interloper in the paper. But this is an open market. The whole benefit of deregulation was to bring low fares to people and make flying more affordable. This is what it is supposed to do. They say we are destabilizing the market. I think you translate that to “We can’t charge $100 per leg.” In that respect, we are destabilizing the market, because they can’t charge what they want. I am sorry if that upsets them.
But that is what business is about, competition. That is what makes our economy what it is. For some reason, they think they should be immune to competition.
On whether the interisland fare is a war of attrition
Let’s put it this way: It doesn’t have to be. We are here trying to create a niche of profitability to expand our scope of business so we [Mesa Airlines] are not always reliant on major airlines. But I can’t save the other guys from themselves. No one has a gun to their heads that says they have to match our fares. We are 8 percent of the capacity, it would be another thing if we were 70 percent of the capacity.
Do you hear other airlines saying the same thing about Southwest when they come into a marketplace? That’s competition. That is the way of the world. They have to run their business in a manner that they think is in their best long-term interests. We are willing to compete effectively and we will do what we have to do.
On anti-go! publicity
There has been a lot of noise publicly from the other carriers and their employees. But I tell you when I walk down the street and people recognize me and realize that I am from go! the response is overwhelming. People are so thrilled. They tell me, “I haven’t been able to go see my cousin, or travel to the hospital to visit relatives. My kid’s teams can go and play on the Neighbor Islands. I can go shop.”
On what he would charge if he were the only carrier
Well, I think it would be crazy for us to charge anything above a fair rate of return. Because when you do start charging fares of $100 one way, it attracts competition. Once you get to the point you are charging so much, it will attract competition like us.
We feel confident with our fare structure, with our normal selling fare of $39 to $79, we can make money. And I can assure you if tomorrow I was hit by a bus and the new CEO decided to take the four airplanes out, those fares would be right back up to $100 the next day.
On the patience of his stockholders
I hope they have the same patience as the stockholders of Southwest. It takes time. Or the same level of patience Richard Branson had with Virgin. He made an investment and it took years for the company to be profitable, and he later sold half of that business for $1 billion.