Collusive duopoly: The economic effects of the aloha and Hawaiian airlines' agreement to reduce capacity

Antitrust Law Journal

Volumn 74, Issue 2, 2007, Pages 409-438

  Blair, Roger D ^a   Mak, James ^b   Bonham, Carl ^b  

^a UNIVERSITY OF FLORIDA   (United States)

^b UNIVERSITY OF HAWAII   (United States)

Author keywords

[No Author keywords available]

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EID: 34548134852     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (149)

1. Pub. L. No. 107-71, 115 Stat. 597 (2001) (codified as amended in scattered sections of 5 U.S.C, 26 U.S.C. 31 U.S.C. and 49 U.S.C).
2. Id. § 116(a).
3. See Frank Cho, Aloha, Hawaiian Defend Route-Sharing Proposal, HONOLULU ADVERTISER Sept. 10, 2002, at IA [hereinafter Route-Sharing], available at http://the.honoluluadvertiser. com/article/2002/Sep/10/bz/bz01a.html.
4. Aloha and Hawaiian also provide overseas service to the western region of the United States mainland in direct competition with some of the largest U.S. trunk air carriers, including United, American, and Northwest, but that service was not subject to the agreement examined here. Cf. Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc. for Antitrust Immunity at Ex. 1, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. July 31, 2002) [hereinafter Joint Application] (attaching Inter-Island Cooperation Agreement, Hawaiian Airlines and Aloha Airlines art. 1.1 [hereinafter Cooperation Agreement] (outlining an "Inter-Island Operations" scope only), available at http://dmses.dot.gov/docimages/pdf1a/182242_web.pdf.
5. Dan Nakaso, Interisland Travel Dwindling, HONOLULU ADVERTISER, Mar. 27, 2005, at IF, available at http://the.honoluluadvertiser.com/article/2005/Mar/27/bz/bz02a.html.
6. See Table 2. This was true for nearly all U.S. airlines. See Daniel M. Kasper, Coffee, Tea or Chapter 11? The Bumpy Ride to Friendlier Skies, MILKEN INST. REV., 2d Quarter 2005, at 27. 31 (focusing largely on the woes of "legacy" carriers).
7. Joint Application of Aloha Airlines, Inc. et al., for Approval of the Transfer of Certificate Authority and Transfer of Exemption Authority, Joint Application of Aloha Airlines, Inc. et al., Docket OST-2002-11315 (Dep't of Transp. Jan. 11, 2002);
8. see also Rick Daysog, Hawaiian and Aloha Announce Merger, HONOLULU STAR BULL., Dec. 19, 2001, http://starbulletin.com/2001/12/19/news/story1.html (detailing prior attempts at merger between the two airlines);
9. Susan Hooper, Air Merger Off, Hawaiian Says, HONOLULU ADVERTISER, Mar. 17, 2002, at 1A [hereinafter Air Merger Off, Hawaiian Says] (providing a chronological history of this attempted merger).
10. Order Dismissing Application at 1, Joint Application of Aloha Airlines, Inc. et al., Docket OST-2002-11315 (Dep't of Transp. July 19, 2002), available at http://dmses.dot.gov/docimages/pdf82/180227_web.pdf. It cannot be said that the merger talks broke down due to the DOJ objections. There appears to have been conflict between the two airlines and each blamed the other for the break.
11. See Susan Hooper, Power Grab Killed Air Deal, Aloha Says, HONOLULU ADVERTISER, Mar. 18, 2002, at 1A; Hooper, Air Merger Off, Hawaiian Says, supra note 7.
12. Jayne O'Donnell & Barbara De Lollis, Aloha, Hawaiian Airlines Could Share Operations, USA TODAY, Jan. 11, 2002, at 2B.
13. 15 U.S.C. § 1 (2007) provides in relevant part that "[e]very contract, combination . . . or conspiracy, in restraint of trade . . . is declared to be illegal."
14. Corporations can be fined up to $100 million; individuals can be fined up to $1 million and/or imprisoned for up to 10 years. See Antitrust Criminal Penalty Enhancement and Reform Act of 2004, Pub. L. No. 108-237, § 215, 188 Stat. 661, 668 (codified as amended at 15 U.S.C. § 1) (increasing maximum penalties).
15. 15 U.S.C. § 15 (2007) (authorizing successful plaintiffs to recover treble damages and reasonable attorney's fees.)
16. "Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity . . . is illegal per se." United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940). Courts have applied this rule to "agreements to limit production or set quotas," such as the Cooperation Agreement, reasoning that "the laws of supply and demand indicate that an agreement to limit output is tantamount to an agreement to fix price." ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 87 (5th ed. 2002) (citations omitted).
17. HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY THE LAW OF COMPETITION AND ITS PRACTICE 144-90 (2d ed. 1999), provides a survey of per se violations. Of course, firms may violate Section 1 despite potential penalties, if they believe that they will not be caught, but it would be very difficult for the two Hawaii airlines to collude in the manner outlined in the Cooperation Agreement without getting caught.
18. Aviation and Transportation Security Act, Pub. L. 107-71, 115 Stat. 597, § 116(a) (2001) (codified as amended at 49 U.S.C. § 41309 (2007)).
19. Id. § 116(a)-(b).
20. Id. § 116(c) (1).
21. Id. § 116(c) (2).
22. Id. § 116(d)-(e).
23. For an economic analysis of cartels, see George J. Stigler, A Theory of Oligopoly, 72 J. POL. ECON. 44, 44-61 (1964);
24. ROGER D. BLAIR & DAVID L. KASERMAN, ANTITRUST ECONOMICS 132-63 (1985);
25. KEITH N. HYLTON, ANTITRUST LAW: ECONOMIC THEORY AND COMMON LAW EVOLUTION 68-89 (2003);
26. RICHARD A. POSNER, ANTITRUST LAW 51-100 (2d ed. 2001);
27. HERBERT HOVENKAMP, THE ANTITRUST ENTERPRISE: PRINCIPLE AND EXECUTION 112-34 (2005).
28. For an accessible explanation, see George J. Stigler, Price and Nonprice Competition, 76 J. POL. ECON. 149, 150-52 (1968);
29. cf. David Genesove & Wallace P. Mullin, Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case, 91 AM. ECON. REV. 379, 380-84 (2001) (pointing out that the Sugar Institute raised margins and profits through collusion on business practices, not price).
30. For example, unequal costs will lead to differences regarding the optimal price. A way to resolve this is to pool profits and share them. Alternatively, the market could be divided along geographic or customer class lines.
31. See BLAIR & KASERMAN, supra note 19, at 141-45, for an analysis of the incentive to cheat. Keith Hylton also emphasizes the need to prevent cheating if a cartel is to be stable.
32. See HYLTON, supra note 19, at 68-73.
33. Cooperation Agreement, supra note 4, art. 2.1.2.
34. One can think of the total ASMs as a measure of output because it measures the air transportation service produced by the airlines. To the extent that some seats are empty, not all of the output is sold. Obviously, ASMs are extremely perishable as they cannot be stored for future sale.
35. For example, if Aloha flew a 100-seat plane between Honolulu and Hilo - a distance of 216 miles - that flight would generate 21,600 ASMs. To aggregate the ASMs on all Aloha flights for that month, one would simply add the ASMs for all flights offered during that month.
36. The only constraint was that no route could be abandoned by both carriers. All existing routes had to be served by at least one carrier. Cooperation Agreement, supra note 4, art. 2.1.1.
37. Id. art. 2.2. If Aloha and Hawaiian found the official reports insufficiently reliable for verification, they agreed to develop satisfactory audit procedures.
38. Id.
39. Load factors will always be below 100 percent due to variations in demand. In this case, however, the load factors were well below 100 percent, and normal demand could be accommodated with fewer flights and/or smaller planes.
40. The Cooperation Agreement could be canceled by either party on seventy-five days' written notice. Cooperation Agreement, supra note 4, art. 8.4.
41. Cf. id. art. 2.1 (outlining capacity collaboration only). The two carriers wanted to allocate routes and coordinate their schedules but this plan was not part of the proposal submitted to DOT for approval.
42. See Frank Cho, Hawaiian Begins Exploring Joint Activities with Aloha, HONOLULU ADVERTISER, Nov. 29, 2001, http://the.honoluluadvertiser.com/article/2001/Nov/29/bz/bz01a.html;
43. see also Hawaiian, Aloha Ask to Be Allowed to Plan Schedules Together, PAC. BUS. NEWS, Sept. 19, 2001, http://pacific.bizjournals.com/pacific/stories/2001/09/17/daily37.html.
44. Cooperation Agreement, supra note 4, art. 2.2.
45. It also provided a disincentive to behave strategically by operating well below the allocated ASMs. If an airline offered less than 98 percent of its allocated ASMs, it received no revenue transfer irrespective of any imbalance in its share of the total business. Id.
46. For example, if Aloha carried 80 passengers on its flight from Honolulu to Hilo, that flight would generate 17,280 RPMs (= 80 × 216 miles). Aloha's total RPMs for a month would be the sum of the RPMs generated on all of its flights during that month.
47. See Cooperation Agreement, supra note 4, art. 2.2.
48. Id.
49. Several illustrations were included as Exhibit 1 to the Cooperation Agreement.
50. The relationship between an airline's ASMs and RPMs is straightforward: RPM = LF × ASM where LF is the airline's load factor, which is defined as the number of paying passengers divided by the total member of available seats × 100.
51. See Cooperation Agreement, supra note 4, art. 2.2.
52. See id.
53. See STATE OF HAWAII, DEPARTMENT OF BUSINESS, ECONOMIC DEVELOPMENT & TOURISM, 2003 STATE OF HAWAII DATA BOOK, Table 18.42 (2004), available at http://www.hawaii.gov/ dbedt/info/economic/databook/db2003/.
54. Joint Application, supra note 4, at Ex. 2 (attaching Decl. of Benjamin J. Cayetano, Governor of the State of Hawaii at 3 [hereinafter Cayetano Declaration]).
55. Id. In remarks made following the submission of his declaration, Governor Cayetano explained that; "Interisland air transportation is of critical importance to the people of Hawaii and if we can help maintain that service, then that is what we should do. . . . The proposed cooperation agreement is necessary to ensure the continuing availability of air transportation which both originates and terminates at points within the State of Hawaii. . . . If, after reviewing their plans, we find that implementing the agreement produces undue restriction on the availability of interisland travel or is otherwise not in the State's best interest, I have the right to withdraw my declaration." Cayetano OKs Interisland Airline Cooperation, PAC. BUS. NEWS, July 23, 2002 (quoting Cayetano Declaration), http://pacific.bizjournals.com/pacific/stories/2002/07/22/daily22. html.
56. Aviation and Transportation Security Act, supra note 1.
57. See Public Comments of the Dep't of Justice, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. Aug. 30, 2002) [hereinafter Public Comments], available at http://dmses.dot.gov/docimages/pdf1a/186219_web.pdf.
58. See id. at 8-10.
59. Id. at 8.
60. Id. at 4. The DOJ did not opine as to whether consumers would be better off if one of the airlines were to fail and exit the market in the absence of the antitrust immunity, so that a monopoly resulted rather than a collusive duopoly.
61. See id. at 7-8.
62. Indeed, when Hawaiian Airlines filed for Chapter 11 bankruptcy protection on March 22, 2003, Aloha's CEO predicted that if Hawaiian were to reduce flights, "Aloha could likely pick up a substantial amount of the slack in the interisland market." Kelly Yamanouchi, Aloha Could Add More Flights, HONOLULU ADVERTISER, Apr. 19, 2003, at IC, available at http://the.honoluluadvertiser.com/article/2003/Apr/19/bz/ bz01a.html.
63. Public Comments, supra note 44, at 9-10. Tacit collusion, as economists use the term, does not involve an explicit, albeit covert, agreement. The term refers to situations where explicit agreement is unnecessary because the parties know how they should act to avoid competing. Tacit collusion does not involve agreement as that term has meaning in antitrust law and, therefore, does not violate Section 1 of the Sherman Act.
64. See, e.g., HYLTON, supra note 19, at 75-78; HOVENKAMP, supra note 19, at 65.
65. Public Comments, supra note 44, at 16.
66. Motion for Leave to File Late and Comments of American Airlines, Inc. at 2-3, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. Sept. 2, 2002), available at http://dmses.dot.gov/docimages/p73/186386.pdf.
67. See Comments of Pacific Wings, LLC at 2-3, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. Sept. 3, 2002), available at http://dmses.dot.gov/docimages/ pdf1a/186407_web.pdf.
68. Interview with Greg Kahlstorf, President, Pacific Wings, LLC (June 7, 2006).
69. See, e.g., Joint Application, supra note 4, at 10-11.
70. Reply Comments of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., and Motion for Leave to File an Unauthorized Document at 6, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. Sept. 9, 2002) [hereinafter Reply Comments], available at http://dmses.dot.gov/docimages/p73/187214.pdf. This claim is entirely inconsistent with the views expressed by Governor Cayetano and Hawaii's Congressional delegation, who pointed out the critical nature of inter-island air transportation.
71. See id. at Ex. 1 (attaching letter from Governor Benjamin J. Cayetano to the Honorable Norman Y. Mineta, Secretary of Transportation (July 23, 2002) [hereinafter Cayetano Letter]), Ex. 2 (attaching letter from Senator Daniel K Inouye, et al. to the Honorable Norman Y. Mineta, Secretary of Transportation (Aug. 6, 2002) [hereinafter Congressional Delegation Letter]). Absent the critical importance of inter-island air transportation, there would be no basis for granting antitrust immunity under Section 116.
72. Joint Application, supra note 4, at 12.
73. See Cayetano Letter, supra note 55;
74. Cayetano Declaration, supra note 41, at 3-4.
75. Reply Comments, supra note 55, at 3-4 ("Hawaii's unique status as an island state makes it heavily dependent on air transportation as a basic component of its economic and social life. There is simply no other practical way for the people of Hawaii to travel among the islands for business, family, and recreation; for businesses to distribute time-sensitive products such as newspapers, medicines, and food among the islands; for mail and express to reach their destinations quickly; or for tourists to enjoy fully the pleasures of our multifaceted island communities.") Congressional Delegation Letter, supra note 55.
76. Reply Comments, supra note 55, at 14-15.
77. See Hawaiian, Aloha to Merge with Staff Layoffs Likely, HONOLULU ADVERTISER, Dec. 19, 2001, http://the. honoluluadvertiser.com/article/2001/Dec/19/br/br10p.html;
78. see also Susan Hooper, Aloha-Hawaiian Merger New Era in Hawai'i Skies, HONOLULU ADVERTISER.COM, Dec. 20, 2001, http://the.honoluluadvertiser.com/article/2001/Dec/20/bz/bz01a.html.
79. Greg Kahlstorf, Pacific Wings President, pointed out that "[Aloha and Hawaiian] are still ignoring the fundamental question of why they can't cut capacity without government intervention." Cho, Route-Sharing, supra note 3.
80. Reply Comments, supra note 55, at 6. ("Further capacity adjustments are undeniably needed, but neither carrier is able to run the risk . . . of unilaterally making these further cutbacks.") The logic goes something like this: Each airline may fear that its capacity reduction will not be matched absent an enforceable agreement to do so. If capacity reductions are not matched, the now smaller airline may not get its fair share of the customers based on a percentage of the industry capacity. The result will be increased load factors and more profits for the now relatively larger airline. The airline that reduced capacity will have lower costs, but may not necessarily be more profitable. As a result, an enforceable agreement is necessary to achieve the optimal capacity reduction.
81. See id. at 12-16.
82. By "socially efficient," we mean that the sum of the consumer and producer surpluses is maximized.
83. Order Approving Agreement and Granting Antitrust Immunity at 6, Joint Application of Aloha Airlines, Inc., and Hawaiian Airlines, Inc., Docket OST-2002-13002 (Dep't of Transp. Sept. 30, 2002) [hereinafter DOT Order], available at http://dmses.dot.gov/docimages/pdf1a/192238_web.pdf. Since the original application was so close to the statutory deadline, the carriers asked for the extension to October 1, 2003, in their initial application. The two carriers actually sought a further extension (by one year) of the statutory deadline, but were unable to obtain Senator Inouye's support.
84. Russ Lynch, Inouye Balks at Airlines Request, HONOLULU STAR BULL., Mar. 15, 2003, available at http://starbulletin.com/2003/03/15/business/story1.html.
85. The DOT Order states, in part: [W]e find that approval of the proposed Aloha/Hawaiian agreement, subject to our conditions, meets the standards of the statute and that approval of the agreement for the short-term period . . . will facilitate the recovery of inter-island services in the after-math of September 11 and promote the viability of an effective inter-island network in Hawaii. DOT Order, supra note 63, at 6.
86. "[W]e remind the carriers that the Department at any time has the discretion to amend, modify, or revoke its approval of all, or any portion of, the Inter-Island Cooperation Agreement if we determine that the carriers have acted in a manner that no longer is in the public interest." Id. at 10-11.
87. Id. at 10-12.
88. Prabha Natarajan, DOT Approves Aloha-Hawaiian Coordination, PAC. BUS. NEWS, Sept. 30, 2002 (quoting DOT press release), http://pacific.bizjournals.com/pacific/stories/2002/09/30/daily15. html.
89. The carriers claimed that their inter-island business was unprofitable. Although we do not have empirical evidence to support their claim, we accept it as accurate for purposes of our analysis.
90. David Kreps and José Scheinkman demonstrated, using a two-stage oligopoly game, that if two duopolists jointly observe each other's production choices, subsequent Bertrand price competition leads to a Cournot outcome in which prices will be higher than the competitive price but below the monopoly price. In the Aloha-Hawaiian Cooperation Agreement, subsequent price competition following collusive capacity reduction was discouraged by the revenue balancing provision. David Kreps & José Scheinkman, Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes, 14 BELL J. ECON. 326, 326-27 (1983).
91. This example is meant to illustrate the profitability of cooperation over unilateral conduct. The actual Cooperation Agreement did not permit the type of cooperation incorporated in the example. The reduction in ASMs caused by the agreement, however, necessarily resulted in the cancellation of some flights even though specific cancellations could not be coordinated.
92. Of course, some consumers may choose not to travel due to the added costs of reserving scarce seats.
93. Again, assuming no increase in price, some revenue would be lost if a few consumers choose not to travel.
94. Reply Comments, supra note 55, at 18.
95. Hylton employs a similar model to analyze the age-old claim that collusion is necessary to set "reasonable" prices and, thereby, avoid "ruinous" competition. HYLTON, supra note 19, at 94-98.
96. Fixed costs for the airline are reduced if the number of flights are reduced and aircraft are eliminated. In this illustration we simply want to show that capacity reduction will lead to higher prices if losses are eliminated.
97. Dan Nakaso, Airlines'Antitrust Immunity Nears End, HONOLULU ADVERTISER, Sept. 28, 2003, at IF, available at http://the.honoluluadvertiser.com/article/2003/Sep/28/bz/bz10a.html. Nonetheless, there was no attempt on the part of state or federal officials to revoke the exemption.
98. Aloha and Hawaiian Capacity Collaboration Under Way, PAC. BUS. NEWS, Oct. 26, 2002, http://pacific.bizjournals.com/ pacific/stories/2002/10/21/daily98.html.
99. The ATPI excludes charter flights. DEP'T OF TRANSPORTATION, BUREAU OF TRANSPORTATION STATISTICS, AIR TRAVEL PRICE INDEX, http://www.bts.gov/ xml/atpi/src/index.xml (providing a detailed description of the methodology used to construct the index and as well as access to the index since 1995).
100. See id.
101. See id. (follow "Technical Notes" hyperlink; then scroll to "1. How do the ATPI series differ from air travel price index series currently published by BLSP") (contrasting Consumer Price Index and Producer Price Index bases in numbers of tickets sold with ATPI base in units used at "Reference Period" bullet).
102. See id.
103. See id. (follow "Technical Notes" hyperlink; then scroll to "Index Estimation Method"). This is analogous to the standard market basket that is used when calculating the Consumer Price Index.
104. According to the Bureau of Transportation Statistics, in calculating the ATPI, round-trip tickets are assigned to the city of origin. See e-mail from Answers@bts.gov to James Mak (June 28, 2005) (on file with author). To the extent that most of the outbound travelers from Hawaii are tourists returning to their origin cities (for example, the number of Hawaii residents returning from overseas trips in 2003 totaled 1,019,316 while the total number of overseas deplaning passengers totaled 7,492,272), their return tickets would not be included in the Hawaii ATPIs. The 2003 data for overseas and inter-island enplane-ments from the individual Hawaii airports should thus be interpreted as the likely rank order of the ratios for outbound travel originating from Hawaii's major airports.
105. "Vacation spots" was listed in the Technical Notes on the inaugural ATPI offering, according to the Bureau of Transportation Statistics. They are no longer listed. We included Las Vegas in our comparison cities even though it is not listed by the Bureau of Transportation Statistics as a "vacation spot."
106. See Table 5. Of course, some of the decrease in enplanements was undoubtedly due to the dramatic fare increases.
107. See Table 2. The annual SMS Hawaii Market Study, based on approximately 2,500 responses to a random survey of Hawaii residents, found that resident inter-island travel declined by 18 percent (nearly 90,000 trips), due in part to higher inter-island airfares. Cf. id. (illustrating trend). In contrast, the number of residents traveling to the U.S. mainland increased marginally.
108. See Travel Within Islands Declines, HONOLULU ADVERTISER, Sept. 11, 2004, at 2C, available at http://the.honoluluadvertiser.com/article/2004/Sep/11/bz/bz11a.html.
109. The data plot figure is available from the authors upon request.
110. Kelly Yamanouchi, Hawaiian to End Wholesale Discounts, HONOLULU ADVERTISER, Mar. 9, 2003, http://the. honoluluadvertiser.com/article/2003/Mar/09/bz/bz09a.html.
111. Given the drop in demand following 9/11, and the financial distress of Aloha and Hawaiian, some capacity reduction and fare increase probably would have occurred even without the Cooperation Agreement. It is extremely difficult to say just how much of the change would have occurred anyway. Experimental methods are being employed by Kyle Hampton and Katerina Sherstyuk at the University of Hawaii to obtain some qualitative evidence on this issue.
112. Rene Kamita, Analyzing the Impact of Antitrust Immunity: Price Effects Following the Aloha-Hawaiian Antitrust Immunity Agreement (Oct. 2005) (manuscript at 2, on file with authors), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=847964.
113. See Cayetano Letter, supra note 55;
114. Congressional Delegation Letter, supra note 55.
115. We thank our colleague Denise Konan for this observation.
116. See Reply Comments, supra note 55, at 13.
117. Kelly Yamanouchi, Aloha Joins Hawaiian in Eliminating Coupons, HONOLULU ADVERTISER Jan. 3, 2003, http://the. honoluluadvertiser.com/article/2003/Jan/03/bz/bz02a.html.
118. Id.
119. For a careful examination of cartels and their problems, see, e.g., Don Patinkin, Multiple-Plant Firms, Cartels, and Imperfect Competition, 61 Q.J. ECON. 173 (1947).
120. Kamita, supra note 89 (manuscript at 26). Kamita suggests that the rise in airfares after 9/11 was largely the result of the elimination and the expiration of outstanding discount one-way coupons.
121. That was not true of output. State of Hawaii, Department of Transportation, Airports Division records show that before 9/11 Aloha's market shares at Hawaii's five major airports exceeded those of Hawaiian Airlines; not so after 9/11. For the first nine months of 2003, the month-to-month absolute difference from 50 percent (market share) averaged 1.43 percentage points, or 2.85 percent when the cooperation agreement was in place. The absolute difference from 50 percent market share was 3.21 percentage points (or 6.43 percent) during the final 3 months when the agreement ended. For the entire year, the average absolute difference from 50 percent was 1.87 percentage points (or 3.75 percent) in 2003. By contrast, for the entire calendar year 2001, the average absolute difference from 50 percent was 1.92 percentage points (or 3.85 percent). Deviations from the 50 percent (market share) were greater pre- and post-agreement than during the agreement. Cf STATE OF HAWAII, DEPARTMENT OF TRANSPORTATION, AIRPORTS DIVISION, AIRPORT ACTIVITY STATISTICS BY CALENDAR YEAR (providing basis for data compiled by the authors), available at http://www.hawaii.gov/dot/ airports/publications/cysmallone.pdf (last visited May 26, 2007).
122. Conversation with Katerina Sherstyuk about work in progress.
123. One might wonder why the popular coupons did not return after the expiration of the agreement, except as a promotional anniversary celebration fare by Aloha Airlines. One possible explanation is that the introduction of discount coupons long ago enabled the two airlines to price discriminate between locals and tourists using a two-tier price system. With the advent of the Internet and high-speed computers, the airlines now have the ability to profitably price discriminate against all customers, not just locals versus tourists. Indeed, the more interesting question is why Aloha and Hawaiian Airlines did not adopt sooner the now common and more sophisticated discriminatory pricing strategy that they employ in virtually all of their overseas markets. It took 9/11 and the collusive agreement for the two airlines to finally phase out the coupons.
124. Dan Nakaso, Airfare Between Islands May Fall, HONOLULU ADVERTISER, Nov. 1, 2005, at A1;
125. Rick Daysog, No Planes, No Space - Is Mesa for Real?, HONOLULU ADVERTISER, Nov. 4, 2005, at 1A, available at http://the.honoluluadvertiser.com/article/2005/Nov/04/bz/FP511040349.html;
126. Rick Daysog, Mesa's Airline Flies June 9, HONOLULU ADVERTISER, Mar. 24, 2006, at 1C [hereinafter Mesa's Airline Flies June 9];
127. Jaymes Song, The Sound of Interisle Air Competition Starting: 'go!', HONOLULU ADVERTISER, June 5, 2006, at 3B. Another group of potential investors promoting itself as FlyHawaii Airlines withdrew its plan to enter the market after Mesa's announcement. IslandAir, once a commuter airline with limited routes, first announced its intention to expand its inter-island air service greatly under new ownership, using 78-seat Bombardier Q400 jet-prop aircraft.
128. Rick Daysog, Island Air Makeover Under Way, HONOLULU ADVERTISER, Mar. 22, 2006, at 1C [hereinafter Island Air Makeover Under Way]. Following the entry of go!, FlyHawaii put its plan on hold citing the entry of go!, the ongoing fare war, and high fuel prices as the principal reasons for its decision.
129. Rick Daysog, Island Air Puts Hold on Expansion, HONOLULU ADVERTISER, Sept. 27, 2006, at 1C.
130. Rick Daysog, HAL Sues New Competitor, HONOLULU ADVERTISER, Feb. 14, 2006, at 1C [hereinafter HAL Sues New Competitor].
131. Dave Segal, New Carrier go! Losing About $300 a Flight, HONOLULU STAR BULL., July 27, 2006, http://starbulletin.com/2006/07/27/business/story02.html.
132. Rick Daysog, Go! Avoids 1-Year Grounding, HONOLULU ADVERTISER, Oct. 6, 2006, at 1C; Daysog, Island Air Makeover Under Way, supra note 100, at 1C;
133. see also Rick Daysog, Hawaiian Air to Add Flights, HONOLULU ADVERTISER, Apr. 2, 2006, at IF [hereinafter Hawaiian Air to Add Flights]. As a warning to Hawaiian and Aloha, Mesa's CEO noted at a news conference in March 2006 that " [w]ith these low fares, we can go a long time. Even if we fly empty, we could fly five years on the profits the rest of our company makes in one year."
134. Daysog, Mesa's Airline Flies June 9, supra note 100, at 1C;
135. cf. Dan Nakaso & Rick Daysog, A New Fare War for Local Flights, HONOLULU ADVERTISER, June 8, 2006, at 1A.
136. Nakaso & Daysog, supra note 103, at 1A.
137. Lynda Arakawa, $19? Hah! Aloha Says You'll Fly Free, HONOLULU ADVERTISER, June 9, 2006, at 1A.
138. Rick Daysog, Aloha Upgrades Fleet, Schedule, HONOLULU ADVERTISER, Mar. 22, 2006, at 1C;
139. Daysog, Hawaiian Air to Add Flights, supra note 103.
140. Daysog, HAL Sues New Competitor, supra note 101, at 1C;
141. Rick Daysog, Suit Against Mesa Can Proceed, HONOLULU ADVERTISER, Mar. 23, 2007, at 1C [hereinafter Daysog, Suit Against Mesa Can Proceed]. Hawaiian is seeking to block Mesa from issuing tickets for two years. The suit is scheduled to go to trial on September 25, 2007. Second Amended Scheduling Order 1, Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., No. 03-00817 (Bankr. D. Haw. Mar. 27, 2007).
142. Dan Nakaso, Lawsuit Tries to Halt go!'s Tickets, HONOLULU ADVERTISER, June 29, 2006, at IC;
143. Rick Daysog, Judge Throws Out Mesa's Suit, HONOLULU ADVERTISER, Dec. 9, 2006, at 1C, available at http://the.honoluluadvertiser.com/article/2006/Dec/09/bz/FP612090318.html;
144. Daysog, Suit Against Mesa Can Proceed, supra note 107, at 1C. During the hearing on Hawaiian Airlines's injunction against Mesa, Hawaiian Airlines allegedly produced an e-mail by Mesa's chief financial officer in which the CFO discussed giving Aloha Airlines a final push to drive it out of business.
145. Rick Daysog, Aloha Airlines Lawsuit Calls go! 'Unfair,' HONOLULU ADVERTISER, Oct. 14, 2006, at 1C.
146. Pub. L. No. 107-42, 115 Stat. 230 (2001) (codified as amended at 49 U.S.C. § 40101 (2003)), available at http://www.ustreas.gov/offices/ domestic-finance/atsb/hr2926.pdf.
147. § 101 (a) (2), 115 Stat, at 230. The law also limited third-party damages to $100 million per incident. § 201 (b) (2), 115 Stat, at 234.
148. Andrew Gomes, New Law Opens Way for Interisle Air Talks, HONOLULU ADVERTISER, Nov. 20, 2001, at 1A, available at http://the.honoluluadvertiser.com/article/2001/Nov/20/bz/bz01a.html.
149. It is not entirely clear that preserving a duopoly by allowing them to collude is better than allowing one of the firms to fail.