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Does Larry Ellison Want to Be a Millionaire?

By Adam Levine-Weinberg – Mar 1, 2014 at 12:00PM

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Another billionaire entered the airline industry last year. What is Larry Ellison up to?

Billionaire Richard Branson famously stated, "The easiest way to become a millionaire is to start out a billionaire then go into the airline business." As a billionaire who has invested lots of money in the airline industry, Branson is well aware of the dangers of trying to run an airline.

So far, Oracle co-founder and CEO Larry Ellison has followed both pieces of Branson's "advice". Oracle's dominance in the enterprise software market has made Ellison the third-richest American, behind only Bill Gates and Warren Buffett, with a net worth of roughly $40 billion! Then, Ellison bought his first airline last year: Island Air, a small Hawaii-based carrier.

Ellison purchased Island Air primarily to improve transportation to Lanai, the Hawaiian island that he bought in 2012. However, Ellison has been very cautious in managing Island Air -- showing that he has no interest in losing lots of money in the airline business. That's great news for Island Air's main competitor, Hawaiian Holdings (HA 4.04%), which currently carries the lion's share of air traffic within Hawaii.

Big plans in Hawaii?
Larry Ellison's purchase of Island Air made sense. It's a good vehicle to ferry passengers from Honolulu to Lanai, where Ellison now owns two Four Seasons resorts among a variety of other real estate interests that encompass 98% of the island's land area. Island Air currently flies five daily round-trips between Honolulu and Lanai, along with a handful of flights from Honolulu to other Hawaiian islands.

Last year it looked like Ellison might have bigger ambitions in the interisland air travel market. In June, several media outlets reported that Ellison was buying Mesa Air Group's go! subsidiary -- one of the other small competitors to Hawaiian Airlines. However, that transaction never occurred.

A few months later, Island Air reportedly looked into buying the Aloha Airlines name. Prior to its 2008 bankruptcy, Aloha Airlines was the second-largest airline in Hawaii, so this would have significantly boosted Island Air's profile. These talks also apparently fell through.

Hawaiian Holdings looks on with interest
Hawaiian Airlines has benefited immensely from its near monopoly on air travel within Hawaii. It holds at least an 80% seat share on all of its interisland routes. This business is a consistent moneymaker for Hawaiian Airlines. The ability to seamlessly connect travelers to all of the major islands is also a competitive advantage for Hawaiian's long-haul business.

Considering the scale of Larry Ellison's personal financial resources, his purchase of Island Air created some risks for Hawaiian Airlines. If he were so inclined, Ellison could afford to invest in a rapid expansion of Island Air's fleet in order to make it a more serious competitor.

A hint of Ellison's financial muscle came last fall after Island Air suffered major reliability problems with the ATR-72 aircraft it had just begun using. At the time, Island Air CEO Paul Casey said the airline expected to finalize plans for a new aircraft fleet within a few weeks. Normally, an airline of Island Air's size would have been stuck with its unreliable planes due to the cost of replacing them.

No competition
Luckily for Hawaiian Airlines, it now seems clear that Larry Ellison has no interest in losing a bunch of money in the airline business. Last year, he passed on buying go! and the Aloha Airlines trademarks, and so far he has not moved to replace Island Air's ATR-72s.

Furthermore, Island Air does not seem very interested in competing with Hawaiian Airlines' new Ohana turboprop subsidiary, which is due to start service later this month. Ohana's initial schedule calls for two daily round-trips between Honolulu and Lanai and three daily round-trips between Honolulu and Molokai.

Ohana by Hawaiian will fly to the smaller Hawaiian islands. Source: Hawaiian Airlines

A little more than a week after Hawaiian announced the flight schedule for Ohana, Island Air announced plans to gracefully withdraw from Molokai. This will give Hawaiian Airlines a near-monopoly on travel to Molokai within a few weeks of the start of service.

Island Air hasn't yet announced what it plans to do with the capacity that will be available after it drops Molokai from its route map. One possibility is that it will try to bolster access to Lanai by starting nonstop Maui-Lanai flights.

In any case, Ellison's actions show that he is not interested in fighting for market share in the Hawaii interisland air travel market. His main goal is to ensure that travelers -- especially Four Seasons guests -- can easily get to Lanai. Ellison doesn't seem to care that much about whether they get there on Island Air or on Hawaiian Airlines' Ohana subsidiary.

Foolish conclusion
While Larry Ellison has used a small part of his fortune to enter the airline industry, he hasn't done so in a flashy way. He is treating Island Air essentially as a utility that can bring tourists to Lanai. Ellison's modest goals for Island Air make it unlikely that he will lose very much money. There's simply not that much money at stake!

This is great news for Hawaiian Airlines. Ellison's essentially unlimited financial resources give him the ability to turn Island Air into a serious challenger for travel within Hawaii (or even long-haul travel to Hawaii). Fortunately, he doesn't seem inclined to spend the money to build Island Air into a major competitor, which leaves Hawaiian Airlines with a very strong market position.

Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool owns shares of Oracle. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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