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The Regional Airline Pilot Shortage Claims Another Victim

By Adam Levine-Weinberg - Mar 19, 2014 at 6:33PM

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Mesa Air Group is abruptly shutting down its Hawaiian subsidiary, go!. It's the latest victim of a pilot shortage facing the regional airline industry.

The airline pilot shortage has claimed yet another victim. Earlier this week, regional airline operator Mesa Air Group announced that it is shutting down its Hawaiian subsidiary -- which is named "go!" -- at the end of this month.

Mesa has contracted with Hawaiian Holdings ( HA -5.36% ) to rebook all go! passengers with tickets for travel between April and June on Hawaiian Airlines flights. The company will refund all tickets for travel after June 30.

Hawaiian Airlines will benefit from the demise of a key competitor. Source: Wikimedia Commons.

Mesa's decision to shut down go! is a boon for Hawaiian Airlines, which can further solidify its dominance of the interisland travel market in Hawaii. It is also a sign that the fallout from new rules regulating pilot hiring and pilot rest periods is far from over.

Mesa's story doesn't make sense
References to a pilot shortage were conspicuously absent from Mesa Air Group's announcement that it was exiting the Hawaii market. Instead, the company stated, "With the significant expansion opportunities in flying large regional jets in contracted service, we are redeploying the go! aircraft to support our existing mainland operations." Mesa also blamed a long-term rise in fuel prices.

However, neither of these justifications can fully explain Mesa's decision to shut down go! at this particular moment. First, go! flies 50-seat regional jets (Bombardier's CRJ-200), whereas Mesa flies larger regional jets in its mainland contract business. It's hard to imagine how the go! planes will actually be able to "support" Mesa's mainland operations -- the company's contracts with its legacy carrier partners call for using larger planes!

Second, while fuel prices are significantly higher today than they were when go! began flying, jet fuel has been somewhat cheaper in the last year than it was in 2012. If fuel prices were a major consideration, go! should have stopped flying long ago. Clearly, Mesa previously thought that it could overcome high fuel prices with higher fares.

The pilot shortage is the key
The one thing that has changed recently is the availability of pilots. Major airlines have gone on a hiring spree due to a wave of retirements and new rules that require longer rest periods for pilots.

Around the same time, the FAA began requiring that new commercial pilots have 1,500 hours of flight experience (up from just 250 hours previously). The Government Accountability Office recently found that 11 out of 12 regional airlines that it interviewed are having trouble meeting their hiring quotas due to these rule changes.

Regional airlines are cutting 50-seat-jet flights due to a growing pilot shortage.

For example, Republic Airways (NASDAQ: RJET) announced last month that it will take 27 small regional jets out of service this year in order to reduce its pilot staffing needs. This will ensure that Republic has enough pilots to fly larger Embraer E-175s under its new contract with American Airlines.These large regional jet flights are much more profitable than 50-seat-jet flights.

Mesa is probably following a similar logic. The go! operation has been struggling. Last year, Mesa Air Group sent a new leader to Hawaii in an attempt to turn it around. However, given the scarcity of pilot labor these days, it makes more sense for Mesa to try to redeploy pilots from Hawaii to the mainland as it grows the more profitable contract flying business.

The impact in Hawaii
Hawaiian Airlines executives must be ecstatic about Mesa's decision to pull the plug on go! Hawaiian Airlines already has at least 80% market share on all of its main interisland routes, and it is losing its biggest competitor. In fact, Hawaiian will now have a monopoly on flights from Honolulu to the Big Island.

With even less competition, Hawaiian Airlines should see continued unit revenue increases for its interisland flying. However, investors shouldn't expect the company to exploit its monopoly power too much. If it were to raise fares too far, it could suffer a severe backlash from local residents who depend on the airline for intrastate travel, while encouraging other airlines to enter the market.

Foolish conclusion
While Mesa Air Group is attributing its decision to shut down go! to high fuel prices and a desire to redeploy aircraft to the mainland, there is a much simpler explanation. The regional airline pilot shortage forced Mesa's hand.

Like fellow regional airline Republic Airways, Mesa has a new fixed-fee contract to fly Embraer E-175s. Assuming that Mesa isn't the one regional airline (out of 12) that has met its hiring quota, it's safe to say that the company is struggling to hire enough pilots to support this growth in contract flying.

Since flying large regional jets is much more profitable than flying 50-seat jets, if regional airlines are short on pilots, it makes sense to slash 50-seat-jet flights. For Republic, that meant dropping plans to renew 50-seat jet flying contracts. For Mesa, it means shutting down the go! subsidiary. Undoubtedly, other regional airlines will be faced with similarly tough choices in the next year or two.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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