Mesa's Not Quitting Hawaii

Hawaiian Air isn't backing down either.
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Despite a judge's ruling that it must pay a competitor $80 million,

Mesa Air

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CEO Jonathan Ornstein says his subsidiary go! will keep flying between the Hawaiian islands.

Why? Because, he says, "It's a shame to let the bad guys win."

Earlier this week, Honolulu Bankruptcy Court Judge Robert Faris said Mesa must compensate

Hawaiian Airlines

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because it misused confidential information it obtained as a potential acquirer of Hawaiian in 2004. The amount Mesa must pay covers damages from when go! began operating in June 2006 through October this year.

The barriers to go!'s continued operation are significant, because it is conceivable that Mesa could incur additional damages. Additionally, Mesa is dedicating five airplanes to a money-losing venture in Hawaii at a time when it faces severe pilot attrition, as its pilots -- like those at other regional airlines -- are rapidly being hired away by higher paying carriers.

The court did not award damages for any loss Hawaiian may sustain going forward, nor did it agree to bar go! from selling tickets for one year. However, "The judge left open the possibility to pursue damages going forward," said Hawaiian CEO Mark Dunkerley, in an interview.

Ornstein says it is important to stay in Hawaii because, "if we were to leave, the fares would go right back to where they were the day we got there -- a hundred dollars-plus for a 20-minute flight." Current fares are around $39. "In the long run, we will carve out a niche there, operate profitably, and serve the people of Hawaii," he says.

Mesa plans to appeal the adverse ruling, saying it was based on "evidentiary" issues. The court found that Mesa's chief financial officer, Peter Murnane, destroyed evidence, erasing information that he was not supposed to have on his computer. Murnane has been placed on administrative leave.

"This was not a corporate misdeed," Ornstein says. "It was the wrongdoing of one employee. And the net result was that the consumer got a better deal." As far as the "confidential" information that is at the heart of the case, Ornstein says it was largely meaningless, "without one stitch of value."

Hawaiian sought damages of $173 million over 39 months. Dunkerley says that length of time represents the average period that new entrants typically survive in the inter-island market that has historically been shared by Hawaiian and privately held Aloha Airlines.

The award roughly approximates the damages over 17 months, Dunkerley said, raising the prospect that more time in the market for Mesa could mean more damages.

Hawaiian shares traded Thursday at $4.85, down 5.8%. On Wednesday, they rose 17% following the announcement of the court's verdict and strong third-quarter earnings. Meanwhile, Mesa shares rose 1.3% to $4.71 after falling 6.7% in the prior session.

Meanwhile, Mesa is contending with other pressures, including a pending suit filed by Aloha in U.S. District Court, and its restless pilots. Negotiations have been slow to begin on a pilot contract that became amendable in September, while attrition has claimed about 500 pilots this year from a workforce of 1,700, forcing high workloads.

Now, "the financial impact of the Hawaiian Airlines decision -- if it is not overturned on appeal -- will likely be felt for years to come," said Michael Jayson, chairman of the Mesa chapter of the Air Line Pilots Association, in a prepared statement.

Dunkerley, however, says "there is a lot of spinning going on at Mesa." He calls the case "a simple one in which Mesa entered into a contract, breached the contract, tried to cover up the breach by destroying evidence, and then lied about it.

"It had been Mesa's plan to drive local competitors out of business, and then to raise fares higher than they had been before

Mesa entered the market," he continued. "Everybody understands the naked, predatory nature of that strategy."

Wednesday was a good day for Hawaiian. If the ruling is upheld, the carrier is compensated for months of operating losses. If not, its earnings report still indicates that it has "a terrific franchise, even with irrational market behavior," Dunkerley said.