Southern Airways Express Buys Mokulele, Forming the Largest US Commuter Carrier

Mergers/Finance, Mokulele, Southern Air Express

Though it may not fit your definition of a blockbuster merger, the announcement that will be coming out in just a few minutes that Southern Airways Express is buying Mokulele (but keeping separate brands) is actually a pretty interesting one. On the surface, this might leave you scratching your head. After all, Mokulele primarily flies in Hawai’i while Southern Airways Express flies in Pennsylvania and the Southeastern US. So, what the heck do they have in common? I spoke with Southern CEO Stan Little to learn more.

This merger is all about size. If the combined airline gets big enough, it’s going to help with connectivity into the global aviation system, something small cities have been craving.

Today I think of a “regional airline” as one that flies aircraft with 40 or more seats on behalf of a larger airline. But a “commuter airline” is one that’s still flying props under its own brand at the smaller end of the scale. This space has been filled with all kinds of fly-by-night operators who have come and gone, trying to make a living off government-funded Essential Air Service (EAS). It rarely has been a model for success, and things have been made much more difficult thanks to the pilot shortage. The airlines with airplanes between 10 and 40 seats have all but disappeared. Those with fewer than 10 seats haven’t had the same level of pilot pressure, but that doesn’t mean life has been easy.

You’ll remember that I wrote about Southern Airways Express and its effort to fix the small city model back at the end of 2017. Some of those cities have dropped off the map, but others have worked out quite well. Back in June, Southern began an interline agreement with American Airlines, and that has made a big difference.

Take a look at DuBois, Pennsylvania, for example. In July and August, Southern served more than 1,000 people at the airport. That may not sound like a lot, but it’s a 43 percent increase over what was happening before the interline agreement. And the airline is running an on-time operation that rarely cancels. People in these small cities have been desperate for a sustainable, reliable connection to the global aviation system. This has finally happened. But it only happened because Southern had built up enough of a presence at Pittsburgh that American took notice and realized there was enough benefit to do the work to connect the two airlines.

The desire to interline resulted in Southern moving on to a new reservation system from SITA that made connectivity easy. It is ready for more agreements, but it needed a catalyst. Enter, Mokulele.

Mokulele has been flying around Hawai’i for decades. Like Southern Airways Express, it flies primarily Cessna Grand Caravans. It has dipped its toes into EAS flying on the mainland, but as of now, it is only flying from LA to Imperial/El Centro. So what the heck can Mokulele bring to Southern in a merger?

You have to start with those treasured interline agreements. Mokulele already has a deal with Alaska and Air New Zealand. I’m sure the former will soon benefit Southern as well, though on a small scale. But even Mokulele hasn’t implemented those agreements to the fullest extent, because it is hamstrung by its reservation system. Getting Mokulele on to the Southern reservation system will make it easier to integrate with existing and new partners alike. And Mokulele is an attractive interline partner for the big guys in the US and Asia.

Remember, for travel within Hawai’i the only possible other interline partner is Hawaiian. Airlines like to have competition to keep rates lower, and they might like to reach into secondary markets in Hawai’i that Hawaiian doesn’t serve comprehensively. So, Delta and United might find Mokulele attractive now that it’ll have an easier reservation system to integrate with. Plus, the Southern network has to add some value to the mix.

Southern also likes Mokulele, because it does more flying that’s not subsidized by the government. In fact, after this merger, it should be about a 50/50 split. It’s always good to diversify away from something that’s always been a political hot potato. You don’t want your airline to go away if the government winds change.

Next, while there may not be route overlap, there is substantial fleet overlap. Southern and Mokulele both use the Cessna Grand Caravan as the backbone of their fleets. Combined they’ll operate 35 of them which is no joke. That will make it easier to combine operations. Having a larger fleet is also going to bring efficiency.

Another benefit? In addition to those 35 Grand Caravans, Mokulele has 2 Pilatus PC-12s to operate as Lana’i Air. It’s a charter operation that brings people from Honolulu to the Four Seasons resorts on Lana’i. Southern likes having this airplane on the certificate. The PC-12 is a nicer flying experience compared to the Grand Caravan even though it can carry a lot less payload and is more expensive to operate. It does, however, have a more luxurious cabin, and it’s pressurized. There are some places on the mainland where that airplane could come in handy. Now it’ll be easier for Southern to consider experimenting with it.

Lastly, there’s a renewed ambition that comes with a change in ownership. Mokulele’s owner is getting older, and from the tone used in internal memos I saw, it sounds like he really wants to slow down. Southern was a natural partner since Mokulele used to operate airplanes for Southern’s predecessor Sun Air, and there was trust between the organizations. Further, Mokulele’s owner didn’t have to be too concerned about jobs going away. After the combination, the brands will remain separate, and most people will stay in their same roles. Even the President of Mokulele will remain as the President of Pacific Operations for the combined airline.

Southern also wants to do more in Hawai’i . The airline has already talked about the idea of bringing a twin-engine aircraft to Hawai’i by 2020 so it could fly to Kaua’i. (Rules for single engine airplanes make that too challenging today.) It wants to build that operation while also growing on the mainland. Combined, these airlines will have more than 200 flights per day to start. I’d expect to see more.

Southern has long had growth ambitions, and this seems like a pretty good fit. If it helps to create a larger, more sustainable airline with better connections to the world, then that’s great news for people in small cities from Lana’i to Lancaster.

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23 comments on “Southern Airways Express Buys Mokulele, Forming the Largest US Commuter Carrier

  1. I wonder if the new SkyCourier would be of interest to fill that two engined requirement in the islands?

    1. It’d work, but my money would be on the Tecnam P2012. It’s half the price, can operate single pilot under 135, and is much cheaper to operate.

      1. I flew Mokulele about a year ago from Molokai to Honolulu. They really emphasized in their marketing how they voluntarily staff all flights with two pilots, even though they don’t have to. I think they did this to distinguish themselves from their main competition out there, Makani Kai Air. Makani Kai also flies caravans MKK-HNL but I believe uses a single pilot, which is fine.

        I wonder if the merger might influence Mokulele to switch to operating with a single pilot.

    2. Roanoke – I wasn’t able to get any specifics, but Southern does still have a couple Piper Chieftains on the certificate….But I imagine they’d want something bigger if they were going to go twin. Not sure.

      1. I was just thinking if they already had Caravans, they would have support in place for the PT6 engines. I would rather have turbines than pistons.
        Already a supply chain in place with Cessna. Maybe their will be a combo version that could haul 12 people and some cargo. Just a thought.

  2. Does Southern Airways Express plan to fly to IAD? During a December trip to IAD, I saw an arrivals/baggage level sign that had “Southern Airways Express”

      1. If I recall, the given reason for switching to BWI was customers’ desire to connect to Southwest. Would an interline agreement with United tempt them to switch back to Dulles?

  3. How, if at all is this going to impact or be impacted by Southwest doing inter-island flying?

      1. SWA actually might supplement its inter island flying with Mokulele. I believe SWA pilot agreement allows code sharing inter island in Hawaii and the Caribbean.

    1. Douglas – I don’t expect there to be an impact. Southwest is doing low frequency in the big markets only. So it’s going to be very different than what Mokulele does today. It might pull a few of the people off Mokulele, but I don’t think it’ll matter. Also, Southwest doesn’t interline so there’s no threat there as of now.

  4. I imagine there are some substantial facilities limitations, and pretty hefty local resident resistance to an (even greater) influx of tourism, but man, seems like there could be a huge demand for more flights to Hana – especially from HNL or the Big Island.

  5. In a mature industry, finding a niche market is probably the best way to profitability. It seems that Southern has found a profitable niche. It’s a bit like a shrunken Allegiant, and if I remember correctly, Allegiant is one of the country’s more profitable airlines. What’s even more shocking is that you think American did something right (meant as a tongue-in-cheek comment, not in a mean-spirited way).

  6. I could see the combine airline even growing in the PNW as a feeder to Alaska in Seattle/Portland. A lot of markets that Horizon left when they ditched the Q200s could work.

  7. Using a quick snapshot of October ’18 as the baseline (arbitrary), and combining Southern Airways Express (or SEX as I like to refer to it) with Ukulele gets you an airline that (with T100 results used) still isn’t the largest independent in the country. That honor belongs with Cape Air. In October, a reasonable comparison for Cape Air as it adds a little normalcy for the massive summer Cape & Islands peak traffic, Cape Air flies almost 1,500 more departures and about 10,000 more people across their system than the combined SEXULELE… (I just made that up, see what I did there?).

    I do think the real story is the large Caravan fleet which, while not “large” by Cessna standards (Fedex feeders like Wiggins, Mountain Air Cargo and the like have that honor), it still gives them more of a seat at the table. And, it gives them some theoretical flexibility to move aircraft seasonally, although the revenue opportunity needs to offset the ferry expense and risk from HI to/from the mainland.

    Just my two pence.

  8. Interesting to read more about Mokulele. They’re certainly an interesting niche player. If you travel enough within Hawaii, you’ll likely wind up on one of their flights. They are often the most convenient way (and sometimes the only way) to get from point A to point B in Hawaii. I haven’t seen any financials, but I assume they’re profitable? That said, while some technical aspects may be interchangeable with Southern, the business model has to be SO different. I mean, Mokulele only “works” because it’s operating within an island chain; you can’t DRIVE these distances. And they benefit from a solo competitor who simply doesn’t have the small aircraft necessary to fly these routes on the frequency needed. It’s a true niche, that couldn’t exist on the mainland.

  9. I did a flight on a Cessna Caravan roughly 5-7 years back when SeaPort (I believe) was doing EAS flying from Dallas Love to rural Arkansas. Seat 1A on those planes is one of the best seats around for an avgeek… Enough legroom to be comfortable, yet you get to look over the pilots’ shoulders the whole flight and see the view through the cockpit windows.

    Call me crazy, but I’ve been looking for an excuse to take a passenger flight on a EAS/commuter airline ever since, very different experience than the usual cattle car cabins on the big planes.

  10. The Southern partnership with American now brings sense to their mentioned move into PHL airport coming this May.

  11. I flew Mokulele about a year ago from Molokai to Honolulu. They really emphasized in their marketing how they voluntarily staff all flights with two pilots, even though they don’t have to. I think they did this to distinguish themselves from their main competition out there, Makani Kai Air. Makani Kai also flies caravans MKK-HNL but I believe uses a single pilot, which is fine.

    I wonder if the merger might influence Mokulele to switch to operating with a single pilot.

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