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Sunday, December 23, 2001


THE ONLY WAY TO FLY
The merger of Aloha and hawaiian

art

In the skies above Honolulu,
two foes end a fight


By Rick Daysog
rdaysog@starbulletin.com

The rivals lined the perimeter of the penthouse boardroom in First Hawaiian Tower, holding in decades of mutual suspicion. Aloha Airlines board members sat on a boxy sofa by the mauka corner of the room. Representatives from Hawaiian Airlines stood silently, their backs to wall-size windows looking over Honolulu Harbor.

Each side, veterans of a half-century dogfight over Hawaii's skies, waited for Wednesday's formal announcement that their companies would be merging.

The airlines' principals spent long hours in their offices the night before working out the details, and the strain was evident in their tired faces, and in the quiet of the room.

At the Banker's Club on the other end of the 30th floor, First Hawaiian Bank's officers uncorked a $1,300 bottle of Louis XIII cognac to celebrate the completion of BNP Paribas S.A.'s $2.5 billion acquisition of First Hawaiian's parent BancWest Corp.

The bank deal -- which was concluded on the same day the airline merger was announced -- turned scores of First Hawaiian shareholders and employees into millionaires. The airline deal -- the equivalent of a marriage between the Hatfields and the McCoys -- is about surviving.

If the merger between Hawaiian and Aloha can be characterized as a shotgun wedding, then the events following Sept. 11 provided the ammunition. How two proud competitors dropped their differences to embrace in a merger of equals reveals the extent to which the tragic events have hurt the local aviation and tourism industries.


THE DEALMAKER

Greg Brenneman pulled off a merger that had been tried -- and failed -- several times

BEFORE SEPT. 11

>> Reached while mountain climbing in Colorado, Brenneman says he has no interest in investing in Aloha, since the market can only support one airline.

AFTER SEPT. 11

>> The attacks pushed the merger forward, helping Brenneman make his argument that in order to survive, the longtime rivals had to join forces.


When the chief executives of both carriers -- Aloha's Glenn Zander and Hawaiian's Paul Casey -- opened the 3 p.m. news conference by scolding the local media for reporting details of the merger the night before, they inadvertently revealed that the deal had gone down to the wire.

Documents finalizing the merger were signed just four hours before the news conference, although thousands of the airlines' worried employees and customers already knew.

Negotiations between Hawaiian's chief shareholders, Randy Smith and John Adams of New York-based Airline Investors Partnership; and Aloha's investors, which include the heirs of local financiers Hung Wo Ching and Sheridan Ing, was often difficult, said Greg Brenneman, who will become the chairman and chief executive officer of the merged company, Aloha Holding Inc.

"Doing the deal was tough. It was really tough," said Brenneman, a former Continental Airlines president who is credited with turning around the Houston-based airline. "What you have is two investor-banker-bond traders at Hawaiian Airlines and (two) several- generation Chinese-American families that own Aloha. You can't get more different personalities than that. That made the issues very difficult. I spent a lot of time speaking both languages."

Brenneman, whose Texas-based investment firm TurnWorks Inc. will own 20 percent of Aloha Holdings, said his involvement in the merger began Aug. 1 when he received a call on his cell phone from Aloha's consultant, Peter Walsh of Mercer Management Inc.

Brenneman -- who at the time was climbing a 14,000-foot mountain outside -- said Walsh wanted to know if he was interested in owning a piece of Aloha.

Brenneman wasn't, given the years of cutthroat competition between the two airlines.

Aloha and Hawaiian have been operating at near break-even during the past five years while national carriers were posting record profits, Brenneman said.

"Why don't you just go back and tell the other guys that the fastest way to turn a small fortune into no fortune is by investing in an airline in a market that has two carriers that can only support one," Brenneman told Walsh.

Brenneman said he later spoke with Zander, who told him the company was talking to several investors. Brenneman said he would be interested only if Aloha merged with Hawaiian.

Brenneman later called Casey at Hawaiian, who he knew from his days at Continental. Hawaiian was not for sale but Casey agreed to arrange a meeting in New Jersey with Brenneman and Adams, Hawaiian's chairman.

Over dinner at the Newark Airport Marriott, Brenneman wooed the investment banker. Adams made no commitment but Brenneman agreed to meet on the East Coast again the following month with Adam's partner, Smith.

That meeting was scheduled for Sept. 12.

For Brenneman, the events of the day before pushed the merger through. After his noontime flight from Houston to Newark International Airport was canceled, Brenneman phoned Smith and asked him several pointed questions.

What was his average holding time for an investment? Eighteen months, Smith answered. What was Smith's average rate of return? Between 30 percent and 40 percent.

Smith and Adams, who are well known for their savvy investment decisions, have controlled Hawaiian Airlines since 1996 when they invested $20 million in the company. The rate of return is unknown, but likely has not reached Smith's usual goals.

"There was a long pause ... and then he said 'Greg, I think we should talk,' " Brenneman said. "I think the events of Sept. 11 and the events of the market really helped everybody realize how important it was to have a stable carrier."

Brenneman also met with Zander and Aloha Chairman Han "Sonny" Ching in late August. Members of the Ching and Ing families were concerned about investing more money in the airline to cover future operating losses.

For the first six months this year, the company posted a net loss of $4.6 million. That loss was on top of $4.3 million in 2000. Sept. 11 further blackened the outlook.

While Aloha was not in immediate danger of shutting down, its investors were worried about the airline's long-term viability, a person familiar with Aloha's operations said.

They also were wary of 40-year-old Brenneman's Texas-sized ego, the source said, but the investors were awed by his knowledge of the airline business and plans for merging the two companies.

During the negotiations Brenneman played the role of referee. Hawaiian's managers would complain that Aloha was undercutting them on ticket prices. Aloha's managers said the same of Hawaiian, he said.

"This really is a marriage between the Hatfields and the McCoys," Brenneman said. "I just kept working the process between the Hatfields and the McCoys back and forth and back and forth and over time we came to an agreement."

Casey said he wasn't surprised how quickly the deal moved after that. The two airlines have looked to combine their operations a number of times during the past 30 years, he noted, only to pull the plug each time.

In 1971, Hawaiian's then-Chairman Jack Magoon, Aloha's Hung Wo Ching and then-Gov. Jack Burns held a news conference to announce that the airlines were merging. The deal fell apart, creating further animosity between the two companies.

Ching, who died in 1996, often bristled when he recounted the details of those merger negotiations, saying Magoon went back on his word and pulled out.

One former Hawaiian executive, in turn, blamed Ching for the collapse of the deal.

The difference this time is Brenneman.

"He was able to bridge the cultural gaps between the two companies," said Casey, who, along with Zander, plans to retire when the merger is completed.

"The alternative is to wait for one or both airlines to go out of business, creating a monopoly. It's best to manage the process upfront."



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