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Friday, January 30, 2004



Boeing seeks
$40.4 million for
rejected Hawaiian jets

The airline sent back two
717s and refused a 767


Boeing Capital Corp. has filed a $40.4 million claim against Hawaiian Airlines for losses suffered from the carrier's return of two 717s and the rejected delivery of a 767.

The aircraft lessor's final claim is expected to be considerably more since it is still negotiating with Hawaiian on restructuring the leases of 11 717s and three 767s that the airline is using. One source familiar with the situation said the additional claim likely will be part of the restructuring agreement.

Boeing Capital's claim is the second highest so far behind a $110.1 million claim filed in June by aircraft lessor Ansett Worldwide. Ansett sought damages for the rejection of a 767 scheduled for delivery and for losses it would incur on seven 767 leases that it restructured with Hawaiian. The airline, though, won't have to come up with $110 million in cash in the Ansett case, according to Hawaiian trustee Joshua Gotbaum, because more than $90 million of that amount can be deferred to the end of the bankruptcy and be paid out in stock.

The deadline for filing claims was Monday, but the amount of some of the claims are not known yet since there is a lag time for when the information becomes public.

In June, Hawaiian Airlines pilot Robert Konop, who has actively filed individual motions in the bankruptcy case, entered a claim against Hawaiian of just more than $40 million. He sought that amount for unfair labor practices, illegal communications access, illegal wiretap and legal expenses. Konop has had a longstanding suit against the airline that preceded Gotbaum in which he sued the airline for unlawful access and acquisition of Konop's private electronic communications.

In the latest claim, Boeing Capital listed $23.7 million in damages related to the return of the 717s and $16.7 million for nondelivery of the 767.

The financing arm of Boeing Co. said the amount sought for the 717s includes $10.3 million in past due rents as of Hawaiian's March 21 bankruptcy filing, $6.8 million for the lower rental rate it is getting from another carrier, and $6.5 million for the costs of doing maintenance and reconfiguring the aircraft for the new leaseholder, AirTran Airways. Hawaiian returned one of the 717s in December and the other in January.

Boeing Capital's $16.7 million claim for the 767 includes a loss of $15.4 million it incurred in the resale of the aircraft to a foreign carrier, which asked that the sale be kept private. Boeing Capital cited losses associated with remarketing the aircraft, the capital cost of money tied up in the transaction and legal expenses.

At the end of the third quarter, Hawaiian Airlines was Boeing Capital's fifth-largest customer in terms of lease value at $536 million. That total represented 4.4 percent of Boeing Capital's entire portfolio. Fourth-quarter figures have not been filed yet with the Securities and Exchange Commission.

However, Boeing Capital's parent company did report earnings yesterday in which it broke out some individual results for Boeing Capital. The aircraft lessor posted an 11 percent increase in fourth-quarter revenue to $307 million from $276 million a year ago. Full-year revenue rose 23 percent to $1.2 billion from $994 million a year earlier. Pretax income in the fourth quarter jumped 192 percent to $76 million from $26 million a year ago. Full-year pretax income nearly doubled to $143 million from $72 million in 2002.

In the Hawaiian Airlines situation, Bob Mann, an airline industry analyst and president of R.W. Mann & Co. in Port Washington, N.Y., said Hawaiian's senior pilots may have a hard time stomaching the freezing of the pension plan, one of the elements of Gotbaum's business plan.

"He wants to convert the pension to a cash balance going forward and give the pilots some version of the value that they've presently earned," Mann said. "The real debate will be establishing that value, and he's kind of testing the equity of older vs. younger employees.

"What happens in the conversion is basically that the older employees who are closer to retirement get whacked and the younger employees end up with something approximating what they've paid in. The real effect is that any senior employees, typically within seven to 10 years of retirement, don't come close to approximating the value they typically would have earned under a normal plan."

Mann said the reason for that is because a pilot's final payout is a function of the average of a pilot's earnings over the last five years and that a senior pilot typically would be making more due to a likely promotion to captain, the upgrade to flying a wide-body jet and longer routes that results in more pay.

"A pilot's taxable earnings at the end of his career are probably the highest than at any other time," Mann said. "It's that final average earnings number, multiplied by some factor, that produces their final retirement payout number."

Gotbaum, though, said he's confident he'll be able to win over employees' support for $11.2 million in labor concessions he is seeking, as well as the change in the pension plan.

"One of the really terrific things about Hawaiian Airlines is that Hawaiian's employees have always done what they think is necessary for the airline to succeed," he said.

But Mo Garfinkle, an adviser to Smith Management Co. and its president, ousted Hawaiian Chairman and Chief Executive John Adams, said Gotbaum's proposal to seek additional labor concessions will have a devastating effect on morale.

"The result of that will be a mighty unhappy work force than I think was under Smith Management and the current Hawaiian management team," Garfinkle said. "They worked hard to get a happy and productive and customer-friendly work force, and all of that will be undone. But if nothing else competes with the trustee's plan, then that's what's going to happen."

Garfinkle said that except for restructured leases with Boeing Capital, Adams had put the airline on solid footing to move forward.

But Gotbaum disagreed with that contention and said fixing what was wrong with the airline was not as simple as Adams and Garfinkle have made it out to be.

"I cannot tell you John Adams chose to put Hawaiian Airlines in bankruptcy," Gotbaum said. "But when I got here, I discovered that, in addition to his failure to renegotiate an agreement with Boeing, he had a seriously underfunded pension plan (of more than $60 million) and there were a series of other undone tasks. There was not a growth plan for Hawaiian Airlines. There was no plan getting Hawaiian Airlines the space at the Honolulu Airport that it deserves.

"So, I think one thing we have said in court and one thing I've said elsewhere is that Hawaiian is a very, very good airline that is facing increasingly serious competition, and that it needs to meet that competition. That, it cannot do, by putting its head in the sand. And it cannot do so by pretending that no change is needed."




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