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Saturday, September 24, 2005



Aloha CEO says costs
in line as rival looms

Banmiller says new investors
will proceed with their plan
despite the threat from Mesa

Aloha Airlines' top official is questioning Mesa Air Group Inc.'s intention to start a new interisland airline in Hawaii.

But David Banmiller, chairman, president and chief executive of Aloha, said yesterday the incumbent airline has the appropriate cost structure now and the right investment partners to stave off the challenge.

Banmiller, who has been on the fast track to get Aloha out of bankruptcy in less than a year, awoke yesterday to the news that Phoenix-based Mesa was planning to begin interisland flights in the first quarter of next year. Mesa's announcement came hours after Aloha disclosed it had lined up two Los Angeles-based, private-equity firms to commit more than $100 million to bring the carrier out of bankruptcy.

"(Mesa) may not have been aware of this particular transaction," he joked. "The press releases may have crossed in the mail."

Banmiller said, though, that The Yucaipa Cos. LLC, led by billionaire Ronald Burkle, and Aloha Aviation Investment Group LLC, headed by former National Football League standout Willie Gault, "haven't changed their position at this point."

Neither has Jonathan Ornstein, chairman, president and CEO of Mesa.

"Not in the least," Ornstein said yesterday. "Even though our official announcement was after their announcement, we had filed our announcement hours before their announcement."

Banmiller said thanks to renegotiated aircraft leases and union concessions that Aloha's cost per available seat mile -- an important financial gauge in the airline industry -- is considerably less than Mesa's.

"Their cost structure for their airplanes is over 30 cents a seat and ours is 17 cents," Banmiller said. "There's no room for a fourth carrier (besides Hawaiian Airlines and Island Air in the interisland market), but stuff happens. The reason we had to reduce our costs ... is that you never know when someone is going to come into the market."

Ornstein said Banmiller's information about Mesa's cost structure is way off the mark.

"Our reported cost in the last quarter was 11.1 cents based on stage length and operating environment," he said. "I appreciate him being concerned about our costs, but I assure you we wouldn't be doing this if we didn't think we'd be profitable.

"The fact of the matter is we've run a profitable company for 20-something years and it's been profitable consistently since I took over the company. Let us make that decision. We can determine what will work for Mesa Airlines."

Peter Murnane, chief financial officer for Mesa, said the 2004 numbers that the federal Bureau of Transportation Statistics reported were erroneous because the agency was taking into account all of Mesa's expenses but not all of Mesa's aircraft. In a filing with the Securities and Exchange Commission, Mesa listed its fiscal 2004 cost per available seat mile at 11.7 cents, an improvement from 12 cents in the previous fiscal year.

Regardless, Banmiller said Aloha is in considerably better shape than it was a year ago. He said Aloha has lowered its costs by $70 million, or by 14 percent, on an annualized basis excluding the bankruptcy-related costs that soon will go away.

On Tuesday, Aloha attorneys will go to federal Bankruptcy Court to request exclusivity for the $100 million-plus reorganization plan being proposed by Yucaipa and AAIG. The exclusivity designation means that no other group will be able to file a competing reorganization plan.

In the Hawaiian Airlines bankruptcy, there was no exclusivity once a trustee was put in charge to see the airline through bankruptcy. Consequently, Hawaiian received multiple offers before deciding on RC Aviation LLC.

Banmiller said he's seen enough from potential investors and wants to go to the altar with the two Los Angeles firms.

"We've been in the marketplace for nine months looking for investors so in fairness we have more than covered the waterfront," he said. "In addition, we've seen a number of other proposals from various parties that have expressed an interest and they're simply not competitive with this proposal on multiple fronts -- the $100 million value of debt and equity, in terms of labor issues, in terms of getting a deal done."

Banmiller said it hasn't been determined yet what the airline's creditors will receive.

Yucaipa is run by Burkle, the former owner of the Ralphs and Food 4 Less grocery chains on the West Coast.

"The Yucaipa group is a fabulous group of people with an incredible track record," Banmiller said. "Since 1986, they've done $30 billion in merger and acquisition transactions,. I met with Ron Burkle personally Monday and with his people and I'm very impressed with his desire to do this, to infuse capital into the airline, to bring it out of bankruptcy and to ultimately look for future opportunities."

Banmiller said the airline is taking things one step at a time so he's not ready yet to talk about expansion. But he issued a veiled threat at Mesa.

"The thing about this industry is that our assets fly so you can put them anywhere," he said. "There's going to be people that want to jump into our space. But if we do this right with our low cost structure, we can jump into their space.

"With expansion, the key is two things. The first one is a low cost structure. And the second one is a good balance sheet with liquidity. If you look at the filing, we're going to have a substantially improved balance sheet coming out of bankruptcy with sufficient cash to manage opportunities in the future."

Mark Dunkerley, president and CEO of Hawaiian Airlines, said in a statement yesterday that Mesa represented yet another challenge.

"Over the years, our employees have faced many competitive challenges and have overcome them all," he said. "I trust that the prospect of another competitor in this market will be no different. Our focus will continue to be delivering the best service and value to our customers."

Marsha Wienert, state tourism liaison, welcomed a new competitor to the interisland market.

"We know this is a reputable company that can provide good service," she said. "What I think Mesa will be able to bring to Hawaii is an alternative and, hopefully, a way to move between our islands at a less expensive rate."

Ryokichi Tamaki, senior vice president for purchasing and marketing in Hawaii for Japanese tour operator Jalpak, said Mesa's impending arrival is "great news" because Japanese visitors have been reluctant to fly to other islands due to the high fares. For example, he said, Japanese tourists traveling to Maui in 2004 were down about half from the number in 1999.

"It's very expensive to fly if you divide it into the mileage between any of the interisland flights," he said. "Also, the frequency of the flights has been reduced in a large number since 9/11."

Former Hawaiian Airlines CEO Bruce Nobles, a Dallas-based airline consultant whose attempt to return as Hawaiian CEO with an investment group was unsuccessful during the recent bankruptcy, said Mesa is going to have to do more than lower its prices to attract customers.

"There have been a number of people who have come in to start a third carrier in Hawaii and it has been traditionally very difficult to get a foothold in that kind of market because of the power of the existing infrastructure," Nobles said. "Nobody is going to be able to buy market share with price because in the airline business people always match.

"You're going to have to have product advantage in order to take market share in a market where there's not many travel alternatives. It's schedule, service and frequent-flier programs. A lot of people are loyal to Hawaiian and Aloha. Mesa has a very smart group of guys and they've been successful at what they've been doing, but it seems to me to be a risky strategy."

But Mike Boyd, an aviation consultant with the Evergreen, Colo.-based Boyd Group, doesn't put it past Ornstein.

"We've kind of found in the last year or so that it's hard to make money in the Hawaiian islands," Boyd said. "It's expensive to fly short distances because you have a lot of landings and takeoffs, fly at a low altitude and your fuel burning goes up.

"That much said, we have to look at the people involved. If Mesa is involved, you better believe this is serious and they probably can make some money. Jonathan Ornstein is not like us mere mortals. He can find opportunities where the rest of us can't see anything."



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