Potentially fatal appeal against Aloha rejected

A judge upholds the carrier's plan to terminate pensions

Aloha Airlines averted a potential death blow yesterday when a U.S. District Court judge rejected a federal agency's appeal of the carrier's reorganization plan confirmation.

But the ruling by U.S. District Judge Michael Seabright left more questions than answers because yesterday was the deadline set by investors for the airline to emerge from bankruptcy and the expiration date of a $68 million loan to the company. Afterward, the airline said it's business as usual for now, and it plans to emerge from its nearly one-year bankruptcy as soon as possible.

Seabright, who agreed to hear an appeal by the Pension Benefit Guaranty Corp. on a one-day notice, said federal Bankruptcy Judge Robert Faris was correct when he determined that the airline needed to terminate its unions' defined-benefit pension plans to get out of reorganization and that Faris had jurisdiction in establishing Dec. 14 as the effective date for terminating the plans.

The PBGC, a federal agency that insures pension plans, has 30 days to appeal Seabright's decision to the 9th U.S. Circuit Court of Appeals. The agency previously has said it would appeal to that court, but gave no indication during its telephone arguments yesterday whether it still plans to do so. A PBGC official said last night he had no immediate comment.

"Now that PBGC has had an opportunity for appellate review, and the ruling was so profoundly in favor of Aloha Airlines, we are hopeful PBGC will not pursue a further appeal," said David Banmiller, president and chief executive of Aloha.

Banmiller said the airline is in close communication with its lenders and is "hopeful." He also indicated that Los Angeles-based investors Yucaipa Companies LLC and Aloha Aviation Investment Group LLC appear willing to extend their deadline.

"The investors desire to complete the transaction, and they are supportive of our efforts to find an immediate solution," Banmiller said.

In fact, after Seabright's ruling, Yucaipa attorney Robert Klyman asked Seabright if he would be available next week if needed.

A Yucaipa spokesman said yesterday he was unable to reach any of the principals for comment.

PBGC attorney Stephen Schreiber argued yesterday that at least two of Aloha's pension plans were affordable and that Congress never intended for potential investors to come in and dictate that plans be dropped in a distress termination to make a purchase more appealing.

But Brett Miller, attorney for the airline's unsecured creditors' committee, said it actually was Aloha that decided to eliminate the defined-benefit plans from its business plan after an earlier lender, MatlinPatterson Global Opportunities Partners II LP, which also had the option to invest in the airline, decided to walk away because it did not want to take on the company's defined-benefit plans.

Aloha attorney Charles Dyke argued in court that the airline did everything it could to find an investor, and the company would need to liquidate if Yucaipa and AAIG walked away.

"This debtor is and has been on the verge of liquidation," Dyke said. "The notion that the debtor can afford these plans is simply wrong. There was only one investor group out of 65 we spoke to -- nine maybe seriously -- and only one was willing to put up the money. They said they were not willing to take on the black hole with the pension plans."

Yucaipa and AAIG are putting up $50 million in cash and up to $50 million in debt, as well as putting aside $2 million to pay creditors' claims.

Schreiber said the reorganization plan was not confirmable because the federal pension agency can decide against taking over a company's distressed pension plan, the Bankruptcy Court's decision is only a step in the process and there is no way at this early stage to set a termination date.

"We believe the plans can and should be continued by Yucaipa and that they can still make their 25 to 30 percent annual return," Schreiber said.

Seabright, though, disagreed with all of Schreiber's arguments except one: He agreed with the PBGC that an investor should not be able to dictate whether pension plans get terminated without financial justification. Seabright said it was clear from the record that Aloha took nearly a year looking for investors and would not have been able to emerge from reorganization without terminating the pension plans.

With the PBGC's appeal rejected and all of Aloha's unions having ratified new contracts, the airline could gamble and emerge from bankruptcy in the hope that the federal agency will not prevail on another appeal. But since the investors do not want to put any more money into the airline, the airline's safest option would be to reach an agreement with the federal agency.

"We think that Judge Seabright came to the only conclusion he could in reviewing Judge Faris' extensive review of the factual record in this case," Dyke said. "From here we hope to be able to reach a consensual resolution with the PBGC. And we remain in contact with our (bankruptcy) lenders. We are in constant touch with them and hope to be able work out a resolution with them as well."