Most creditors of Aloha likely to receive ‘squat’

The sale of assets and a pending lawsuit will generate funds, but the airline owes too much

Aloha Airlines' unsecured creditors, who received one-hundredth of a cent on the dollar after the company's last bankruptcy three years ago, likely will receive nothing this time around.

The unsecured creditors include all those who paid for Aloha tickets using cash or checks -- people whom Aloha's Web site advises to file claims with the U.S. Bankruptcy Court.

"Between you and me, the unsecureds are not going to get squat," said one insider close to the case.

All the money that Aloha receives from the sales of its cargo division, aviation services unit and the company's intellectual property, such as the Aloha name and logo, will go first to its primary lender, General Motors Acceptance Corp., and then -- if anything is left over -- to its majority investor, Yucaipa Cos. LLC.

Aloha owes GMAC $44 million of principal, plus an additional $4.9 million for letters of credit that the lender issued on behalf of Aloha, while Yucaipa is owed $106.7 million.

Aloha reported in its March 20 bankruptcy filing that it has in excess of 4,000 creditors. On Monday the 61-year-old airline shut down its passenger operations.

"We have major concerns that this is essentially being operated for the benefit of the secured lenders rather than for the creditors and the people of Hawaii," said attorney Christopher Prince, who represents the unsecured creditors committee.

Under federal Bankruptcy Law, secured creditors -- those with collateral -- get paid first from the proceeds of any sales. Administrative claims, such as attorney fees, are paid next, while unsecured claims are last in the pecking order.

In a case where there is little money available, attorneys can get paid through "carve-outs" in which the secured creditors set aside money to pay the attorneys and other professionals for the debtor -- in this case, Aloha -- and the unsecured creditors committee.

The one wild card for creditors is Aloha's lawsuit against Mesa Air Group, which is scheduled to be heard in federal District Court in October. Aloha is alleging that Mesa used predatory pricing and confidential information obtained as a potential investor during Aloha's bankruptcy to gain a competitive advantage in entering the Hawaii market.

A federal Bankruptcy Court judge already has awarded Hawaiian Airlines more than $80 million in a separate lawsuit with some of the same allegations. Aloha President and Chief Executive David Banmiller thinks the damages award could be even higher if Aloha prevails in its suit.

Banmiller said the shutdown of Aloha's passenger operations increases the amount of damages it could seek from Mesa in the lawsuit.

But the next turning point for Aloha's creditors comes today, at a court hearing over the potential sale of the cargo unit.

Cargo, the airline's most profitable division, flies 85 percent of the state's goods as well as all the U.S. mail to Maui and the Big Island. The unit has generated earnings before interest, taxes, depreciation and amortization of more than $6 million annually in recent years.

A dispute over pilot seniority and the company's fears of a walkout that could scuttle the cargo unit's sale prompted Aloha to file a motion Tuesday in Bankruptcy Court seeking a temporary restraining order against the Air Line Pilots Association. Bankruptcy Judge Lloyd King put off making a decision on the motion to give the sides time to talk. A status conference on those talks is scheduled for today.

Prince said he is concerned that there is a "rush to judgment to sell these assets piecemeal and deny the state of Hawaii the business that it's enjoyed for the last 61 years."

But Banmiller said there was no rush to sell the cargo unit at all.

"I've been trying for at least a year to sell Aloha Airlines -- the entire entity -- because I think it has great value," Banmiller said. "The problem is, the realities that are out there today are frankly different. Fuel has dramatically increased the bet on trans-Pac and interisland because most of the fuel goes to that. So when you talk about a doubling of fuel, it really affects interisland and trans-Pac and not cargo, because the cargo cost fuel surcharge is passed on. Contract services just handle other carriers, so the economics is different for those two.

"Go! trashed the environment interisland, but not cargo. Fuel did the same for trans-Pac and interisland. So we woke up one day and everybody is saying, 'I'd like to buy this but not the entire entity.' So as a responsible debtor, I have to listen to the marketplace, and we have a lot of interest in cargo."

Also on the docket today is a motion by Aloha to reject 14 of its 27 aircraft leases. The remaining aircraft are either cargo planes or aircraft already owned by Aloha.