PHOTO ILLUSTRATION BY DEAN SENSUI / DSENSUI@STARBULLETIN.COMThe $200 million deal helps save
the sputtering airlines, hurt by the
downturn since the Sept. 11 attacksBy Rick Daysog
rdaysog@starbulletin.comTHE $200 million proposed marriage between longtime rivals Hawaiian and Aloha airlines will cost hundreds of jobs, may raise fares on some flights and will leave Hawaii with a single interisland carrier for the first time in more than 50 years.
THE ONLY WAY TO FLY
MERGER OF ALOHA AND HAWAIIAN
Get ready for takeoff
The two companies, hard-hit by the economic downturn since Sept. 11, said the merger is necessary for their survival and will lay the groundwork for future growth.
Hawaii's two major airlines announced yesterday they have agreed to merge into a new publicly traded company, Aloha Holdings Inc., which will be the nation's 10th-largest airline with annual sales of about $1 billion.
The carriers expect to complete the merger during the first half of 2002, pending regulatory approvals.
Former Continental Airlines President Greg Brenneman, widely known for his experience as a corporate turnaround specialist, was introduced as chairman and chief executive officer of Aloha Holdings.
"We have the patient on the operating table, and we want to get it well first and in all aspects, and then we want it to grow," Brenneman said. "We have to get healthy to do that."
At a news conference yesterday, Brenneman said the merger will save about $90 million. But he added that the new airline still needs to "trim around the edges" to bring it back to profitability.
Brenneman -- whose Texas-based firm TurnWorks Inc. will own 20 percent of the new company -- said the new company will eliminate fewer than 600 positions, or less than 10 percent of the combined payrolls of Aloha and Hawaiian.
He said the merger will not require more drastic job cuts because both carriers have already eliminated more than 600 positions since Sept. 11. Brenneman said he will meet with employees and unions to make the merger work.
The new airline also will tinker with its interisland flight schedule. Since Sept. 11 the interisland business has not been profitable as the two airlines have been flying with about 60 percent of their seats filled.
Some of the morning routes have been flying with less than eight passengers, he said.
"The fastest way to make money is stop doing things that lose it," he said. "Regardless of whether or not this merger is pulled off, the natural trimming of interisland schedules to bring their load factors up will certainly happen."
The new airline also plans to freeze fares on unrestricted interisland fares and would link future fare increases to inflation rates and other costs.
Brenneman conceded that fares for some peak-hour flights could go up. The airline industry typically charges higher fares for peak-hour travel. Aloha and Hawaiian charge the same fares for peak and off-peak travel.
Company officials plan to negotiate with the state Attorney General's Office to work out a new fare structure. The new airline also will file an application with the Department of Justice to
The merger requires antitrust clearance from the state and the Department of Justice.
Brenneman said the deal already has the support of Gov. Ben Cayetano and U.S. Sen. Daniel Inouye. He believes that the state's review will be more rigorous than the federal government's review because the Attorney General's office will be looking at the impact on the interisland market whereas the Justice Department will largely focus on the impact on West Coast flights.
A spokeswoman for the Justice Department did not return calls.
Deputy Attorney General Michael Meaney, who met briefly with attorneys for the two airlines yesterday, said the state will look at whether the deal will create barriers for potential competitors interested in coming to Hawaii.
"Bottom line we're looking at the ultimate affects on competition and consumers," Meaney said.
The review also will take a close look at competition from mainland carriers who fly directly between the West Coast and the neighbor islands.
Brenneman said the issue of direct flights has altered the economics of the interisland business. During the past five years, both Aloha and United have been operating at a roughly break-even level. During the same period, the U.S. airline industry had their most profitable years.
The Sept. 11 economic downturn only made things worse for the two local carriers, he added.
Of the two airlines, Aloha has been harder hit.
Aloha, a privately held company led by the heirs of local financiers Sheridan Ing and Hung Wo Ching, launched its mainland service earlier this year, only to see business tumble as a result of the terrorist attacks.
In an August filing with the Transportation Department, the 55-year-old company said it had lost $205,618 during its second quarter. Year-to-date figures were not available. For all of 2000, Aloha lost $4.3 million.
Publicly traded Hawaiian Airlines, which was established in 1929, posted a year-to-date net profit through Sept. 30 of $15.2 million.
The merger will add new value to shares in the two companies. Hawaiian Airlines' shareholders will received about 52 percent of the combined company while Aloha Airlines' investors will get 28 percent.
Of the shares going to Hawaiian Airlines' investors, Airline Investors Partnership will receive 28 percent while public shareholders will receive 28 percent.
Airline Partners, led by New York investor John Adams, also will receive $10 million in cash as well as a six-year note bearing an interest rate of 8 percent.
The new company will be run by an 11-member board chaired by Brenneman. Aloha Airlines Chairman Han Ching will become vice chairman of Aloha Holdings.
This is not the first time that the two airlines looked to merge.
During the past 30 years, both companies have explored combining operations several times, but the plans fell through when neither side could agree on who would run the new company.
Glenn Zander, Aloha Airlines chief executive officer, said his company has talked to a number of investment companies during the recent months about a capital infusion.
Zander, who plans to step down when the merger is completed, said Aloha's consulting firm Mercer Management Consulting first approached Brenneman in August about acquiring the company.
But Brenneman told the consultants that he would be interested in acquiring both companies.
"I guess I am responsible for bringing together the Hatfields and the McCoys," Brenneman said.
Stock price up
Hawaiian Airlines' stock, which did not trade yesterday, soared 24.4 percent, or 61 cents, to $3.11 today on the American Stock Exchange. Volume was 818,730 shares. Earlier, the stock gained as much as 62 percent to $4.05 before paring its gains.
Flying solo
Here's a look at the operations of Hawaiian and Aloha airlines:
Hawaiian Airlines
>> Founded in 1929 as Inter-Island Airways.
>> Largest Hawaii-based airline, 12th-largest U.S. carrier.
>> Operates interisland and between Hawaii and seven Western U.S. cities and two destinations in the South Pacific.
>> 3,100 employees.
>> 29 airliners.
Aloha Airlines
>> Founded in 1946 as Trans-Pacific Airlines.
>> Largest interisland air transportation service, including cargo and charters.
>> Operates interisland and between Hawaii and Oakland, Calif., Orange County, Calif., and Las Vegas, and to five islands in the South Pacific. Affiliate Island Air operates between larger and smaller Hawaii airports.
>> 3,041 employees.
>> 23 airliners.
Merged company would
try to keep both namesSome questions and answers regarding the announced merger of Aloha and Hawaiian airlines:
Question: What will the new airline be called?
Answer: At the moment, there is no name for the merged airline. The new parent company will be called Aloha Holdings Inc. and will be a public company traded as Hawaiian Airlines (ticker symbol: HA) on the American Stock Exchange.
Greg Brenneman, who will be chairman and chief executive of Aloha Holdings, said he hopes to keep both the Aloha and Hawaiian names alive in the new airline.
Q: When will the merger be complete?
A: The merger is subject to federal and state antitrust laws, but Brenneman said he expects the deal to be completed in the first half of 2002. "We hope to close it very quickly," he said. Meanwhile, both airlines will continue to operate separately until the merger receives approval.
Q: Will ticket prices go up?
A: It's too early to tell. Brenneman said he expects market demand to dictate mainland fares.
With respect to how interisland fares might be affected by a single-carrier market, Brenneman said airline executives plan to meet with the state Attorney General's Office and the U.S. Department of Justice to discuss the situation.
"We plan on working out some guarantees in terms of service levels and guarantees in terms of fares to ensure that our customers are treated fairly in this process," Brenneman said.
In the meantime the companies plan to freeze unrestricted fares for two years, while any increases in the immediate three-year period following the merger would be tied to market factors such as inflation.
Q: Will my frequent-flier miles still be accepted?
A: Yes. Each airline's frequent-flier programs will be honored, and customers with accounts at both airlines would have their miles combined. "What you would typically do," Brenneman said, "is combine the mile balances of both programs, and we intend to do that."
Q: What about my interisland coupons, will they still be good?
A: Again, yes. But the coupons could be phased out in the future.
"The coupons will be good until they expire," Brenneman said. "Both airlines' coupons will be honored by the new airline. ... I know the market really likes the coupons."
Brenneman did say the new airline would evaluate the coupon system, which essentially amounts to using "any ticket on any flight at any time."
"One of the things that the rest of the industry does is take a look at times when people don't want to travel as much -- a particular time of day or a particular time of week -- and they make that fare real low," Brenneman said. "At times when people want to travel more, that fare might be a little higher.
"I think there's actually a way of giving very affordable air fares to folks who have a little bit more flexibility at the time they go."
Q: Will any jobs be lost as a result of the merger?
A: Yes, although Brenneman said he does not expect the losses to be as high as the layoffs in the days immediately following Sept. 11.
The economic slowdown that hit the state since the terrorist attacks prompted the airlines to cut roughly 600 jobs. Brenneman said he expects layoffs from the merger to be less than the 600 figure as the combined airline looks to streamline services and cut duplicate functions.
Brenneman said he plans to meet with union leaders and employees beginning today. "You are going to need some trimming that happens there around the edges," he said. "I think it'll be, in total, much smaller than what the 9-11 cuts were.
"You never know what those are ... until you sit down and work through them, because there's all kinds of training issues with employees, and you have to work through that process."
Q: How will flight schedules be affected?
A: Although there are no immediate plans to cut down on the number of routes, the number of interisland flights is likely to decrease following the merger.
"For both carriers, the routes to the mainland appear to be improving and are coming back quite nicely," Brenneman said. "The interisland market is very weak.
"Regardless of whether this merger happens or not, the natural trimming of interisland schedules ... will certainly happen."
By B.J. Reyes, Star-Bulletin reporter
