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Public companies may
keep rolling along

Health care, gas price regulation, airlines
and agriculture all face key challenges

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By Dave Segal
desegal@starbulletin.com

Bear market aside, it was a pretty good year for most of Hawaii's public companies in 2002. But 2003 figures to be even better.

While the stock market was experiencing its third straight down year, Hawaii stocks were posting a 13.6 percent gain as low interest rates, active mortgage refinancing and booming real estate and construction activity helped reinvigorate the state economy.

Hawaii stock experts expect the momentum to continue in 2003 as the state begins to distance itself from the effects of Sept. 11. Not only have local economists forecast moderate growth for the state, but the new Lingle administration is expected to be more business friendly, and Act 221, which provides tax credits for investment in Hawaii high-tech companies, also should help.

"The fact that we now have a Republican governor will create more confidence in the Hawaii economy by drawing some outside funds," said Richard Dole, chief executive officer of Dole Capital LLC.

Dole also said that while Act 221 isn't expected to necessarily benefit public companies, it should help the construction and visitor industries.

STAR-BULLETIN / 2002 Mortgage refinancing, construction activity and real estate sales may not be as hot as last year but still should be strong in 2003.

Randy Havre, CEO of Hawaii Venture Group LLC, said he expects the real estate market to level off but remain strong this year. He said Hawaii banks' short-term loans should leave them somewhat insulated from possible interest-rate increases although Dole thinks the oversized gains of bank stocks in 2002 may have run their course.

Havre emphasized that the state, despite its desire to diversify, still needs to focus on its No. 1 industry.

"Right now, it's a good opportunity with El Nino going across the United States, the Sony Open coming up and the great football game we just had on Christmas Day," Havre said. "We need to continue to support tourism. If we are able to do that, it will bode well for the economy, which in turn will bode well for companies, too."

But there are a lot of things that can happen to throw cold water on the party, Dole said.

"A war with Iraq could shut down the visitor industry," he said. "Interest rates could go up. There are things that could happen that could change the direction of various trends that are going on right now."

One thing that probably won't happen, however, is additional fallout from the corporate accounting scandals that plagued mainland companies in 2002. All of the CEOs and chief financial officers of Hawaii's publicly traded companies last year had to certify financial statements in order to comply with the newly enacted Sarbanes-Oxley Act. And Hawaii's Arthur Anderson office, which was dragged through the quagmire by its parent company last year, is no longer around after getting purchased by its local partners.

"When the situation is bad, what companies do is take a big bath," said Hamid Pourjalali, director of University of Hawaii's School of Accountancy. "They recognize losses a lot faster.

"Basically, I believe the outlook for the economy is getting better. My expectation is that companies will have better-than-expected earnings per share in 2003. I don't think there will be any more accounting problems simply because if there were more whistle blowers, they already would have brought up those problems. Also, companies now are a lot more cautious about their accounting practices."

Other forecasts for 2003:

DEAN SENSUI / DSENSUI@STARBULLETIN.COM Nurses from the Hawaii Nurses Association march along Beretania Avenue in protest over working conditions. Managing labor costs will be one of the biggest labor challenges in 2003.

Health care

For the health care system in Hawaii, 2003 looks to be another year of increasing demands needing to be served by already stretched resources.

One of those who will have more than her fair share to deal with is Chiyomi Fukino, the incoming director for the State Department of Health.

Fukino inherits two long-standing and expensive federal mandates: The Department of Justice remedial plan for fixing the state's mental health system and the ongoing action required to adhere to the special child mental health treatment requirements of the Felix Consent decree.

"Right now there are certain landmark decisions against the Department of Health in mental health and Felix. There's just no way around it so the public needs to understand that these things come with big price tags attached," she said.

She also hopes to tackle some of the state's other long-standing health-related problems, such as substance abuse, the growing population of uninsured and the lack of long-term care for the ever-growing population of elderly residents. Fukino knows she's going to need all the help she can get and is looking to the private sector for some of that help.

"We need to have a really good collaborative effort with the private sector and engage groups like the Hawaii Medical Association rather than waiting for a crisis to occur," she said.

For Hawaii's physicians, declining insurance reimbursements, increasing malpractice insurance costs and the impact of patient privacy regulations required by the federal legislation known as HIPPA, or the Health Insurance Portability and Accountability Act, will need attention in 2003, said Bill Donahue, consulting director for physician group Hawaii Independent Physicians Association.

For Hawaii's hospitals, expect more red ink as Medicare reimbursements decrease by an additional 5 percent in 2003, unless Congress increases payments.

Chris Pablo, Kaiser Permanente's director of public affairs, predicts a number of health-related issues will surface again in the upcoming legislative session. As medical costs continue to rise along with the cost of health insurance, expect some challenges to the state's Pre-Paid Health Care Act, which mandates employer contributions to employee health insurance policies, he said.

With most hospitals struggling to meet increasing costs, some closures or at least consolidation of facilities may also occur, Pablo said.

Managing labor costs while retaining and attractive skilled personnel, especially given the competitive national and international market place, will be one of the single biggest challenges faced by all health care facilities, Pablo predicts.

-- Lyn Danninger

Gas prices

The stage has been set for a potential confrontation over recently enacted regulations for Hawaii gas prices.

Lawmakers passed a law in 2002 that caps wholesale and retail gas prices in the islands, making Hawaii the first state to do so. But Gov. Linda Lingle said she will suspend the law, an action permitted under its terms. The measure does not take effect until 2004, to allow for further scrutiny.

Before making their next move, legislators are waiting to see what type of alternative plan Lingle will have to deal with the lack of competition in the gasoline marketplace, said Rep. Ken Hiraki (D, Kakaako).

Lingle had no comment for this story. "Still under review," said Russell Pang, a Lingle spokesman.

Legislators created the law in the aftermath of the settlement of the state's antitrust lawsuit against Hawaii's major oil companies, following years of investigation into the state's highest-in-the-nation gas prices. During the lawsuit, attorneys for the oil companies said there is little competition in the gasoline market here.

-- Tim Ruel

RICHARD WALKER / RWALKER@STARBULLETIN.COM Hawaiian and Aloha airlines last month began coordinating seat capacity on interisland flights to save costs. There already have been complaints by customers who can't get seats or who have to book tickets well in advance.

Airlines

Hawaiian Airlines and Aloha Airlines, still independent and competing with each other for interisland and mainland-Hawaii business, enter 2003 with newer fleets, lower wages and lean and mean attitudes toward increasing efficiency and cutting losses.

Both were on the way back last year, with strong third quarters, but the third quarter is usually a good one because summer tourism peaks and final-quarter figures are not yet reported. For the first nine months of last year, both lost money. Hawaiian was in the red to the tune of $43 million and Aloha lost $2 million.

Hawaiian, which says it will report a loss for all of 2002, has not predicted its performance for this year but does say that its lower staffing and tighter capacity controls are steps in the right direction. Aloha said the business plan it presented to get its $40.5 million loan guarantee from the federal government calls for a return to profitability over the next three years.

The airlines approach this year with fewer interisland flights. Local customers may not be happy with having to book well in advance or pay a lot more for a last-minute seat, but it should improve efficiency by filling planes. Both airlines have new aircraft and will add more this year.

Both are looking for new destinations outside Hawaii and could announce new routes in 2003.

Like airlines everywhere, they cannot predict what will happen to fuel prices, particularly with the uncertainty in the Middle East. Fuel is an airline's single biggest cost.

-- Russ Lynch

Agriculture

New ideas or a different emphasis often come with a new administration. For the new chairwoman of the state Department of Agriculture, Sandra Kunimoto, the focus in 2003 includes finding new markets for Hawaii agricultural products, encouraging entrepreneurship and maximizing federal grants to support the industry. She also wants to get the word out about Hawaii's diversity and the quality of the state's agricultural products by encouraging more marketing.

"We want to get the Hawaii name out there and associate it with good quality," Kunimoto said.

Creating partnerships is key to moving Hawaii agriculture forward, she said.

"I'd like to work in partnership not only with the counties but with various industry groups so we can have some coordinated efforts," she said.

But Kunimoto acknowledges there are still plenty of challenges to be faced, such as those associated with land, transportation and water availability.

Catherine Chan-Labrendt, associate dean for research at the University of Hawaii's College of Tropical Agriculture and Human Resources, forecasts a focus on research and development.

"I would say some of the most exciting areas are biopharming and biorefining," she said.

With biorefining, agricultural commodities such as sugar and pineapple are transformed into value-added products. With biopharming, high-value medicinal-type products such as neutraceuticals are produced from a variety of locally grown crops.

She is also excited about Hawaii's potential for growing organic agricultural products.

"It's another area where we don't do a lot but the movement coming is in organic products," she said.

Other areas for further development include aquaculture including microalgae and fish farming for consumption and aquarium use.

-- Lyn Danninger