Hawaiian Airlines’ Since the world changed 18 months ago, Hawaiian Airlines' finances have been reading more like a flight manual for the Blue Angels -- a lot of twists and turns with numbers flying all over the radar screen.
buyback draws fire
as stock tumbles
The airline got $30 million
from the government, then spent
$25 million buying back its stockBy Dave Segal
dsegal@starbulletin.comIn September 2001, Hawaiian began receiving $30.1 million in federal grants to help recover from the 9/11 terrorist attacks.
That was followed by the December 2001 announcement and subsequent March 2002 cancellation of a merger with Aloha Airlines that caused Hawaiian's stock to nearly double and then nose dive below its pre-announcement level.
Then in July, the company completed a $25 million tender offer to buy back its stock -- at a 31 percent premium -- despite earlier insisting it needed a merger to ensure the airline's stability.
Now, the financially ailing carrier is trying to recoup that $25 million and more in the form of $30 million in labor and leasing concessions.
So what's going on in the cockpit of this $39 million company?
Did the airline's desire to reward its shareholders cloud its long-term judgment? Was the tender offer necessary to ensure future investment? Or did Hawaiian, still reeling from 9/11, simply fall victim to an intensifying Iraq situation that has deterred travelers and weakened earnings?
"I'm sure everybody who did those buybacks would like to have a do-over, a mulligan, so to speak, in golf parlance," said Robert Mann, airline analyst and president of R.W. Mann & Co. in Port Washington, N.Y. "Like anything, things change. But there's one thing that doesn't change as long as I've been involved in the industry, and that is cash is king. You can never have enough of it. I'm sure you can find somebody who thought (the stock tender offer) was a good idea and, at the time, it may have been."
John Adams, Hawaiian's chairman and chief executive officer, defended the tender offer in a Jan. 31 memo to employees. In the correspondence, he said the tender was a way to reward investors who had poured more than $50 million into the company six years ago. He added that those investors subsequently supported the reinvestment of additional millions in technology and other infrastructure improvements and also encouraged the investment of $1 billion more in new aircraft.
"We implemented the plan because it was important to compensate all shareholders for their support and patience in much the same way employees had been granted wage increases," said Adams, whose partnership, according to the most recent Securities and Exchange Commission filing, owned 50.9 percent of Hawaiian. "It was also important in that it assured the company credibility in the investment community, improving our ability to raise additional capital in the future should we need it."
In 1996, two years after the airline emerged from Chapter 11 reorganization bankruptcy, Adams formed an investment group, now called Airline Investors Partnership LLC, to purchase a controlling interest in the company for $20 million. The tender offer was an opportunity to reward some of those investors.
"At the time we offered this buyback," Adams said in the memo, "the outlook for economic recovery was good, our company had more than $100 million in cash and an independent investment adviser declared the plan reasonable."
Paul Brewbaker, chief economist for Bank of Hawaii, agreed that visitor counts for the summer were on an upward trend.
"Whatever was happening in some cities in other parts of the country as far as lack of travel was not true in Hawaii," Brewbaker said. "Business travel was dead but planes were full coming to Hawaii and around Hawaii. The way things looked (at the time) and the way things looked six months later can be summed up in one word: geopolitical. If anyone knew the Iraq situation was going to be the dead weight on global economic performance it's become, I think (Hawaiian) would have thought different where the economy was heading over the intervening months. But no one (then) was talking about Iraq."
Still, the tender offer hasn't sat well with some employees who feel that shareholders, and particularly Adams, have benefited at the employees' expense.
"This is contrary to every airline practice at this time," said an Hawaiian employee who requested anonymity. "While every airline in the industry hoards cash, Hawaiian has seen fit to reward investors by offering a premium on a stock repurchase. Management has yet to admit that this action is one of main reasons that brought us to where we are today. They received about $30 million from the stabilization board, took the windfall and rewarded investors with it. This is a travesty."
Analyst Brian Smith, who covers the company for Portland, Ore.-based equity research firm RedChip Review, said he didn't like the tender offer for another reason.
"It had the effect of instituting greater insider control," Smith said. "I don't view that as a positive. Certainly, from an employee's perspective, I can see where questions arise. Officers and directors of the company own more than half of the outstanding shares, and that provides the perception that the company is really a private company masquerading as a public company because, ultimately, insiders control the decision-making process. At RedChip, we like to see a relatively high degree of insider ownership because it aligns management interest with the shareholders, but we don't like to see (that much) ownership."
Hawaiian spokesman Keoni Wagner, though, refers to the tender offer as a one-time issue and said the airline would have proceeded with seeking concessions with or without the tender.
"In general, the need speaks for itself," Wagner said. "The airline, as an industry, and Hawaiian, as a company, is facing severe economic changes that require us to adapt. And any airline that doesn't adapt won't survive."
Unions at competitor Aloha Airlines agreed to $37 million in cost concessions in November to help the carrier secure a conditional loan guarantee that will cover $45 million in financing Aloha arranged from the private sector. The federal government would pay $40.5 million in the event of a default.
Adams, for his part, had reason to believe when he announced the tender offer May 31, 2002, that the airline's fortunes were about to improve, despite losing $18.6 million in the first quarter and being on the verge of a $31.1 million loss in the second quarter. Although Hawaiian's passenger traffic fell 6.1 percent in April from the previous year, it was looking better for May with just a 1.3 percent decline. During the summer months, the number of passengers Hawaiian carried rose 2.4 percent in June, 0.8 percent in July and 3.2 percent in August.
Hawaiian's board of directors, which includes Adams, decided to reward shareholders after the company's stock had fallen from a 4 1/2-year high of $4.45 to just above $3 shortly after the merger was called off. Hawaiian offered to spend $25 million to repurchase as many as 5.88 million shares, or about 17 percent of shares outstanding, at the price of $4.25 a share. That represented a 31 percent premium over its price at the time of $3.25.
"The purpose of the tender offer, instead of buying piecemeal small amounts of stock, is to offer all shareholders the right to proportionately share in the tender," Adams said in an interview following Hawaiian's Aug. 23 shareholders meeting.
Adams' group, AIP, which owned 18.2 million shares prior to the tender offer, was the buyback's biggest beneficiary. Since the tender was oversubscribed, all tendering shareholders received the 31 percent premium for just 22.1 percent of their shares. Remaining shares from the tender were returned to the shareholders.
In Adam's case, the tender fetched AIP $17.1 million, which represented a premium of more than $4 million based on the $3.25 stock price when the tender offer was announced. The same number of tendered shares would be worth only about $5.6 million today, since Hawaiian's stock is now trading at an all-time closing low of $1.40.
The company's finances also have turned bleak. In November, Hawaiian said it will report a loss for the fourth quarter and all of 2002 when it releases its earnings at the end of this month. The airline, which had a net gain of $6.4 million in the third quarter, lost $11.3 million through the first nine months of last year.
Sam Poomaihealani, a Hawaiian Airlines board member and a grand lodge representative for the International Association of Machinists' international office in Upper Marlboro, Md., said the tender offer was the right thing to do at the time.
"If you're looking for investors, what's going to happen when someone is interested in investing in the company?" Poomaihealani said. "The benefit of the stock buyback is that it provides the company with shares they may consider offering to investors coming in."
Analyst Mann said, though, that warning signs were visible within the industry when the tender offer was made.
"The industry recognized in March (2002) and April (2002) that the improvement they saw in October, November, December and January was unfortunately a mirage and it wouldn't be continued," Mann said. "As a result, the industry had one of its worst periods on an operation basis during the summer of 2002."
Hawaii, though, was a different story since the state caters to the leisure market rather than business travelers.
"The outlook at that time had just gotten to the point where visitor counts for the summer were looking pretty good," Brewbaker said. "Hawaiian must have felt that not being able to use the shareholder capital to effect a merger, the most immediately beneficial thing for the shareholder was to spend some of what was excess capital in a stock buyback, which lots of companies are doing and have been doing for more than a year. Then, the world changed (again)."
Hawaiian Airlines
