BRYANT FUKUTOMI / BFUKUTOMI@STARBULLETIN.COM It was supposed to be a marriage made in paradise.
By Dave Segal
dsegal@starbulletin.comBut Hawaiian Airlines, which left Aloha Airlines at the altar a year ago after opting for more control, is finding that single life isn't a leisurely taxi down the runway.
Hawaiian put itself back in the public eye Friday with a Chapter 11 reorganization bankruptcy filing that came as a surprise to some airline followers. Not only did it follow on the heels of the airline's recent negotiations with its employees and aircraft lessors, but the legal move also revived questions about the logic of Hawaiian's $25 million stock buyback last summer. A Boeing Co. attorney at Friday's hearing said the airline's buyback raised concerns about possible "insider transactions" in relation to the tender offer.
"(The bankruptcy filing) surprised me and I would suspect it surprised them, too," said aviation consultant Mike Boyd, president of The Boyd Group in Evergreen, Colo. "The bottom line is it looks like the people leasing the airlines (to Hawaiian) did not want to play ball."
In reality, though, Boeing -- which lists Hawaiian as its fifth-largest customer -- already has been playing ball with the ailing airline. A source close to the situation said an agreement between Hawaiian and Boeing Capital Corp., the aircraft maker's financing arm, has enabled Hawaiian to defer "multiple" payments. The source described the amount Hawaiian owes in back payments as "millions of dollars."
In its filing, Hawaiian's largest unsecured creditor was listed as Wells Fargo Bank, which is involved in the leasing arrangements. Hawaiian owes Wells Fargo $10.3 million.
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Aloha Airlines chief Glenn Zander, left, Greg Brenneman, and Paul Casey, then Hawaiian Airlines chief executive, announced a merger of Aloha and Hawaiian in December 2001. By the middle of March 2002, the deal was dead. A year later, Hawaiian declared bankruptcy while Aloha predicts a profitable year.
Still, Hawaiian has been seeking more than just deferred payments from its three aircraft lessors, which besides Boeing include International Lease Finance Corp. and Ansett Worldwide Aviation Services. Hawaiian, which already has secured $15 million in labor cost concessions from its three major unions, also wants to reduce its leasing concessions by $15 million. This follows a year in which the company lost $58 million. Hawaiian, though, said on Friday it was unable to reach agreements with some of its lessors to reduce the airline's lease rates to market levels.
The bankruptcy filing is Hawaiian's second such reorganization in a decade, but may be a prudent move, according to Boyd.
"They'll have a great deal of leverage over those aircraft lease companies over the next 60 days," Boyd said. "They won't have to make any payments during that time and at the end of the period they'll have to make up those payments or give the aircraft back. But, today, who wants airplanes? Boeing has nowhere to go with those 717s and 767s. So Hawaiian will have a great deal of leverage over those leasing companies -- good, bad or indifferent. Now, they'll have some time to deal with them."
Aloha Airlines, which has been watching Hawaiian's travails from across the runway, refuses to play the role of the jilted partner.
"We have no comment on their business," Aloha spokesman Stu Glauberman said.
Glauberman did say, though, that Aloha is not contemplating bankruptcy protection and is in good financial shape.
"We are anticipating profits for this year, but the war is a wild card right now," Glauberman said. "Aloha has not experienced any significant drop in bookings or any significant increase in cancellations since the outbreak of war in Iraq."
Hawaiian's bankruptcy filing, just like the December 2001 Hawaiian-Aloha merger announcement, is the airline's second major undertaking following an attack involving the United States. The first time was after 9/11 and resulted in former Continental Airlines President Greg Brenneman making a bid to merge the state's two major airlines. The bankruptcy filing, of course, comes days after the start of the United States war against Iraq.
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In Hawaiian Airlines' bankruptcy filing, it listed $256 million in assets and $399 million in debts.
Since the merger fell through, Brenneman has been adamant about not wanting to comment on what is transpiring in Hawaii's airline industry. However, it wouldn't be surprising if he has kept Hawaii's airlines on his radar screen. Depending what happens with the bankruptcy, Brenneman once again could make a pitch for Hawaiian.
Aloha, buoyed by a $40.5 million federal loan guarantee, has benefited from a new business plan that includes $37 million in employee concessions, the restructuring of interisland fares, the elimination of coupons and an antitrust exemption to regulate interisland seat capacity with Hawaiian.
But Hawaiian's fortunes seemingly have gone in the opposite direction, despite also benefiting from several of those same interisland changes. Hawaiian's commitment to overhaul its entire fleet over the past three years with 717s and 767s has resulted in the airline's inability to meet its leasing obligations. Its $25 million stock buyback came at a weak time in the airline industry, when cash was at a premium. In Friday's filing, Hawaiian said that as of Dec. 31 it had assets of $256 million and debts of $399 million.
Boeing, which since 9/11 has seen values and lease rates drop between 10 percent and 40 percent depending on the type and age of its airplanes, said it had an inkling that Hawaiian might be forced to seek help from bankruptcy court.
"Obviously, it's a cause for concern," Boeing Capital spokesman Russ Young said. "But it's a possibility that we recognized and the airline had acknowledged. We're going to continue to look for a solution that will recognize the best interest of Boeing Capital, the airline and all the other stakeholders."
While Boeing Capital can recall its leased planes if no financial agreement can be worked out, Young said "our interest is in keeping airplanes flying and getting an acceptable return on our investment."
Gov. Linda Lingle, likewise, is hopeful that the sides can work out their differences and that the airline will survive.
"After understanding they were filing this because they couldn't negotiate with the lessor of their planes, I felt better about it," she said. "They have worked very hard to bring down costs with their employees and vendors and, according to Hawaiian Air, this is simply because they were unable to negotiate with the lessors. This is not the first time the airline has sought the protection of the court and come out of it stronger, and we certainly hope they do it in this case as well."
Boyd, the aviation consultant, said that Hawaiian Chairman and Chief Executive Officer John Adams' hope of emerging from Chapter 11 this fall is realistic.
"This is not like United and US Airways (who are both currently in bankruptcy) where you have a lot of factors," Boyd said. "The employees already have done their part. They just have to work it out with the lessors and go from there."
In 1993, the last time Hawaiian filed for Chapter 11, the company emerged from bankruptcy in just under a year. It canceled existing shares of stock and issued new shares to be distributed among unsecured creditors. Such a scenario is possible again this time although nothing has been decided yet.
While filing bankruptcy may help Hawaiian get back on its feet, it's bound to hurt the airline's credit rating and may effect the carrier's ability to borrow money in the near future.
"No one really wins in a Chapter 11 filing," Boyd said. "A Chapter 11 filing is an unnecessary thing that airlines have to go through. No one really wins except the attorneys. All Adams (who owns more than half the company) can win is maybe survival of the airline, but management does not get rich from a bankruptcy filing.
"There's also other baggage that comes with bankruptcy. Everything now has to go through the judge. There's no guarantee that at the end of the day that creditors aren't going to get their pound of flesh from ownership."
Despite signs that a bankruptcy filing was possible, it nevertheless caught Hawaii officials and airline union members by surprise.
Senate President Robert Bunda said the filing is not good for the economy.
"We have several bills in the hopper to help with the airlines," Bunda said. "It makes it more acute with the war and I am sure there are thoughts now about Aloha."
Bills are working their way through the Legislature to reduce airport landing fees, as well as bills to reduce rent for concessionaires.
Hawaiian pilot Joseph Mocarski said he believes the local Air Line Pilots Association leaders were blindsided by the filing.
"Absolutely," he said. "I think the (master executive council representatives were) caught by surprise even though they were continuously appraised of the financial health of the company."
Still, Mocarski was heartened that the employees' wage and benefit programs will remain intact.
"It's somewhat satisfying to see that management has put in a specific request to honor its contracts," he said.
Dave Durkin, president of Local 540 of the Transport Workers Union, said he was taken back by the speed at which Hawaiian filed for bankruptcy.
"I didn't think if they were going to file, they'd be filing this quickly," Durkin said. "I saw some financial books early, but I thought they'd be able to hang on for a little while. I'm not sure what the war did to the company."
Meanwhile, Dawn Deeks, a national spokeswoman for the Association of Flight Attendants, said she doesn't expect Hawaiian to be going back to its employees for additional concessions.
"The industry is in turmoil and we don't know how far we are from the bottom, especially with war in Iraq, and how it will affect the airline industry," she said. "That's why the labor groups pulled together and did their part in coming up with these concessionary contracts. We don't expect anything else to be asked of the workers. We've already done our part to help the airline reorganize and we're behind them 100 percent with that reorganization."
Hawaiian spokesman Keoni Wagner said the employees had been forewarned that Chapter 11 was a possibility.
"The employees were very well aware this was a multistep approach," Wagner said. "Part of it was labor concessions and part of it was operating efficiencies in the system, but a big part of it was the leases and the cost of the those leases. The company kept (the unions) very much in the loop with this stuff. They're very familiar with the different aspects of the steps of this restructuring, and it was more than just the employees."
Wagner said the company will continue to negotiate with its lessors.
"Clearly, there is work to be done," he said.
