Hawaiian Air refocuses
CEO John Adams' resignation is
rejected, while top management
distances itself from the legal battles
Hawaiian Airlines' top management, trying to separate itself from the trustee issue that has plagued its highest official, said yesterday it's time that attention be refocused on the business of running the airline.
Mark Dunkerley, president and chief operating officer, said Boeing Capital Corp.'s motion to appoint a trustee to steer the company through Chapter 11 reorganization has set off a flurry of motions and responses that has overshadowed the airline's mission.
"I really think it's important that the state of Hawaii have two airlines and there's vibrant competition between them," Dunkerley said. "The issue in this Chapter 11 proceeding is, fundamentally, can Hawaiian restructure to become a commercially feasible operation going forward? That's the really important issue. And I speak to the frustration that all of us in the company feel that the motion, whatever the merits or otherwise, is taking away from that core question."
Hawaiian's plan to restructure the airline through labor cost reductions and restructured aircraft leases was thrown a wrench when the airline's largest lessor, Boeing Capital, filed the trustee motion 10 days after Hawaiian's March 21 bankruptcy filing. Boeing Capital accused Chairman and Chief Executive Officer John Adams of "self-dealing" and has demanded Adams and his affiliates return $30 million to the airline that they received from "insider" transactions. A hearing on the trustee matter is scheduled to begin at 9:30 a.m. tomorrow in U.S. Bankruptcy Court before Judge Robert Faris.
In the meantime, Hawaiian, which has said that a trustee would be damaging to the airline, has been seeking to cut a deal with a seven-member committee representing Hawaiian's unsecured creditors.
Adams, the company's largest shareholder, offered to resign his positions in exchange for a revamped board of directors and the exclusive right for Hawaiian to submit a reorganization plan, sources close to the situation said. The committee, however, rejected that proposal. That offer included Dunkerley being named CEO and Dunkerley and Chief Financial Officer Christine Deister being named to the 11-member board.
A counterproposal from the creditors' committee that included Adams' resignation, a different make-up of the board and a shared exclusivity plan between the creditors' committee and Hawaiian subsequently was rejected by Hawaiian.
Bankruptcy law gives Hawaiian 120 days from the date of its filing to submit a reorganization plan without other parties submitting competing plans. After that period ends, other parties, such as the creditors' committee, can submit their own plans. Although competing reorganization plans are unusual, it occurred recently in Hawaii when Liberty House's parent and a group of creditors submitted competing plans.
Hawaiian spokesman Keoni Wagner declined to comment on Adams' resignation offer while Dunkerley said he didn't feel it was appropriate, nor did he feel comfortable, talking about it.
Dunkerley said Hawaiian was forced to file for bankruptcy because it had "to bank in the savings" by April 1 and realized it wasn't going to meet that target due to slow negotiations with Boeing Capital.
"We simply cannot continue to pay the current lease rates we're contracted to pay under the agreements," Dunkerley said. "We felt we went a long way with two of the lessors (International Lease Finance Corp. and Ansett Worldwide) but made little progress with one major lessor, Boeing. We had let everyone know that April 1 would be an important date for us ... and if we couldn't get there that we would have to look at alternatives."
Dunkerley said the emerging Iraq conflict and the inability of Hawaiian to get a deal with Boeing Capital "really pushed us over the edge."
Boeing Capital said in a Bankruptcy Court filing that it had extended Hawaiian an olive branch to help the airline with its financial problems. Boeing Capital said it offered combined net lease concessions of $17.6 million during 2003 and 2004 and additionally said it would remove some of Hawaiian's aircraft liability by removing three 717s permanently from Hawaiian's fleet if the airline accepted certain conditions. The conditions were that Adams and business partner Randy Smith collectively return to the airline $20 million in 2003 and $10 million in 2004.
Hawaiian, however, rejected the proposal, according to the filing. Adams said the only scenario in which he would contribute more equity to Hawaiian would be after he had done a "road show" and successfully attracted a substantial amount of new equity from outside investors, according to the filing. Boeing Capital said in the filing it did not consider the offer viable because of the likely difficulty in finding outside investors willing to invest in Hawaiian and the necessary time that would be involved.
Boeing Capital settled on the $30 million figure because of $3.1 million Hawaiian spent on a stock repurchase program, $25 million from an above-market tender offer and $3 million in consulting contracts and a compensation increase involving Adams or his management company, Smith Management.
Dunkerley described the current negotiations now with Boeing Capital as "businesslike" and said the process is moving forward on almost a parallel track to the litigation.
"These are complicated lease structure deals," he said. "I don't think any of us anticipated that it would be done very quickly."
Dunkerley said the three biggest expenses for an airline are fuel, employees and aircraft. He said Hawaiian can't do much about fuel costs and already has negotiated employee concessions. That leaves the aircraft leases.
"When we look around the industry and see what the market rate is for airlines, we have to get our cost of capital equipment down to that level," he said. "If we don't get it down to that level, that value loss has to be made up of elsewhere."
Dunkerley said he's optimistic for the future because the level of bookings is starting to rebound. Still, he said the appointment of a trustee could irreparably harm the airline since it is now entering its peak travel period.
"The most important bookings we get is summer travel because that's when we enjoy, not only a healthy level of bookings, but also when prices go up and we get more revenue in," he said. "If you look at the economics of our business, we make money in a relatively few months of the year that we hope will tide us over for the longer, leaner periods of the year. Our concern as a management team isn't for the rights and wrongs of the (trustee) motion. Our concern as a management team is about the estate, Hawaiian Airlines, and the role it plays. And the effect that the appointment of a trustee will have."