Judge urges talks
between Boeing
and Hawaiian

Faris will make a decision soon unless
the parties can work out a compromise
regarding the management of the airline

U.S. Bankruptcy Judge Robert Faris, expressing concern about two of Hawaiian Airlines' financial transactions, said yesterday he would rule promptly on whether to appoint a trustee but urged the parties to reach a compromise.

Faris, who did not indicate during the two-day hearing which way he might rule, said he has three options available to him.

Hawaiian Air He can deny aircraft lessor Boeing Capital Corp.'s trustee motion and leave Hawaiian Chairman and Chief Executive Officer John Adams in place. He can grant the motion to appoint a trustee, who ultimately would be selected by the U.S. Trustee's Office.

Or, he can appoint an examiner who would work parallel with the current management, including Adams, but wouldn't have the same power as the trustee in running day-to-day operations. An examiner also would be able to investigate alleged preferential payments.

"I have a limited number of tools in my tool kit," Faris said. "Some of them are blunt. Some say a trustee would be too strong a remedy. Some say an examiner is too weak a remedy. The parties have more options."

Faris then added, "I think the option of me denying the motion is the least likely. I'm concerned about the tender offer and the payment to the holding company. I'll be wrestling with that."

Hawaiian filed for Chapter 11 reorganization bankruptcy March 21 and Boeing Capital filed a motion seeking the appointment of a trustee 10 days later. Boeing Capital accused Adams of self-dealing and insider transactions involving conflict of interest.

Most of the second day of testimony centered around the timing of Hawaiian's $25 million tender offer last June, which occurred when the airline's bookings were dropping and the company was falling short of financial projections. In the tender offer, AIP LLC, of which Adams is the controlling member, received more than $17 million. AIP is the airline's top shareholder.

Hawaiian Chief Financial Officer Christine Deister, who was on the stand for nearly two hours, testified the airline had an aggressive growth strategy because it was planning on expanding its routes later in the year. The airline, in fact, later did begin service to Sacramento, Calif.; Ontario, Calif.; Phoenix and Las Vegas.

Hawaiian attorney John Karaczynski said the airline had ample cash in hand to do the tender offer. He said Hawaiian had $93.6 million in cash at the end of the first quarter, $81.6 million at the end of the second quarter and $53.7 at the end of the third quarter despite the $25 million tender payout during that period. He said Hawaiian had $71.9 million at the end of the year.

However, Boeing Capital attorney Susan Foster argued that CBIZ Valuation Group Inc., the firm that advised Hawaiian's board on the tender offer, wasn't given a complete picture of Hawaiian's financial health because the airline withheld certain information. CBIZ was given projections that included an aggressive growth plan and a modified fleet plan and didn't receive the actual numbers. The fleet plan included swapping 767s for 757s on Transpacific routes. However, the plane swap was rejected by Boeing Capital because the lessor already was financially responsible for the 767s.

Foster said Deister's financial projection in April, for example, was off by nearly 500 percent from the company's actual results. Deister had projected a $1.3 million loss for April that eventually turned out to be a $7.6 million loss. Several weeks later, the company changed its forecast for the year from an estimated $12 million operating profit to a $9.3 million operating loss.

Karaczynski said in his closing arguments that CBIZ received all the information it asked for to do its analysis.

"Hawaii had a business plan and clearly there was a bump," Karaczynski said. "It wasn't the most perfect business plan in the world, but it was built on reasonable projections and the hope to trade some 767s for 757s."

Boeing Capital also questioned a $500,000 payment the airline made to its holding company shortly before filing for bankruptcy. Deister claimed it was for legal expenses to pay for required Securities and Exchange filings. But Boeing Capital said there was a conflict of interest because the counsel for Hawaiian Holdings had ties to Adams and two of his firms, AIP and Smith Management LLC, which does consulting for Hawaiian. Boeing Capital said Adams would be able to use that $500,000 of Hawaiian's money for his own personal legal bills.

In his closing, Karaczynski said there had been a legitimate reason for each corporate decision and there were no grounds present to appoint a trustee. Foster said Faris could take his choice from fraud, dishonesty, incompetence or gross mismanagement as the "cause" for selecting a trustee.

Hawaiian Airlines

Boeing Capital Corp.

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