Hawaiian stock
a risky propositionThe airline's shares are trading
again, but may end up worthless
The stock of Hawaiian Airlines' parent, completing a quick takeoff and landing, is back to where it started when its trading moratorium was lifted 12 days ago.
Still, investors may be letting their optimism for a successful Chapter 11 reorganization cloud their financial judgment.
Several sources close to the airline say its large debt makes it likely that Hawaiian Holdings Inc.'s shares are headed for a crash landing. If that happens, it would mark the second time in 10 years that the airline has canceled its shares and issued new stock as part of its debt repayment plan.
"Equity is out of the money at this point. The stock is absolutely worthless," said one source, echoing the sentiments of the others.
But that assessment isn't shared by all Hawaiian insiders.
Richard Havel, the attorney representing Hawaiian Holdings and the John Adams-led partnership that is the company's majority investor, said the parent company still believes there is value in the stock. Adams, chairman and chief executive of the holding company, held those titles with the airline before he was ousted in May over questionable financial dealings. He was eventually replaced by trustee Joshua Gotbaum.
"It's obviously our hope there's a way to preserve value for the current shareholders and there are several different ways you can do that in a Chapter 11," Havel said. "Creditors may want to restructure their claims by taking discounts, payments over time, or taking some or all of the equity of the company based on reorganization value."
Whether the shares are ultimately canceled or somehow survive, owning the stock seems risky given the airline's uncertain future. Nevertheless, that uncertainty hasn't kept investors away. They pushed the stock up as much as 43.8 percent to $1.15 intraday on Aug. 21. Since then, the shares have made a gradual descent to close yesterday at 80 cents -- the same price they were when trading was halted for five weeks.
Hawaiian's stock was suspended from trading by the American Stock Exchange on July 14 after stock transfer agent Mellon Investor Services LLC resigned. The shares didn't trade again until Aug. 19 after Hawaiian paid Mellon $15,000 in back pay and signed a new contract.
Nicolas Owens, an airline analyst for Chicago-based investment research firm Morningstar Inc., said investing in the stocks of companies that are in Chapter 11 is "extremely risky" because shareholders of common stock are last in line when it comes to companies repaying debt.
At the head of the line to receive payment are administrative creditors, such as the trustee, attorneys, analysts and consultants, along with rent, employee payroll, and taxes incurred after filing for bankruptcy. Additional payments are earmarked for secured creditors, who have collateral to guarantee payment on their claims; taxes incurred prior to filing for bankruptcy; and unsecured creditors, who include the providers of goods and services, as well as other people who have claims against the airline. Owners of common stock are last.
"Even when a company is not in bankruptcy, shareholders generally have a claim on the future profits of the firm after everyone else, so that's why stocks go up in good times because companies have more profits from which to pay shareholders," Owens said. "The whole point of bankruptcy is to protect the company from liquidation when there is not enough money to pay off all the people who are in line ahead of the shareholders. It's like being last in line in a soup kitchen that's running out of soup."
In Hawaiian's case, it's unlikely there will be enough soup to go around.
The airline filed a motion in U.S. Bankruptcy Court Thursday requesting approval to suspend federally required contributions to its pilots' pension plan. Hawaiian, saying it needed the money for its reorganization, noted it had pension funding requirements of $45 million over the next 25 months, including $4.25 million due no later than Sept. 15. At the end of last year, Hawaiian said the three pension plans it sponsors were underfunded by $115.8 million.
As of Dec. 31, 2002, Hawaiian listed assets of $257 million and liabilities of $398.8 million. Although not a direct comparison, the airline's unaudited July monthly operating report listed assets of $308.1 million and liabilities of $355.1 million.
In addition, aircraft lessor Ansett Worldwide has submitted a proof of claim for more than $110 million in damages resulting from money it will be losing from restructured leases, as well as the revenue it will lose from Hawaiian's decision to cancel the delivery of a Boeing 767 from Ansett. Boeing Capital, which leases Hawaiian 16 of its 27 planes, and International Lease Finance Corp., which had its restructured leases approved Friday by Bankruptcy Court Judge Robert Faris, have not yet submitted claims.
The airline, which has just ended its peak travel season, had approximately $75 million in unrestricted cash as of Aug. 27, according to Thursday's court filing.
However, Hawaiian noted in the filing that the cash reserve "will decline significantly" as it enters its historically weaker off-season period.
Dave Zerfoss, chief investment officer at Central Pacific Bank, said he regards Hawaiian Holdings' stock as speculative at this point.
"There's no intrinsic value in the company," he said. "It's got negative net worth. I find it hard to believe that the common shareholder will get anything out of it (from the reorganization). Why someone would want to own the stock, I don't know."
Zerfoss said he would advise shareholders to move onto something else.
"You own 100 percent of whatever you own," he said. "You can still lose 100 percent of whatever it's worth. If I owned an asset like that and it didn't look very hopeful, I'd have to say I'd taking my licking and go elsewhere. At least, you'd get some capital loss out of it."
Gotbaum, the airline's trustee, said he won't comment on the value of Hawaiian's stock.
"I will note," he said, "that the last time Hawaiian came out of bankruptcy, the previous shareholders got nothing. Their stock was canceled and new stock was issued to creditors and investors. That's what happens with most bankruptcies."
United Airlines parent UAL Corp., which filed for Chapter 11 last December, is expected to cancel its existing shares when it comes out of bankruptcy sometime next spring. UAL put its investors on alert in June when it said in a Securities and Exchange Commission filing that UAL's stock has "little or no value and it is highly likely that the equity in UAL will be canceled under any plan of reorganization proposed by the company." Despite the warning, UAL's stock trades for 75 cents on the Over-the-Counter Bulletin Board.
US Airways Group Inc., which filed for Chapter 11 in August 2002 and emerged March 31, 2003, wiped out its old shares and issued new shares to officers, employees and equity investors. The thinly traded stock currently trades for $25 over the counter and USAir said it is exploring its options to get the shares listed on a national exchange.
"Investing in the airline industry, in general, is a very risky proposition," Owens said. "These companies have a lot of debt and a lot of fixed costs. You're talking risky stocks, no matter what. When you're talking about an airline in bankruptcy, I can't think of a riskier investment. When they start trading below the $5 range, people think it's an opportunity. But I think people get burned more times than not."
Owens said Morningstar currently rates only two airlines as having buy-and-hold potential -- Southwest Airlines Co. and JetBlue Airways Corp.
"That's because they have the lowest cost structures," he said.
Southwest's stock is up 23 percent for the year and JetBlue's shares are up 99.6 percent.
Hawaiian's stock, which traded as high as $4.45 on March 5, 2002, when enthusiasm ran high for a proposed Hawaiian-Aloha Airlines merger, now is on a lifeline.
One Honolulu Airport employee, who does not work for Hawaiian and didn't want to be identified, said he has a large short position in the stock that he began to acquire after the airline announced a $25 million tender last summer to buy back shares at $4.25 apiece. The stock, which had fallen as much as 36 percent to $2.86 after the merger collapsed, rose to as high as $3.98 a share after the tender offer announcement. Short interest involves borrowing stock and then immediately selling it, betting the price will drop and the investor can later return the shares to the lender at a lower price.
"I sell short when it pops up, and buy back when it dips," the employee said. "Right now, I'm short. There is, of course, no guarantee that I won't lose my shirt if something weird happens, but in my opinion this is as close to a sure thing as there is in the stock market. Hawaiian Holdings stock will go to zero, and that is just about a metaphysical certainty."
Investor Nita Parker, who has no affiliation with any airline and lives in Sugarland, Texas, said she bought Hawaiian's stock following 9/11.
"I did it for patriotic reasons, and the president said that if we invested in America, we would 'not' be sorry," she said. "I am taking him still at his word, so Hawaiian Airlines needs to figure out how to keep the stockholders from losing completely in this process. I love going to Hawaii, and that is why I picked this airline."
If history is any guide, the Honolulu Airport employee may be right in selling the stock short. Hawaiian previously filed for Chapter 11 on Sept. 21, 1993, and emerged just under a year later. But the common stock was a casualty of the reorganization. The Amex halted trading in the stock on March 4, 1994, with the price at $2. The stock resumed trading over the counter 10 days later and ultimately fell to 1 cent before getting delisted on Sept. 14, 1994.
Under the 1994 reorganization plan, approximately 11 million new shares were distributed to unsecured creditors who were owed more than $50 million. New shares also went to employees, management, and for warrants related to financing after bankruptcy court confirmation of the plan. The newly issued shares began trading June 21, 1995, with the stock closing that first day at $3.75. The shares promptly rose eightfold to $13.50 in its first three days of trading on speculation that it would be acquired by USAir or Trans World Airlines. When that speculation proved unfounded, the stock collapsed and a month later was trading for less than $4.
Havel is optimistic the shares can survive this time.
"It is clearly our current hope that by representing the holding company, we do preserve some value and some interest for the current shareholder as the company comes out of reorganization," Havel said. "That's what we continue to work for in this. Whether we can achieve that is completely dependent on additional developments in negotiating areas and the operating results of the airline."
As a fallback, Havel said Hawaiian Holdings would consider submitting a competing reorganization plan if it is not satisfied by the negotiations with Gotbaum.
"Our first choice is to be an active participant and one of the many people to sit down at the negotiating table to work out a plan that other parties can support," Havel said. "We have not attempted to initiate, at this point, separate direct discussions with creditors."
