On the rise again
The airline is ready for a new
start as it exits its second
bankruptcy since 1993
» A long flight from bankruptcy
Hawaiian Airlines' bankruptcy was just beginning to unfold when Boeing Capital Corp. attorney Steve Hedberg stood before the court in early 2003 and said he would tell a story not even Hollywood would believe.
More than two years later, the script's final chapter will be written when the carrier emerges Wednesday from reorganization.
By bankruptcy standards, the carrier's foray into Chapter 11 has been largely successful because all the unsecured creditors will be paid in full, shareholders will keep their stock and the airline is in better financial shape than when it filed on March 21, 2003.
But the 26 months took their toll as the airline returned planes it now needs, missed opportunities and asked employees for concessions less than a year after a previous round of givebacks.
"Bankruptcy is not a good thing. It's a bad thing," said President Mark Dunkerley, who will become chief executive Wednesday when trustee Joshua Gotbaum steps down.
"It's a reflection of a business that is in deep trouble, and there's no question this company was in deep trouble over two years ago. The company and its employees have done an extraordinary job in getting things back on track."
Where Hawaiian Airlines goes after bankruptcy is linked to how soon the carrier can acquire additional Boeing 767-300ER aircraft to augment the 14 767s it already has under lease.
Until then, the company is trying to do what it can with its existing fleet. It recently added a midnight madness return flight from Las Vegas and will be adding a nonstop to San Jose, Calif., on Oct. 1.
"As we look to the year ahead free from the shackles of bankruptcy, we're going to be looking to try and recapture some of the ground that bankruptcy caused us to lose over the last couple of years," Dunkerley said. "We think there's a number of markets out there we could start operating to tomorrow in our traditional areas of strength in California.
"Beyond that, we are always interested and have plans to look further afield to the East Coast of the United States and perhaps to Asia."
Some, if not many, of the company's 3,600 employees share Dunkerley's optimism. Joyce Tyrell, who will mark 36 years with the company in August, said things look promising. Tyrell handles refunds in the accounting department and is a member of the International Association of Machinists District Lodge 141.
"It's always scary because we don't know the new investors (RC Aviation LLC)," she said. "But we got (profit-sharing) bonuses and it was like a first when we started making money. I thought that was terrific."
Still, there were a lot of bruised feelings -- and paychecks -- along the way as Gotbaum told the employees he wanted to keep costs flat and offered small raises in exchange for work-rule changes and increased employee contributions to their benefits.
"It's been really emotionally upsetting and it's generated a lot of anger and I think that the job for the future is to bring people back together and see if management and (new owner) Larry Hershfield can begin to build some goodwill," said Sharon Soper, president of the Hawaiian Airlines unit of the Association of Flight Attendants. "I think in that respect they've got a big job to do."
Hershfield, chairman of parent company Hawaiian Holdings Inc. and the managing director of RC Aviation, said he recognizes the employees' sacrifices and promises a bright future.
"We're attempting to capitalize the company so that at emergence the company is financially able to act on opportunities when they arise," Hershfield said. "There will be sufficient cash on the balance sheet so there won't be issues about financing.
"We feel the company is very well positioned competitively. We have a great product. We have a great work force and we have good management."
Gotbaum, who took over as trustee on July 7, 2003, after former trustee John Monahan abruptly resigned, said the controversy, uncertainty and change that accompanied the bankruptcy process was to be expected.
"Hawaiian is coming out of bankruptcy unquestionably a better, stronger airline," he said. "Part of my task as trustee was just not to run the company and get it out of bankruptcy, but it was to develop a plan that was better than any competing plan. And I think we did that."
In getting to that point, though, this bankruptcy offered a little of everything.
An ill-timed $25 million stock tender offer that enriched then-CEO John Adams and his investor affiliates. The removal of Adams by Bankruptcy Judge Robert Faris. The appointment of Gotbaum after Monahan resigned. A long-running battle with aircraft lessor Boeing Capital. A dissident pilot championing an alternate reorg- anization plan. The FBI undercover arrest of one of the financial backers of that plan and the subsequent arrest of another.
"This one literally had all the dime-store novel stuff right down to the missing episode of 'Hawaii Five-O' where the pseudo investment banker nabs the pseudo investor on the streets of New York with an offer of a bribe," said Robert Mann, an airline analyst and president of R.W. Mann & Co. in Port Washington, N.Y. "It was so bizarre, it was unbelievable."
Next comes the post-bankruptcy era for Hawaiian Airlines -- a place that the carrier last visited in September 1994 after spending the previous year in reorganization.
"There have been lots of changes at Hawaiian, but also the competitive landscape has changed dramatically since they went in and during the period they were in," Mann said. "I think from a cost perspective, competitiveness perspective and structural perspective, the company is on good footing and will be a potent competitor after it emerges."
The airline now has cheaper leases on its aircraft, new management and at the end of April had more than $100 million in unrestricted cash compared with less than $20 million when it filed for bankruptcy.
"Larry Hershfield has experience as both a chief executive and as an investor," Gotbaum said. "He's very sophisticated financially, as is his partner (Chief Financial Officer Randall Jenson). Furthermore, he's brought on the board Don Carty, who is one of the most experienced airline executives in the world."
Adams, who no longer has any connection with Hawaiian, calls the recruitment of new CEO Dunkerley "one of my best achievements at Hawaiian."
Gotbaum, who sued Adams and his affiliated companies for $28 million and settled for $3.6 million, gives Adams a mixed report card.
"I would say John Adams did some good things and some appalling things at Hawaiian in his time," Gotbaum said. "He chose new aircraft, and they were the right aircraft, but Hawaiian overpaid for it. I would have to say that hindsight doesn't make the stock repurchase look any better and you'd have to say that Hawaiian's being forced into bankruptcy because they were running out of cash doesn't say much for Adams' financial management."
Adams said in 2003 that he filed for bankruptcy to gain leverage with Boeing Capital after the aircraft lessor tried to make an example of Hawaiian by holding the line on leases.
Not true, said Anil Patel, who was responsible for negotiating agreements with Hawaiian as the director of financial services for Boeing Capital.
"We don't believe we were singling out Hawaiian for any particular reason," he said.
Boeing Capital, the airline's largest aircraft lessor, turned the tables in the bankruptcy case in March 2003 when it filed a motion seeking Adams' removal just 10 days after the airline filed for bankruptcy. Boeing Capital was upset that Adams was asking to renegotiate leases shortly after pushing through a $25 million tender offer that benefited Hawaiian insiders, including Adams. The tender offer came shortly after Hawaiian received a $30.1 million federal grant as compensation for the losses it suffered following the Sept. 11 terrorist attacks.
Adams, to this day, defends the bankruptcy as necessary.
"By the beginning of 2003, Hawaiian Airlines had in place a business strategy necessary to adapt to the traumatic changes in the airline industry and to assure its operational and financial success," he said. "The bankruptcy process was resorted to for the purpose of completing its restructuring."
Adams, also president of New York-based private investment firm Smith Management during his time at Hawaiian, has since resigned that position but remains as an attorney for the firm. He also said he is on a task team at Oxford University that is putting together a "white paper," and he intends to conduct seminars on "the law and doing business in China."
Even when Hawaiian emerges from bankruptcy, there's one looming event likely to ruffle union feathers. Gotbaum is eligible to ask the bankruptcy court to award a success fee, and some insiders say the request could amount to several million dollars.
Gotbaum will say little about the topic except that he feels it's appropriate his compensation will be decided by the judge. Since taking over in July 2003, Gotbaum has been making the equivalent of $600,000 a year, plus $10,000 a month in living expenses.
Adams likewise wouldn't comment, except that "any fee should be tempered by the recognition that it is the employees of Hawaiian Airlines ... who have made the most significant contribution to the airline's success."
Before the bankruptcy, Adams promised employees that if they agreed to concessions that they wouldn't be asked later for additional givebacks. Yet in January 2004, Gotbaum told the labor groups they would need to renegotiate their contracts again. That request angered union members and dogged the rest of the bankruptcy process.
"The majority of flight attendants are not happy with the new contract because we've been making record profits and everybody expected to get something or at least be able to keep the same contract," flight attendant Leslie Luke said. "There was no need to give more concessions, but we were in a bankruptcy situation and we just had to deal with it the best we could."
By far, the pilots have been the most outspoken group during the bankruptcy. Kirk McBride, master executive council chairman of the Air Line Pilots Association, takes both Adams and Gotbaum to task.
"There was a series of blunders and mistakes post-9/11," McBride said. "The airline didn't do what other airlines in the country were doing, which was conserving cash. Instead, we tried an ill-advised merger with Aloha that cost the airline untold sums of money. Then after the merger fell through, we decided to do a tender offer. It was these things that put the airline in a perilous condition. It wasn't market driven."
Since that time, McBride said the constraints of bankruptcy have unveiled Hawaiian's true picture.
"What ultimately happened was that John Adams was replaced and the company was forced to report its financials to the bankruptcy court and ultimately you saw that Hawaiian is profitable," he said. " I think it was clear that Judge Faris needed to replace John Adams with a trustee, but I don't think the trustee did anything extraordinary. It was a matter of replacing John Adams and the decisions he was making."
Gotbaum takes the criticism in stride.
"One of the things I've learned is that this is a very complicated business and many different people can have many different opinions, and each one can be absolutely convinced they're right," he said. "So I suspect there'll be some folks who think I did a good job and others who think I did a terrible job."
Tyrell, the accounting department employee, may be an exception in that she heaps praise on both Gotbaum and Adams.
"I think Josh Gotbaum is the best thing that ever happened in this bankruptcy because he came in and did what he was supposed to do," she said. "He got to know a lot of the employees and told us from the beginning he wasn't here to win a popularity contest. But he was very open and honest with us."
Tyrell doesn't think anything less of Adams, either.
"Everything was set up by John Adams," she said. "Of course, he didn't know we were going to get a trustee. But his plan started working and we really started making money and it was all due to him. He went out on a limb to get the new planes and a lot we have to be thankful for is because of John Adams. He really cared about this company and for the employees."
McBride is relieved the company can finally move forward.
"Besides costing us lost opportunities, it's cost us millions of dollars for professionals," he said. "I'm guardedly optimistic coming out of bankruptcy that if management does the right thing, then the potential of the company can blossom."
Gotbaum, a former Washington, D.C., resident, said he'd like to remain in Hawaii but hasn't decided on his next job.
"I've been contacted, but it's way to early to say I know what I'm doing," he said. "So right now I'm looking for a job -- executive with strategic vision and a strong stomach available for hire."
By the numbers
10
Years between Hawaiian's bankruptcies.
25
Remaining planes in Hawaiian's fleet after four rejections.
$645
Hourly wage of lead trustee attorney Bruce Bennett.
803
Days in bankruptcy.
5,284
Bankruptcy filings.
$10,000
Monthly living expenses for airline trustee Joshua Gotbaum.
$50,000
Monthly wage for Gotbaum.
$55,249,000
Hawaiian's operating loss the year before bankruptcy.
$71,083,000
Hawaiian's operating gain last year.
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A long flight
Hawaiian Airlines will emerge from bankruptcy Wednesday after more than 26 months in reorganization. Here are some of the key events that transpired during that period.
2003
March 21: Hawaiian Airlines files for Chapter 11 reorganization for the second time in 10 years. Parent company Hawaiian Holdings Inc. does not file for bankruptcy.March 31: Boeing Capital Corp., the airline's primary aircraft lessor, files a motion in U.S. Bankruptcy Court requesting that a trustee replace Hawaiian Airlines Chairman and Chief Executive John Adams.
May 16: Bankruptcy Judge Robert Faris, citing a $25 million tender offer in 2002, rules that Adams has placed the interests of the shareholders ahead of those of the creditors and orders Adams removed from office.
May 30: Former Liberty House President and Chief Executive John Monahan is appointed as trustee. He begins June 2.
June 12: Hawaiian Holdings' stock hits a 52-week closing low of 30 cents.
June 24: Monahan resigns as trustee for personal reasons.
July 3: Joshua Gotbaum is appointed as trustee and begins July 7.
Sept. 22: The Securities and Exchange Commission notifies Hawaiian Holdings that it is investigating the company and several of its officers in regards to the $25 million tender offer.
Nov. 28: Gotbaum files a $28 million lawsuit against Adams, his investment groups and Hawaiian Holdings.
Dec. 5: Hawaiian Airlines announces that it will give employees $3 million in profit-sharing bonuses.2004
Jan. 23: Gotbaum, who earlier had requested the equivalent of $840,000 a year as wage compensation, has his motion granted for $600,000 a year, plus $10,000 a month in living expenses and a success fee to be determined after the reorganization is completed.
Feb. 10: Boeing Capital and turnaround firm Corporate Recovery Group LLC jointly file the first reorganization plan.
May 18: Hawaiian welcomes its inaugural flight from Sydney, Australia, to Honolulu.
June 14: Larry Hershfield, founder and chief executive officer of Ranch Capital LLC, leads a hedge fund entity, RC Aviation LLC, in purchasing 10 million shares worth $41.4 million from Adams-managed AIP LLC, the majority investor of Hawaiian Holdings. Hershfield becomes the new chairman of the company.
July 16: Faris approves up to $7 million in performance bonuses over two years for Hawaiian Airlines' management.
Aug. 26: Gotbaum announces that the airline has reached an agreement with the unsecured creditors' committee, Hawaiian Holdings and RC Aviation to file a joint reorganization plan.
Sept. 8 : Hawaiian Holdings' stock hits a 52-week closing high of $8.72.
Sept. 16: Hawaiian and Boeing Capital reach an agreement on new aircraft leasing terms after 13 negotiation extensions.
Sept. 23: Adams and AIP agree to pay $2.47 million to settle SEC charges over a $25 million stock buyback in 2002.
Dec. 30: Hawaiian Airlines rival Aloha Airlines files for bankruptcy.2005
Jan. 3: Adams and his affiliated companies agree to pay the airline $3.6 million in a settlement over funds diverted from the carrier.
Jan. 14: Faris rules that Hawaiian Airlines must pay the Internal Revenue Service $22.3 million in back federal excise taxes and interest but says that the company is not liable to pay a $40.5 million penalty. The IRS appeals the rulings.
March 9: Paul Boghosian, one of the key financial supporters of a competing reorganization plan, is arrested in New York for allegedly attempting to bribe an undercover FBI agent. Boghosian is charged with conspiracy to commit bankruptcy fraud and commercial bribery.
March 10: Faris conditionally approves a Hawaiian Airlines reorganization plan that is supported by Gotbaum, Hawaiian Holdings, the company's unsecured creditors' committee and investor group RC Aviation. The approval is conditioned on ratification by the pilots of a tentative labor agreement.
March 29: Hawaiian goes to court to seek approval to impose a contract on its pilots after union members reject a tentative agreement. After one day of testimony, the hearing is continued until April 13-15.
March 31: Hawaiian reports a $71 million operating profit for 2004.
April 4: Boghosian and associate William Spencer are indicted on one count of conspiracy to commit bankruptcy fraud. Boghosian is indicted on two counts of commercial bribery.
May 5: Hawaiian Airlines pilot Robert Konop, a co-proponent with Boghosian and Spencer on the reorganization plan, receives a certified letter from the company notifying him of his termination.
May 10: Hawaiian's pilots ratify a three-year deal with Faris' decision on a court-imposed contract looming.
May 18: Faris issues a written order confirming Hawaiian's reorganization plan.
May 20: Hawaiian posts an operating profit of $1.7 million in April but a 46 percent jump in fuel costs helps drag down operating results 76 percent from a year earlier. It is the ninth straight month of lower results.
June 1: Hawaiian Airlines is scheduled to emerge from Chapter 11 reorganization. President Mark Dunkerley will become the company's new CEO.
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