Island Air was never
sold, just leased,
ruling says

Aloha Air’s parent is contesting
an arbitrator’s opinion in a labor
dispute surrounding the sale of
the company’s former subsidiary

Aloha Airgroup Inc. gets 8 percent of the revenue of its former subsidiary Island Air indefinitely and will have the right to buy the carrier back under the terms of Island Air's sale last year to a San Francisco-based company.

Details of the transaction were disclosed yesterday when Aloha Airlines' parent sued the Air Line Pilots Association in Bankruptcy Court seeking to void an arbitrator's ruling that the parent company violated a union contract provision protecting pilots' jobs.

Richard Bloch, arbitrator for the System Board of Adjustment, said in an April 5 ruling that Aloha Airgroup's divestiture of subsidiary Island Air was not a sale but more like a lease.

But Aloha Airgroup, which sold Island Air to Gavarnie Holding LLC in May 2004, said in its suit that the company's filing for bankruptcy in December 2004 should have halted other rulings and that the Bankruptcy Court has jurisdiction over such matters.

The airline also argued that the arbitrator misconstrued the facts of the Island Air sale and drew the wrong conclusions.

"The arbitrator lacked any legal authority to recharacterize or unwind the Island Air sale under bankruptcy law," the suit said.

In Bloch's written opinion, he said a sale normally means a company cedes control over an entity and is distanced from it.

In this case, Bloch said, "the board finds that Island Air's flying has remained 'for' Aloha."

Bloch said the sale calls for Aloha to provide reservation services for two years for Island Air as well as accounting services. The deal also has an agreement that allows Island Air to use the Aloha logo for five years, and a code-share agreement that includes Island Air's participation in Aloha's frequent flier program. Code sharing -- common in the airline industry -- allows a carrier to sell flights on another carrier as its own.

As part of the sale, Gavarnie gave Aloha $2 million in cash and a "low seven-figure note" due in one year. The buyer also provided a seven-year, $8 million note secured by the ownership of Island Air.

Bloch noted that although Island Air was able to compete with Aloha after the sale, Aloha can tap the gross revenue of Island Air. The better Island Air performs, the better it is for Aloha.

Also, in 2008 and 2010, Gavarnie has the right to require Aloha to buy back Island Air, Bloch said. During those same years, Aloha is allowed to buy back Island Air.

"That is hardly the anatomy of a sale," Bloch said. "It is a continuing relationship that, as much as any other element, supports the case of 'flying for' Aloha."

In response, Aloha said in its suit that Island Air is a separate carrier, that Island Air pilots are represented by a different union chapter, and that Aloha is powerless to control where, when and how frequently Island Air operates its flight schedule.

In a formal dissent to the arbitrator, Aloha also said its ability to buy back Island Air is only an option.

The pilots union filed its grievance against Aloha on May 19, 2004, claiming Island Air remained an affiliate of Aloha despite the sale. The union was concerned about the provision in its collective-bargaining agreement that prohibited Island Air from flying between the state's five main airports. That provision, known as a scope clause, provides that any flying done by or for Aloha between the airports has to be done by pilots on Aloha's seniority list.

Upon the close of the sale, Island Air initiated interisland flights to the previously prohibited airports under a code-sharing agreement with Aloha.

Bloch, who examined the sales transaction documents, agreed with the union that Island Air remained an Aloha affiliate for the purpose of determining whether the collective-bargaining agreement applied.

Island Air Chief Executive Rob Mauracher was unavailable for comment.

Separately yesterday, Bankruptcy Judge Robert Faris approved six modified employment agreements involving Aloha senior vice presidents and vice presidents that will enhance their opportunity to get paid ahead of other creditors if they are involuntarily terminated. Aloha's unions had objected to the modified agreements because details of the executives' severance packages and the identities of the individuals were not revealed.

A hearing on the modified contract for David Banmiller, Aloha's president and chief executive, was postponed until July 26.