Judge approves Aloha
Air CEO’s severance

A federal bankruptcy court judge yesterday allowed Aloha Airlines to modify an employment contract with the company's chief executive, over objections from employee unions.

The contract gives David Banmiller a two-year severance package worth $455,400 per year, equal to his current compensation, if Banmiller is terminated while the company is in bankruptcy. This would happen if a new investor acquired the airline while it were still in bankruptcy, then brought in its own management team and fired Banmiller.

The new contract also provides Banmiller a larger severance fee of $562,222 per year for two years if Banmiller is terminated after the company emerges from bankruptcy protection.

In a hearing before U.S. Bankruptcy Judge Robert Faris, Aloha attorney Sheldon Kline argued that the contract was reasonable in part because Banmiller will receive the $455,400 annual salary only if he is fired and because Banmiller will not be entitled to any of the money if he gets a higher-paying job after being fired. Likewise, Banmiller will not receive the payments if the airline loses its operating certificate with the Federal Aviation Administration while he's in charge.

The crux of Aloha's rationale rests in Banmiller's role as an executive trying to turn around the company and make it attractive to the kind of investor that might take over the company and then fire him.

"By working tirelessly to attract equity investment to save the airline and the jobs of its 3,600 employees," Aloha argued in a court brief, "Banmiller may be increasing the likelihood that he will be replaced as president and chief executive should a new investor assume control of the airline."

Given this risk, the airline argued it is essential to provide financial security to Banmiller, whom Aloha says is "critical to (its) efforts to attract new equity investment and reorganize the airline."

A key provision of the severance package, Kline said, is a "mitigation" provision. It states that if Banmiller is fired and takes another job, Aloha will pay only the difference between the new job's salary and the $455,400 that Aloha has agreed to pay. If the new job paid more than $455,400, Aloha would pay nothing. This, Aloha argues, prevents Banmiller from getting a windfall under the contract.

The provision to pay the $455,400 severance while Aloha is in bankruptcy is a thorny topic for some creditors because the payments would come from the money that various parties are making claims against. Kline said Aloha had made several concessions to an earlier proposed contract to address concerns of some creditors, including unsecured creditors, who are toward the back of the creditor pecking order in a bankruptcy.

The mitigation provision is one of the concessions, Kline said.

Nonetheless, the concessions failed to satisfy Aloha's unions.

The Air Line Pilots Association, Association of Flight Attendants and International Association of Machinists and Aerospace Workers objected to Aloha's request. Among other arguments, the unions said Banmiller's salary was excessive when compared with salaries of chief executives of other airlines. Executives of larger airlines with much higher revenue receive salaries similar to or less than Banmiller's, the pilots union said.

Kurt Leong, a lawyer for the machinists union, noted that the modified contract also increases Banmiller's housing allowance to $90,000 per year from $59,400, which he said was inappropriate in light of financial sacrifices made by employees.

The pilots union argued that the bankruptcy court should wait until a plan of reorganization is filed and creditors can see what sort of deal they have gotten before the court approves the contract.

In response, Kline said that salary was just one component of the packages received by chief executives of large airlines, who typically receive stock options, often worth millions of dollars, in addition to their salaries.

In granting Aloha permission to change the contract, Faris said Banmiller's salary is indeed high.

"He does make a lot of money; there's no question about it," Faris said.

However, Faris noted that it is "in the range of reasonableness."

Faris also pointed to the mitigation provision and the requirement that Banmiller would not be paid unless he were fired.

Faris said it made sense to approve the contract now, rather than waiting until a plan of reorganization were crafted or a buyer were found, to avoid having Banmiller negotiate a severance package with a prospective investor.

In that case, Faris said, Banmiller's "personal interests and fiduciary duties (to Aloha and its creditors) are bound to collide."