Aloha-Hawaiian | End of a 55-year rivalry
Aloha-Hawaiian merger new era in Hawai'i skies

By Susan Hooper
Advertiser Staff Writer

The merger of Hawai'i's two interisland airlines will create the nation's 10th largest airline but leave the Islands with only one major local carrier for the first time in more than five decades.

•	Q&A on the airline merger
•	Analysis: Merged airline must strike tricky balance
•	Some fear higher fares, fewer flights
•	Hawai'i's airlines at a glance
•	New boss is an airline turnaround expert
•	Odds favor approval of carriers' merger

The merger likely will mean hundreds of job cuts, as well as some fare increases and reduced flight schedules. And it will mark the end of Hawaiian Airlines, founded in 1929, and Aloha Airlines, founded in 1946.

Until the deal closes, it will be status quo for travelers on the two airlines, executives said yesterday in announcing the merger. But when the merger is complete, a single new airline will emerge, with a new name and a new logo.

Hawaiian and Aloha officials said at a press conference yesterday that weakness in the global airline industry, especially following the Sept. 11 terrorist attacks, led them to merge. Greg Brenneman, a former Continental Airlines executive who will head the new airline, said a single carrier will be able to prosper in the market in a way that Hawaiian and Aloha could not.

The merger deal is sealed with a handshake between Aloha Airlines president and CEO Glenn Zander, left; the new chairman of the merged companies, Greg Brenneman, center; and Hawaiian Airlines vice chairman and CEO Paul Casey. Deborah Booker • The Honolulu Advertiser

The transaction, valued at $150 million to $200 million, will create a new company, Aloha Holdings Inc., with annual revenues of about $930 million. Brenneman, the former president and chief operating officer of Continental Airlines, will serve as chairman and chief executive of the firm.

Glenn Zander, Aloha's president and chief executive, and Paul Casey, Hawaiian Airlines' vice chairman and chief executive, both will step down after the merger is complete.

Brenneman's Texas investment and turnaround consulting firm TurnWorks will hold a 20 percent stake in the new combined company, and experts from TurnWorks will be assisting in the merger.

Brenneman said in a statement that the merger "will also provide the financial muscle and staying power needed to allow us to bring more visitors to Hawaii by growing in new markets, on the Mainland and in the Pacific."

The deal, which is subject to federal and state antitrust and other regulatory approvals, is expected to close in the first half of 2002. Hawaiian and Aloha Airlines will operate as separate entities until then.

But creation of the new carrier will not be painless. Brenneman said that "less than 600" jobs may need to be cut, or 10 percent of the two companies' combined work force of about 6,000.

	Highlights of the deal
•	New holding company, Aloha Holdings Inc., will be headed by Greg Brenneman, the former president and chief operating officer of Continental Airlines.
•	Hawaiian and Aloha airlines will continue to operate independently until the transaction is completed.
•	At that time, a new name for the combined company will be determined and operations will be merged.
•	Some operations will consolidate; some aircraft will be eliminated.
•	Job cuts are expected, but it has not been determined how many and in which operations.
•	Changes in flight schedules and ticket distribution will be determined.
•	Some fares will be capped for two years, adjustments for others will be determined.
•	Interisland cargo service will continue.
•	Island Air service will continue.
•	Interisland, Mainland and Pacific routes served by Aloha and Hawaiian will continue but will be reassessed when the merger is completed.

Brenneman said he expects to make decisions on job cuts, in part through talks with employees and union leaders. The two companies' joint inventory of planes also will need to be trimmed, and executives expect to review routes of both carriers and adjust fares.

Brenneman said he will meet with the Hawai'i attorney general's office to ensure "fair prices" for consumers.

Brenneman said there are ways to offer more affordable fares at off-peak hours, while charging higher fares when demand is high. Currently neither carrier adjusts fares by this method, which is known in the industry as revenue management.

Brenneman said he will review the profitability of all routes after the merger is completed, especially since some interisland routes are served by numerous flights. Federal Justice Department regulations prohibit such decisions prior to the merger, he said.

Most of Aloha's and Hawaiian's employees are represented by unions, which have been rocked by deep cuts in their ranks following the terrorist attacks. Officials with the two carriers' major unions did not return calls yesterday. Brenneman said he expected to meet today with union leaders.

Some airline employees yesterday said the news took them by surprise.

"All I hope is that we still retain our jobs, whatever becomes of it," said Jennie Dang, a Hawaiian customer service agent who has been with the carrier for 6 1/2 years.

Aloha customer service agent Ben Wong, who has been with the airline since 1973, said he won't allow himself to worry about the possible impact of the merger: "It's something that's beyond my control."

While the news took some employees by surprise, Casey said yesterday that the idea of merging the two carriers has been around "for a long time," with "lots of rumors" floating around during his 4 1/2 years with Hawaiian.

But the troubles in the airline industry that followed the Sept. 11 terrorist attacks — and especially the weakness in the interisland market — made the time right to do the deal, he said.

"Overall, the interisland business has suffered dramatically," Casey said. He said that a drop in Japanese visitors to the Islands following the attacks, wary travelers, a reduction in kama'aina passengers because of the weak local economy, and an economy that was slowing even before the attacks all have contributed to a drop in interisland travel. The growth in direct flights from the U.S. Mainland to the Neighbor Islands also has cut into the local carriers' interisland business.

Both Aloha and Hawaiian have looked to sell or find outside investors before. Yesterday Zander said that prior to Sept. 11, "carriers talked to other carriers almost on a continuous basis," but that most of those conversations came to an abrupt halt after the attacks.

Last May, after Mainland investor group Smith Management LLC of New York began negotiating a deal to sell its controlling 45 percent interest in Hawaiian, the airline said it had hired Lazard Freres & Co. of New York to help it find potential buyers or investors.

Brenneman described himself as the one responsible for "bringing together the Hatfields and the McCoys" for the newly announced merger. He began talking with Aloha in August at the suggestion of Mercer Management Consulting, a consulting firm then working with Aloha.

Mercer executives originally asked Brenneman if his firm would be interested in buying Aloha. Brenneman said he turned down the proposal on the theory that buying one of two carriers in what he believed should be a one-carrier market would be "just a really crazy thing to do." As an alternative, he proposed bringing the two airlines together.

"And we started talking and then 9-11 happened, and I think 9-11 in the airline industry added just a sense of urgency to everybody, and the discussions evolved from that point," Brenneman said.

Gov. Ben Cayetano said yesterday that he had been briefed on the merger by attorneys for the airlines and that the state would support the deal.

"Everyone has concerns about how it will impact the cost of interisland travel," Cayetano said. "But the reality is at least one airline may go under, and if that's the case, we would be left with one, anyway."

"I think you will find there will be airline mergers all over the country, including some big ones" Cayetano said. "I think the federal government would be hard-pressed to try to prevent these mergers from happening because many of the airlines are in bad financial shape."

Experts said this week that federal justice officials likely would reject a merger if they found it would reduce competition unacceptably. But a merger might be allowed if it was determined that one or both of the companies would fail without it and the service they provided was essential to the market.

Since the Sept. 11 attacks, both Hawaiian and Aloha have struggled. Each carrier has cut 20 percent of its routes and laid off hundreds of workers. They also have received emergency federal money designed to help the ailing airline industry cope with the downturn in travel.

In November, the two carriers also received a federal antitrust exemption that allows them to collaborate on schedules and prices and share revenues to cope with the tourism downturn. But Zander said the exemption did not go far enough to help the carriers, and a merger was still necessary.

Hawaiian is a publicly held company, and the new company will continue to trade on the American Stock Exchange under the former Hawaiian Airlines ticker symbol of HA.

Aloha and its sister company, Island Air, are privately owned. Stockholders include members of the families of the late Hung Wo Ching and Sheridan Ing. The merger would give Aloha's owners 28 percent of the common stock of the new company.

Stockholders holding at least 80 percent of the voting power of Aloha have agreed to vote for the merger at the next Aloha stockholders' meeting.

Airline Investors Partnership, the majority stockholder of Hawaiian, also will hold approximately 28 percent of the combined company as a result of the conversion of its shares in the merger.

AIP, as holder of approximately 53 percent of Hawaiian's common stock, also has agreed to vote for the merger at the next Hawaiian stockholders' meeting.

Advertiser Staff Writers Frank Cho, John Duchemin, Andrew Gomes, Scott Ishikawa and Curtis Lum contributed to this report.