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The Honolulu Advertiser
Posted on: Sunday, February 3, 2002

Skeptical public, job issues among major obstacles ahead for merger

By Susan Hooper
Advertiser Staff Writer

In the past month, the shape of the new carrier to be created from the union of Hawaiian and Aloha airlines has begun to be visible.

Greg Brenneman, the executive leading the merger, has revealed several key details about the carrier, including the type of interisland and long-distance aircraft he wants in the carrier's fleet, possible new destinations for long-distance service, and a proposal for passenger and cargo fare caps and special ticket prices for Hawai'i residents.

Brenneman has also said he expects to preserve all interisland routes while cutting total inter-island service by 10 to 12 percent.

On the employee side, he has offered merger-related furlough protection to flight attendants and several work groups in the machinists' union if they accept certain conditions by the date of the merger.

Taken together, the individual details assemble into a picture of a trimmer, more focused airline, with newer planes that will help cut costs, a more efficient inter-island operation and a stronger regional presence that could enable the carrier to expand in all directions across the Pacific in ways that Aloha and Hawaiian could not achieve on their own.

Brenneman's plans so far have met with approval from several Mainland industry analysts, who say one strong carrier likely will fare better in this market than two weaker ones. But they all agree that the effort to merge the airlines still faces sizable hurdles, including getting federal and state regulatory approval, overcoming community opposition, laying off somewhere less than 10 percent of the combined work force of about 6,000 and melding two separate employee groups into one with a minimum of pain and hard feelings.

"These are two companies that for the last 40 to 50 years have been indoctrinated to look at each other as the enemy ... ," said Michael Linenberg, airline analyst with Merrill Lynch in Manhattan. "Now, with the snap of a finger here, we're going to merge and be one big happy family. The labor aspect is probably one of the bigger challenges."

Among the larger pieces of the puzzle now falling into place are the types of planes a merged carrier would use.

Brenneman has been in talks with officials at Boeing Co., and said last month that he wants to reduce the several different types of aircraft in Hawaiian's and Aloha's fleets to just two, with Boeing 717s a likely choice for the interisland routes and Boeing 757s or 767s for the long-haul routes. On that wish list are as many as 12 more 757s or 767s, which would allow the new airline to double its long-distance service in four years. Brenneman also said he expects to save "tens of millions of dollars" by renegotiating aircraft leases with Boeing.

The upheaval in the airline industry since the Sept. 11 attacks has made it a good time to go shopping for aircraft and renegotiate leases with aircraft manufacturers, experts say.

From shortage to excess

A year ago, there was a shortage of airplanes, said Dan Hectorne, vice president of the Hobbit Travel agency in Minneapolis. With the drastic drop in business that followed the attacks, aircraft manufacturers found themselves with an excess of airplanes and they are ready to make deals.

 •  The shape of things to come

Since the announcement of the planned merger of Hawaiian and Aloha airlines in December, an outline of the proposed carrier has slowly emerged:

• Fewer interisland flights

A reduction of 10 to 12 percent — from 244 to between 215 and 220 flights daily.

• Same markets

Service to the same interisland and Mainland markets both carriers fly to now.

• Newer planes for interisland service

Likely conversion to all

Boeing 717s interisland; 757s and 767s on long-haul flights.

• More trans-Pacific routes

Twice as many long-distance flights within four years.

• More variety in interisland fares

One-way coach fares will be capped at $78 for two years, with residents qualifying for some interisland fares of $55 or less; new off-peak pricing that will allow flexible travelers to find deals of as little as $39 one-way.

• A slimmed-down work force

About 600 or fewer of the airline's 6,000 employees are expected to be laid off.

In addition, Hectorne said, replacing the older Boeing 737-200s that Aloha flies interisland with newer 717s will mean an important saving on fuel, which likely will make it easier for the new carrier to remain profitable while keeping fares in check.

Maintenance costs also should shrink with the newer equipment and more uniform fleet, said Lantz Stringham, senior equity analyst with RedChip Review, in Portland, Ore. "My opinion is that they're headed in the right direction," he said.

Standardizing the fleet with newer aircraft is likely to be bad news for mechanics in the short run, Hectorne said, because the newer planes will need fewer repairs. But the purchase of newer aircraft could work to hold down passenger fares in the coming years in ways unrelated to lower fuel costs, Linenberg said.

"Demand for air travel is highly elastic, so if you raise fares to high levels, you're going to see a huge falloff in traffic," he said. "And over the last five years this new entity will have made all these investments in 717s and other infrastructure. You don't want to do that and find you're flying aircraft around empty."

New directions

And demand is likely to take the new airline in new directions.

Brenneman and Hawaiian and Aloha executives have said much of the weakness in the two airlines is in the interisland market, with the number of passengers dropping from 9 million to 8 million in the past two years. A number of factors account for the slump, including sluggish economies in the United States, Japan and Hawai'i, the growth of direct flights from the Mainland to the Neighbor Islands and the terrorist attacks.

By contrast, the airlines' trans-Pacific routes are strong, Brenneman has said, and he has plans to offer new direct service to U.S. cities such as Sacramento, Fresno and Phoenix, and secondary markets in Japan such as Sapporo and Sendai.

Such talk reminds analysts of Alaska Airlines, that state's dominant carrier and the sole survivor among a number of regional carriers that fell by the wayside in recent years. Alaska has taken advantage of its position to expand from its more limited north-south flight path to new cross-country routes in places such as Denver and Boston.

"If they were still one of three carriers (in the regional market), some of this new stuff wouldn't have happened," Linenberg said of Alaska Airlines. "The fact that Hawaiian Airlines doesn't have service to Japan — think of the number of Japanese passengers they carry interisland, and yet have to hand off to Japan Airlines, United and Northwest. This (merger) could open up lots of new markets."

Said Scott Gillespie, chief executive officer and principal with Travel Analytics, a Cleveland-based consulting firm that advises large corporations on issues of travel management: "It sounds to me like (Brenneman is) covering all the right bases. If I were in his shoes, I don't think I would have done anything differently."

And yet Gillespie and others warn that even the finest plans for an airline merger can be undone if employees do not become enthusiastic participants in the deal.

"That is probably going to be the biggest headache of all: trying to keep both sides happy," said Hectorne, of Hobbit Travel, who saw the employee animosity when Minneapolis-based Northwest and Republic airlines merged in 1986. "And it's pretty hard to do, but for the survival of the airline, it's critical. Everybody's going to have to take a little haircut."

Brenneman has been diligent about meeting with workers from both airlines, and last week he estimated he has probably spoken to more than 4,000 of the two airlines' approximately 6,000 employees. But talking with employees and negotiating with their union leaders are two different things.

Members of the two largest labor groups involved in the merger — the International Association of Machinists and Aerospace Workers, and the Association of Flight Attendants — have been largely silent publicly about their feelings on the merger. The machinists' international, or headquarters, is still reviewing the merger before taking a position.

But a number of Hawaiian Airlines pilots have been more vocal, expressing concerns about the merger ranging from the lack of competition for travelers, to their belief that their financially stronger airline is being used to prop up a financially weaker Aloha Airlines, to frustration that the salary and benefit concessions they and other employees made to bring Hawaiian out of bankruptcy in the early 1990s will not be rewarded by the new airline.

Hawaiian's pilots

In January, Hawaiian pilots helped form a group to oppose the merger called Citizens for Competitive Air Travel, which now has about 150 members, according to Kirk McBride, a Hawaiian Airlines pilot and a spokesman for the group.

Discontent among the pilots' rank and file also led the governing body, or Master Executive Council, of Hawaiian's unit of the Air Line Pilots Association to vote last month to take a "neutral position" on the merger until the union could study the deal further. This is a surprising reversal of a statement made by John Tindall, chair of Hawaiian's pilots' association, the day after the merger was announced in December that the union recognized the merger as "necessary for the viability of each of our airlines and the Hawaiian economy ..."

The success of the merger hinges in large part on the ability of union groups for each airline to merge their seniority lists into one and agree to a single contract — two tasks with a multitude of nuances that all could be subject to negotiation.

And labor negotiations surrounding the merger likely will only get more complex when company officials decide on the carrier's new fleet and then determine how many pilots and mechanics will be needed by the new airline and how many will be laid off.

Making it work

When all of the numbers are in, it is projected that U.S. airlines will have lost $6 billion last year.

Given the fragile health of the industry, the merged carrier created from Aloha and Hawaiian airlines will face enormous challenges.

Even with newer aircraft, better lease terms, lower labor and operating costs and other efficiencies, the airline will still have to contend with any number of critical factors beyond its control, including weakness in the local, national and global economies and the continuing threat of air terrorism.

But at least one expert gives the new airline good odds, provided it continues to pattern itself after the right examples.

"There are very successful models out there," said Linenberg, of Merrill Lynch. "What come to mind first are Southwest Airlines, (New York airline) JetBlue, WestJet in Canada, Frontier in Denver — these are all profitable and very successful business models. They're all making money and will all generate profits in 2001.

"Given where the economy is, it's a challenging time for any airline. That shouldn't be a detriment to going out and taking two companies and turning them into something better."

Reach Susan Hooper at shooper@honoluluadvertiser.com or 525-8064.