Posted on: Sunday, January 13, 2002

ISLAND VOICES
Sept. 11 made an inevitable airline merger reality

By Alex Salkever

Though it might have come as a shock to many people in Hawai'i, airline industry insiders have known for some time that a merger or buyout was imminent.

Why? Aloha Airlines had long struggled to make money and secure an adequate return on investment for its shareholders.

In the past two years, Aloha lost $5.6 million and $3.7 million respectively. The 2000 loss was particularly telling as most airlines had a banner year fueled by economic growth on the Mainland. Hawai'i also enjoyed a strong year in 2000.

Despite having revenues of $282 million in 2001, Aloha is simply not big enough to survive in the airline business. For its size, Aloha was well managed and competitive. But smaller companies pay more for everything from software to jet fuel. And Aloha faced labor costs significantly higher than the norm for its business.

Further, privately owned Aloha did not have access to public capital markets. That was a clear handicap in a capital intensive business such as running an airline, where tens of millions of dollars are required to buy new jets.

Rival Hawaiian Airlines used the capital markets as a stepping stone to obtain more than $400 million to build a fleet of long-haul jets for its more lucrative Mainland business. Aloha could not take these steps, and, as a result, entered the Mainland business with small planes and far less carrying capacity than Hawaiian.

That particularly hurt as the interisland market where Aloha has the largest share faced increasingly turbulent air. More and more Mainland airlines have added direct flights to Neighbor Islands. That allowed more and more passengers, both locals and visitors, to skirt Aloha's distribution network.

Both Aloha and Hawaiian have tried to cash in on this trend but the real winners are the other airlines which no longer have to pay for code shares with interisland carriers. The real losers are Aloha and Hawaiian which remain locked into leases on planes that can handle only interisland travel.

Which is yet another key point against Aloha. A significant chunk of its fleet was leased. The upshot? The company has to keep paying off these leases even if jets are on the ground, something that happened after Sept. 11 and the resulting cutbacks in travel.

Worse still, Aloha did not have the alternative of re-leasing the planes into an international market. As airlines scrambled to cut flights following the downturn in travel after the Sept. 11 attacks, demand for leased airplanes among carriers plummeted. That and rising lease costs that Aloha had incurred with delivery of a number of new jets in 2000 and 2001 made the company's future look particularly dim.

Add in already high fuel costs and Aloha's goose was cooked.

No doubt, it is a shame that Aloha could not survive and thrive. Competition is always a good thing for consumers and for the economy of Hawai'i. And, to be fair, Hawaiian faced many of the same pressures as Aloha.

But smart money was betting on either a sale, merger or closure of Aloha long before Sept. 11. The attack was merely the final straw.