Merger plans called off, Hawaiian Airlines says

By Susan Hooper
Advertiser Staff Writer

Hawaiian Airlines called off its proposed $200 million merger with Aloha Airlines last night, leaving the future of the merger and the Islands' two major interisland carriers uncertain.

Hawaiian Airlines spokesman Keoni Wagner said the merger was called off because "it's clear the parties are not going to be able to satisfy the conditions of the merger agreement."

The airline said in a statement that it had been asked by TurnWorks, the Houston firm organizing the merger, to consider extending an April 18 "outside date for completing the merger" but decided not to extend the date. Wagner said the growing expense of the merger was a consideration in calling off the deal.

It was unclear what impact Hawaiian's announcement will have on the future of the two airlines, future merger efforts, or the other parties involved.

Neither TurnWorks nor Aloha officials would say last night what Hawaiian's decision meant for them. Since the merger announcement in December, both Hawaiian and Aloha have said they need a merger to survive in an economy hit hard by the Sept. 11 attacks and a sagging interisland airline market.

The sudden announcement comes three months into efforts to merge the airlines and amid growing opposition by employees, consumers and state lawmakers.

The airlines' 6,000 employees have worried about losing jobs and other changes the merger will bring to their work. Customers have worried about possible service cuts and fare increases, because the merged airline will have a virtual monopoly on interisland air travel.

Groups such as the American Society of Travel Agents have opposed the merger for similar reasons. The Citizens for Competitive Air Travel, a merger opposition group started by Hawaiian Airlines employees, says it has collected tens of thousands of signatures in opposition.

Four lawsuits have been filed by Hawaiian Airlines shareholders, charging the deal enriches insiders at the expense of public stockholders. And several state senators have come out against the merger, arguing a near-monopoly airline would harm consumers and the state's economy.

A spokeswoman for TurnWorks said last night that "TurnWorks is extremely disappointed." She had no further comment on Hawaiian's announcement.

Aloha spokesman Stu Glauberman said, "Aloha is aware of the decision by Hawaiian Airlines and will issue comments on Aloha's position regarding Hawaiian's decision at the appropriate time."

The parties involved in the merger had previously characterized April 18 not as a date for completing the merger but as a date after which any of the parties could walk away from the deal.

Last night, Wagner said that April 18 had always been "a target date in the agreement for the parties to work toward getting a deal done."

"... When parties set a date like this in an agreement, it establishes a comfort zone in terms of how much time we think it will reasonably take to complete the deal, and beyond this time the expense necessary to continue the effort, and I suppose the risk as time goes on ... that the transaction will not get done ... are some of the considerations," Wagner said.

The airline said the parties had previously determined the April 18 date would not be met "for several reasons, including the expected time required in order to obtain the necessary regulatory approvals and reviews with respect to the merger."

John W. Adams, chairman of the Hawaiian board of directors, said the airlines had discussed an extension of the outside date but "no agreements could be reached and therefore Hawaiian has concluded not to extend the outside date."

Despite the airline's announcement last night, Adams said, "We continue to believe that a merger with Aloha would be in the best interest of the two companies and their constituencies. ... We believe that the outside date as originally agreed to by all of the parties was an important element of the merger agreement."

The merger agreement provides for penalties and termination fees if any party walks away from the deal. Wagner said last night that he doesn't believe there will be penalties in this case, "because the parties collectively will not be able to meet the requirements of the agreement, and all of the parties are aware of that."

The federal Department of Justice and the state Attorney General's office have been conducting antitrust reviews of the proposed deal but have not publicly released any findings yet.

Gov. Ben Cayetano and Sen. Dan Inouye, both of whom have supported the merger, could not be reached for comment last night.

Officials with TurnWorks, Hawaiian and Aloha announced the planned merger Dec. 19, saying it was necessary because the events of Sept. 11 and other economic conditions made it impossible for both carriers to continue to operate successfully in the Hawai'i market. After Sept. 11, Hawaiian and Aloha each cut 20 percent of their routes and have laid off hundreds of workers. They also have received emergency federal aid money.

Aloha reported a $1.25 million loss at the end of the third quarter Sept. 30. Hawaiian reported a $29 million profit.

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. Last week, Wagner said the two airlines were developing a cooperative plan to take advantage of the exemption.

The proposed merger, valued at $150 million to $200 million, would have created a new company, Aloha Holdings Inc., with annual revenues of about $930 million. Greg Brenneman, the former president and chief operating officer of Continental Airlines, would 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 were scheduled to step down after the merger.

The deal, which is subject to federal and state antitrust and other regulatory approvals, was expected to close in the first half of 2002.

Kirk McBride, a Hawaiian Airlines pilot and spokesman for Citizens for Competitive Air Travel, said last night he was "elated" by the news that the merger was off.

"I'm very concerned reading through the S4 (a statement on the merger filed last month with the Securities and Exchange Commission) about the amount of debt that the new company wold have on its balance sheet as a result of this transaction," he said. "And I'm glad to see that competition within the state of Hawai'i, as far as interisland travel, is going to be preserved."

Fredrick Collison, a professor of transportation and marketing at the University of Hawai'i School of Travel Industry Management, has been following the merger but had not heard it had been called off last night.

"It sounds kind of strange," he said. "I'd have to think that somewhere, something new came up."

He said the inability to meet an April 18 deadline set by the parties did not sound like a full explanation, because the date could have been extended.

Collison said the antitrust exemption allowing the two airlines to collaborate might have given Hawaiian, the financially stronger of the two local airlines, a bit more breathing room.

"Maybe Hawaiian is seeing that it is enough to make a go on its own," Collison said.

Another possibility, he said, "is that someone got word (from) the Department of Justice that the merger wouldn't be approved or would be delayed, and that it is not worth continuing, or that there are conditions."

Collison said Aloha, which has smaller aircraft and fewer flights to the Mainland than Hawaiian, will have more problems surviving on its own than Hawaiian.

"The interisland isn't enough," he said.

Both Aloha and Hawaiian have looked to sell or find outside investors before.

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.

Hawaiian is a publicly traded company, with Adams and his affiliated companies its majority shareholder. The merger would have given Adams, his companies, and Hawaiian's shareholders 52 percent of the new company.

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 have given Aloha's owners 28 percent of the common stock of the new company.

TurnWorks would have received a 20 percent stake in the new company.

Advertiser staff writer Karen Blakeman contributed to this report.