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The Honolulu Advertiser
Posted on: Tuesday, March 19, 2002

Strapped airlines step around dead merger

Previous stories:
 •  Power grab effort killed airline deal, Aloha says
 •  Merger plans called off, Hawaiian Airlines says
 •  Senators question air merger guarantees
 •  Hawaiian-Aloha merger chronology
What are your thoughts on Hawaiian calling off the proposed merger? How does it affect you? Join our discussion

By Susan Hooper
Advertiser Staff Writer

Jennifer Talac held on to her baby at the Hawaiian Airlines ticket counter yesterday, where it was business as usual.

Jeff Widener • The Honolulu Advertiser

Hawaiian and Aloha airlines officials said yesterday they have no plans to resurrect the merger deal that fell apart over the weekend, and both began moving forward with plans to strengthen their operations as individual carriers.

Officials began meeting with employees yesterday and said plans do not include laying off any of the airlines' approximately 6,000 workers.

But as the airlines begin to reshape their futures, analysts said that to survive independently in a difficult climate, both will have to look at structural and other changes in the way they do business.

Although the original merger plan had drawn criticism from consumers and others worried about possible job losses, service cuts and fare increases, it at least had offered some limited guarantees of retaining service to all markets, capping passenger and cargo fares and limiting job losses.

Now, observers say, the challenges of the post-Sept. 11 environment are so great that the two competing airlines may not be able either to offer the same guarantees that a merged carrier would have or to operate as they had before.

Yesterday, Hawaiian Airlines spokesman Keoni Wagner said the airline has no plans to cut service. He said Paul Casey, Hawaiian's vice chairman and chief executive, and chairman John Adams began meeting with employees yesterday to discuss "the turn of events and what the future may hold." Wagner declined to provide details, saying Hawaiian wants to inform its employees first.

Glenn Zander, Aloha's president and chief executive officer, held three meetings with employees yesterday, including executives, union leaders and management, said spokesman Stu Glauberman.

Glauberman said he could not provide details of Zander's remarks to employees, but Bill Lech, an Aloha pilot and government affairs representative for Aloha's Council 80 of the Air Line Pilots Association, said the meeting between Zander and union leaders that he attended was "invigorating."

Lech said the company is "pretty much looking at a positive growth plan with respect to management of interisland assets and also management of trans-Pacific assets. We're not talking about cutting. We're talking about growing. ... We have a plan, we're taking a look at the options and everybody came away from the meeting with a very positive feeling as to what our future will be."

How the deal crumbled

Hawaiian announced Saturday that it was pulling out of the proposed merger with Aloha because it did not want to extend what it called an April 18 "outside date for completing the merger." Hawaiian said increasing costs and risks of the deal were factors.

On Sunday, Aloha said Hawaiian wanted to change the terms of the original merger agreement, including eliminating TurnWorks, the Houston consulting firm coordinating the deal. Aloha said Hawaiian also wanted to replace TurnWorks executive Greg Brenneman with Adams as head of the merged airline. Aloha said it could not accept Hawaiian's proposal, and its board voted to go ahead only under the terms of the original agreement.

Before the weekend announcements, the airlines had been working on a joint application to take advantage of a special antitrust exemption granted by Congress last fall to cooperate on operations such as routes, scheduling and pricing.

Yesterday, an Aloha spokesman said the airline is still looking into it. A Hawaiian spokesman said it was unclear whether the airline would move forward with the application.

The federal Department of Justice and the state attorney general's office have been conducting antitrust reviews of the proposed deal. The Department of Justice said yesterday only that it is continuing to review the merger, an indication that it has received no official word that the merger is off.

Political distance

Hawai'i's top Democratic leaders yesterday expressed dismay that the merger had failed, but did not offer any hope of immediate government assistance.

Kim Murakawa, a spokeswoman for Gov. Ben Cayetano, said he has no plans to waive millions of dollars in airport landing fees that had been lifted following the Sept. 11 attacks. Murakawa said the landing fees will be reinstated effective April 1, as scheduled.

Sen. Dan Inouye, who had supported the merger, said in a statement he was "saddened and dismayed. ... I have always felt that a bona fide merger was in the best interest of the flying public of Hawai'i. ... However, it appears that there were others ... with different ideas, and that is truly regrettable. I hope that the future will be good for Hawai'i, and the many who are dependent on air travel between the islands and beyond."

Sen. Daniel Akaka, who had said he was undecided about the merger, said through a spokesman that he wishes both airlines well and hopes they can operate profitably. Rep. Patsy Mink, who had said she had reservations about the merger, could not be reached for comment. Rep. Neil Abercrombie, who had raised questions about the deal, declined to comment.

In announcing the deal three months ago, executives with both airlines said they needed to merge because conditions in the industry — and in the interisland market in particular — had made it impossible for them to survive separately.

Of the two airlines, Aloha appears to be more financially fragile. Merger documents filed with the Securities and Exchange Commission last month show the privately held airline had more debt on its books than Hawaiian and reported a $1.25 million loss at the end of the third quarter, Sept. 30. Aloha also has smaller and older aircraft and fewer flights to the Mainland, whose market is reviving more quickly than the interisland market.

But analysts said yesterday both airlines face a number of challenges in operating independently and both likely will be forced to make changes that include restructuring debt and cutting operating costs — possibly by adjusting schedules, renegotiating aircraft lease terms, and reviewing union contracts.

Lantz Stringham, a Portland, Ore.-based analyst, said the failure of the merger could still result in Hawai'i being left with only one major interisland carrier.

"It just doesn't seem like that market can support two competing carriers," he said.

"Now we might see a situation where either Aloha or Hawaiian will have to exit the market or face the prospect of going bankrupt," he said.

'Airlines die hard'

Raymond Neidl, an airline analyst with ABN Amro Securities LLC in New York, suggested the airlines will have to work hard to be anything other than marginal.

"You would have had a good healthy operation if they had combined," Neidl said.

If one of the airlines were to fail, its demise could be hard on its competitor. "Airlines die hard," he said. "Even in bankruptcy they could keep operating."

Airlines in bankruptcy tend to discount heavily, Neidl said, which could create a fierce fare war that could harm both of the carriers.

Hawai'i stock analyst Randy Havre, chief executive of Hawai'i Venture Group, said if Aloha continues on its own, "I suspect they'll have to do some financial restructuring, whether it's Chapter 11 or something else. They'll have to talk to creditors, say, 'We need some help, what can we do to make everybody whole?'"

Aloha could also talk to employee groups about renegotiating contracts, Havre suggested.

Both carriers are "going to have to cut their overhead," said Richard Dole, chief executive officer of Dole Capital LLC, a Honolulu private equity investment banker.

Dole said the two carriers may do many of the same things the merged carrier was planning, "but they will be fighting for the same market share. They'll both lumber along at break-even or worse.

"It depends on the economic environment. If the visitor industry picks up again, or Hawai'i's economy, they would probably be no worse off than before. If it continues at the same low level, with the high overhead they have, they'll have to reduce costs."

But in spite of the challenges facing two carriers operating independently, Hawai'i analysts suggested history shows they have at least a fighting chance.

"They've gone through this before," Dole said. "They tried to merge in the early '70s, and they couldn't come to terms.... It fell apart. ... But both survived."

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

Advertiser staff writers Frank Cho and Susan Roth, and the Associated Press contributed to this report.

• • •

Hawaiian stock falls, spurring buyback

Staff and News Services

Hawaiian Airlines' stock tumbled 28 percent yesterday, the first day of trading since the announced collapse of its proposed merger with rival Aloha Airlines.

Hawaiian shares fell $1.16 to close at $2.99 in trading yesterday on the American Stock Exchange. Closely held Aloha is not traded publicly.

Hawaiian's closing price yesterday was still higher than before the merger announcement Dec. 19, when it traded at $2.15 a share.

After the close of trading, Hawaiian said it would repurchase as many as 5 million shares on the open market if the merger with Aloha did not take place.

"The company considers its stock to be a good investment at this time," said Hawaiian spokesman Keoni Wagner. The decision to authorize a stock buyback program was made at a board meeting earlier this month, Wagner said.

"The stock buyback is related to (Hawaiian's) failed merger only in that the board made the approval contingent on the possibility that the merger agreement would be terminated," Wagner said.

He said he did not know where the company would get the cash needed to pay for the stock.

Bloomberg News Service contributed to this report.