Hawaiian, Aloha consider applying for federal loans

By Susan Hooper
Advertiser Staff Writer

As Hawaiian and Aloha airlines move forward separately in the aftermath of their failed merger attempt, both companies are considering applying for federal loan guarantees that could help strengthen their financial health.

Last week, Glenn Zander, Aloha's president and chief executive officer, said his company plans to apply for the loan guarantees, but officials have not determined the amount.

Yesterday, Hawaiian spokesman Keoni Wagner said Hawaiian officials are considering applying for the loan guarantee program, but have not made a firm decision.

The application deadline for all airlines is June 28, according to federal administrators of the program, which was approved last fall by Congress 10 days after the Sept. 11 terrorist attacks.

So far, however, just a handful of airlines have taken advantage of the $10 billion program, designed to help carriers continue in the face of the drastic drop in business that followed the attacks.

The loan guarantee program has had its detractors outside the airline industry, who argue it offers a helping hand to troubled companies that otherwise would be standing or falling by means of the more Darwinian process of bankruptcy reorganization or liquidation.

But supporters say the guarantees offer much-needed assistance to a shell-shocked industry whose survival is crucial to the country's economic recovery.

"It has been just over six months since the events of Sept. 11," Zander said. "The effects of those events on the airline industry had the potential of being catastrophic. And in my opinion, I think that the Congress of the United States recognized that potential and acted responsibly and achieved their objective — they prevented the meltdown of the airline industry in the United States.

"Six months later, as traffic starts to recover, it's very easy for the armchair analysts to make these (critical) comments. But my opinion is that Congress did an excellent job of recognizing the gravity of the problem. ... "

The guarantees also have been regarded with caution by those inside the industry, in part because of the strict conditions tied to them — including the possibility of the federal government acquiring an equity interest in an airline.

Thus far, only America West has received a loan guarantee under the program, in the amount of $380 million on a $429 million loan. Approval of America West's application was contingent on the government receiving warrants on a percentage of the airline's outstanding common stock and on the airline demonstrating an ability to control labor costs.

Only three other airlines, all regional carriers, have applied for the loan guarantees, according to federal officials. They are Vanguard Airlines, based in Kansas City; Frontier Flying Service, based in Alaska; and Evergreen International Airlines, an Oregon cargo and military carrier.

One industry analyst said he doesn't think the lack of other applicants means other airlines are not interested.

"That only suggests to me the major carriers are waiting until closer to the deadline" to see what financial shape they are in, said Patrick Murphy, an airline industry consultant in Washington, D.C., and former deputy assistant secretary for aviation and international affairs. "I would expect there would be many more applications."

The loan guarantees are administered by the Air Transportation Stabilization Board, an arm of the U.S. Department of the Treasury.

Daniel Montgomery, the board's managing director, said the board has been in discussions with a number of airlines across the country, and he anticipates many will apply.

Each application must meet three criteria, Montgomery said. Credit must not be "reasonably available" to the carrier without the loan guarantee; the carrier must have a high likelihood of repaying the loan; and approval of the loan guarantee must be "a necessary part of maintaining a safe, efficient and viable commercial aviation system in the United States."

The applicant also has to have a solid business plan, a transportation department official said.

Although each application must meet those standard conditions, it is also likely that some terms will be developed that are unique to each airline, Montgomery said.

"Without more applications being in with specific terms and conditions, all I can say is the America West application is not going to be representative of others," he said.

Fredrick Collison, professor of transportation and marketing with the University of Hawai'i's School of Travel Industry Management, said airlines may turn to the loan guarantees because they have few financing options without them.

"Even before Sept. 11, I think the financial community looked at the airlines as somewhat risky to begin with because the industry tends to be highly cyclical," he said. "Airlines were starting to have financial problems even before Sept. 11. Post-Sept. 11, you'd have to say the risk (associated with airline loans) would be substantially higher.

"It's difficult (for airlines) to get financing, and if you do get it, you're probably paying higher interest on it," Collison said. "So it's definitely affected the airlines' ability to raise money."

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