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The Honolulu Advertiser
Posted on: Sunday, March 31, 2002

The affair is over, says Hawaiian Air

By Frank Cho
Advertiser Staff Writer

With an old-fashioned airline war looming, Hawaiian Airlines' chief executive officer and president, Paul Casey, is facing one of his biggest challenges since taking over five years ago.

Since the merger efforts failed, Hawaiian Airlines chief executive Paul Casey has seen "renewed energy" among his employees.

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Until earlier this month, Casey had been leading the company into a merger with longtime rival Aloha Airlines. But the deal fell apart three weeks ago, with each side giving different reasons for the breakdown. Hawaiian cited increasing costs and risks. Aloha said Hawaiian tried to change the terms.

Since the announcement, both airlines have been moving quickly to regroup in an industry that has been dramatically altered since the Sept. 11 attacks.

Aloha has said it plans to expand its operations, including its trans-Pacific routes, revamp its interisland coupon system, and apply for federal loan guarantees. Hawaiian has said it will expand trans-Pacific operations with flights between Honolulu and two new California cities in June, and will bring back workers furloughed after Sept. 11 to staff the flights.

Casey, who has been meeting with employees, politicians and union officials almost nonstop since the merger fell apart, spoke with The Advertiser on Friday about his vision for Hawaiian as it goes it alone, including new airplanes, continued expansion to the Mainland, restructuring interisland fares and routes, and working with employees to strengthen the carrier.

Following are excerpts from a wide-ranging interview:

Q. Why was the merger not completed and why did Hawaiian Airlines put in other conditions?

A. In terms of the conditions that were put in, it's inappropriate that I comment on those because those were private discussions between the parties and there may be some pending litigation because Aloha, at a minimum, believes it is entitled to some fee for the deal not going forward.

The board had grown uncomfortable with the potential results of the plan when this merger was put together. It was put together, as you know, by Greg Brenneman, and the board was also approached about six weeks ago by (Brenneman's company) TurnWorks to extend the deadline from the 18th of April until June and the board chose not to extend that date.

It became obvious that we were not going to get approval for the merger by the 18th of April. The board also authorized John Adams, our chairman, to go and negotiate with Aloha. But, as I said, the terms of those negotiations are private and because of some pending litigation we cannot comment.

Aloha chose to reject the new terms and conditions and, as a result, the merger is dead and probably won't reappear in our lifetime.

Q. What can you say about how the new terms and conditions were developed and why?

A. I really can't speak about specifics. It came out of board concerns; the entire board — the independent members, the labor members, the management members and the representatives of AIP, the major shareholder.

Q. Some people have suggested this was a power grab by Hawaiian Airlines.

A. This was not a power grab at all. We wanted a merger because we believed it was in the best interest, at the time, of not only our shareholders, but the company. And there was an honest attempt to get that done and the new attempt at negotiations was rejected by Aloha. There was no attempted power grab.

We have also been criticized that this was a ploy to get a look at the books of Aloha, and that couldn't be any further from the truth.

Firstly, why would we spend between $6 million and $8 million (combined) on legal fees, bankers' fees, consultants' fees, and take up a huge amount of management time in an attempt to gain information that is quite simply publicly available. It makes no sense. The one thing I know that is absolutely false is that we caused the merger not to happen because all we wanted to do is look at Aloha's books. ...

That really irked me because if people examined how much money we spent and if they understood that all of our numbers are public and most of Aloha's numbers are public and because we both live in this tiny little fishbowl and a lot of our employees are married to their employees or live next door to their employees — I mean everyone knows what everyone else is doing.

Q. Would Hawaiian Airlines consider making another attempt at a merger with Aloha Airlines?

A. No. We believe that the merger discussions are over. You can never say never in any business, but we think that for the foreseeable future, it will not happen.

Q. If you had to do it all over again, what would you change?

A. That sort of gets into the area of litigation. I believe that the original concept to put the two companies together post 9/11 was the right idea at the time. Each deal has its time, whether it's still valid in a year's time — who can predict the future? It's difficult to go back and re-cut a deal.

Q. Where does Hawaiian Airlines go from here?

A. It's interesting. We had a plan, as all companies have plans, pre-9/11 and were concerned about the effect of 9/11 on tourism in general to this state because as tourism goes, so do we. If tourism falls 10 percent, our company has a problem, as do others. So, we were anxious to see what the long-term effect would be on tourism to Hawai'i.

Our advance bookings this summer are up very strong. In fact, they are running ahead of the same period last year. So we pulled out our pre-9/11 plan and dusted it off, which in large part resembles the "go forward" plan that TurnWorks put together.

As a result, you saw us recently announce flights to Sacramento and Ontario, Calif., two cities we have looked at for probably three years. So we are just going back to the plan we had pre-9/11, continue to grow, add airplanes, add people, do it as efficiently as possible and as profitably as we can.

Q. Is Hawaiian renegotiating the leases on its aircraft?

A. We have a plan being formulated now to address leases on existing airplanes and to negotiate with Boeing or a leasing company for a small fleet of 757s. They will operate in some of the thinner markets from the Mainland to Hawai'i.

The other challenge we have, of course, is interisland, which was the main driver of the merger.

Interisland continues to be a problem, Japanese tourism continues to be down and who knows when that will return. Even when it does return to pre-9/11 levels, the spending habits of the Japanese have changed dramatically. They are not spending in high-end retail stores and they are not taking day trips to the Neighbor Islands. You've also got the continued nonstop flying to the Neighbor Islands: we are launching L.A.-Maui, just-launched Seattle-Maui, and are adding San Francisco-Maui this June. That takes away a little interisland business.

The third problem, I think, is we continue to have overcapacity between islands and the (federal) antitrust exemption will go some way towards helping us.

The other problem, I think, is local people who, pre-9/11, were used to walking up to the counter 10 minutes before departure and plunking down their coupons and saying, 'Get me on the next flight.' You can't do that anymore.

There also are a lot of people who believe that the security procedures at the airport have made travel difficult so they're are not traveling as much as they were.

So all of those things, combined, have us continuing to seek a solution to our interisland dilemma.

Q. Is Hawaiian Airlines taking advantage of the federal loan guarantee program passed by Congress in the wake of 9/11?

A. We are examining it, but some of the restrictions put on some of the early loans given to, let's say, America West Airlines, we believe, are onerous. It presumes you cannot get loans that are available through commercial lending institutions. We believe we are financially strong enough to attract loans from normal lending institutions and to not resort to the federal government.

We have not ruled it out completely, but it's unlikely.

Q. Does Hawaiian Airlines plan to make use of the federal antitrust exemption?

A. If you go back to 9/11, I had a discussion with Glenn Zander (Aloha's chief executive) right after 9/11 seeking some sort of antitrust exemption to coordinate interisland capacity reductions. It took a long time to get through the federal government and we couldn't wait. So we took our interisland capacity down about 20 percent.

But we have told Aloha we are interested in going forth to seek an antitrust exemption. They have indicated that they are also willing to do that.

Q. What is the public likely to see in terms of ticket pricing?

A. I don't believe the antitrust exemption will cover pricing. ... What I think it will cover is the ability to coordinate schedules to ensure that we each increase our load factors and to reduce flying to make it more efficient. ...

I was really interested in Mr. Zander's comment about differential pricing. We tried that 4 1/2 years ago when I first got here and the market rejected that.

We do have interest in differential pricing. For instance, it takes a lot more fuel to fly to Kona than to Maui, yet we charge the same price. You have peak days and off-peak days. You have peak times and off peak times. Everyone is charged the same price. It actually makes no sense. So we do have some plans to change the inter-island pricing structure.

Q. What about coupons?

A. Coupons are an interesting subject because local people have become wedded to coupons. They give them away as gifts, they give them as prizes and it's become sort of a currency like a traveler's check. We do have some plans to change the distribution of coupons to move to more of an electronic method of distribution because we have had such great success with our e-commerce strategy, getting people to book through the Web, or travel agents' Web sites.

Q. What are your plans for the interisland market?

A. As a percentage of the total, either revenue or seats, interisland continues to shrink because we are adding more and more West Coast flying. You will see more added in the fourth quarter of 2002 and in the summer of 2003.

We have gained market share against our competitor, but this is not a market-share game, it's a profitability game and we have not deliberately sought to increase our market share.

Q. Will the state see a reduction in interisland service?

A. As a result of the (antitrust) exemption, yes, probably. It probably will be during off-peak periods where we run low load factors. The name of the game is to increase load factors. So, if you cut seats and keep the same amount of traffic, your load factor goes up.

Q. What are Hawaiian's plans for expansion to the Mainland or to Asia?

A. From time to time we talk about places in Asia and at the moment no place in Asia makes either economic or strategic sense for us. We will continue our expansion on the U.S. Mainland, where we are a very well-known product and the state of Hawai'i is well known. So we will continue to push into new Mainland cities.

One of these days we will fly from L.A. to Kaua'i and from L.A. to Kona. Probably not with a 767, but that would be one of the reasons for getting a fleet of 757s. ...

Q. With regard to labor, who have you met with and what are you telling them?

A. We have met with everyone. We've met with labor leaders from all five unions. We have met with everyone from pilots, flight attendants, mechanics, ramp agents, check-in agents, accounting people (reservations) people, everyone. We told them that the merger clearly is dead and that we are returning to the planning we had pre-9/11, which was one of expansion.

We've told the employees that the management group does not run the company, the employees run the company. It is the employees that deal with passengers every day and they just need to do the best job that they can.

No concessions have ever been discussed at all. Hawaiian Airlines' employees have given and given and given for years. The company went in and out of bankruptcy. I came in five years ago with a very clear mandate to teach the company how to generate revenues, which I think we have done year after year, and a very clear mandate to bridge what was then a wide gap between labor and management. The labels of labor and management I hate. We are all employees working in the best interests of the shareholder and the customers.

Q. Hundreds of employees were furloughed in the wake of 9/11, what is going to happen to them?

A. We are in the process of recalling the flight attendants and that has to do with the summer expansion. The pilots and the mechanics will be determined by what the fleet plan is and that is still being worked on.

Q. What is your future with the airline?

A. I am still employed. ... Our employees, it is well known, were really against (a merger). Because they had said we had gone through the tough times: "We've lost pay and we've lost benefits, then we lost more pay and we lost more benefits." The employees believed that Aloha should do the same.

What they (Aloha) do is their business, but our employees now, I believe, have renewed energy and they are glad that the merger didn't happen. That is sort of a side benefit to the merger discussions ceasing.

Reach Frank Cho at 525-8088, or at fcho@honoluluadvertiser.com.