Hawaiian Airlines CEO considers selling carrier
By Susan Hooper
Advertiser Staff Writer
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| John Adams is emerging from behind the scenes.
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"We believe that there is a lot of value inherent in Hawaiian Airlines, and it's not reflected in the stock market today," Adams said.
"But we believe that, if we execute our business plan going forward, that eventually it will be reflected and at that time we will consider selling our interest."
Adams, a Manhattan private investment specialist, has played a powerful but largely behind-the-scenes role with the airline since he became majority shareholder in 1996.
Paul Casey, who is vice chairman, chief executive and president, has been the public face of Hawaiian since 1997. With Casey's announcement last week that he is leaving the airline in June, however, Adams is likely to be much more in view.
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| Paul Casey is leaving behind a highly visible role.
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The current business of Hawaiian includes refining its focus as an independent carrier following the March failure of the proposed merger with Aloha Airlines. Adams is also searching for an experienced industry executive to sign on as president and lend a hand.
Last Thursday Adams and Casey sat down with The Advertiser at Hawaiian's Koapaka Street headquarters and talked about the airline's future — and its recent past.
Following are excerpts from the wide-ranging interview. Unless indicated, the answers are from Adams.
Q. What are some of the key elements of your business plan for Hawaiian Airlines?
A. We think that the mission of Hawaiian Airlines is to provide the best airline service to and from the state of Hawai'i. ... After much introspection on my part in attempting to figure out why people fly on Hawaiian Airlines, and how do we increase our business, I come back to the concept of the Hawaiian employee and the naturally warm and family-type service that they can bring to our airline. When you step on an aircraft in Los Angeles, on Hawaiian Airlines, you are immediately in Hawai'i. You can feel the 'ohana, the warmth. ... Our business plan is built on that. It's built around Hawai'i, and bringing people to Hawai'i and among the islands of Hawai'i, and providing the best service ... I believe that especially during Paul's tenure as CEO of the company, we have developed an image, particularly on the West Coast, where people identify fine service with Hawaiian Airlines. As we have announced over the past six weeks, we're going to continue to explore expanding our service to the West Coast and such further places as Phoenix.
Q. Is expanding to Asia part of your business plan?
A. As Paul can explain to you, the issues of Asia are somewhat more complicated because we don't have the necessary open-sky treaties with Asia. It's something that we would like to explore; we feel it's part of our future, it's part of our natural expansion, but
No. 1, we want to make sure that we execute our current expansion adequately ...
Q. Does your mission include travel within the Islands, and is that the troubled part of your business right now?
A. We have not made a profit interisland in the seven or six and a half years that I have been part of Hawaiian Airlines. This notwithstanding the company's investment of over $300 million two years ago in bringing in completely new aircraft for the purpose of getting reliable service, reducing maintenance issues and getting fuel efficiencies and the like. I think that's gone a long way to provide better service, and the service the people of Hawai'i expect, but we still haven't been able to consistently make a profit interisland. And that's something that we're going to continue to explore.
Q. Is there a possibility that you might end interisland service?
A: No. ... We believe that, in addition to the special Hawaiian service that I articulated before, that I think we offer to people flying to Hawai'i something that other airlines don't, and that is the interisland operation. A couple of years ago, Paul and I spent a lot of time considering whether we should terminate interisland service. I think that we decided not to principally for two reasons: One is, it is a service that we can offer that other airlines can't; and number two is, we have to respect the fact that we are an airline of the state of Hawai'i and that we have an obligation to continue to serve the people of Hawai'i in the best way that we can consistent with our mandate — that we are intended to be a for-profit corporation with responsibilities to ensure that we can continue to hire and pay employees and bring a return to our shareholders.
Q. Are you looking for financing?
A: Currently the financing we are looking for is in conjunction with the equipment that we continue to negotiate for the aircraft. And we are talking with ... commercial lending institutions for a very typical stand-by line of credit.
Q. Are these additional aircraft than you've already announced that you're purchasing?
A. In part, yes. We're also looking at perhaps supplementing some of the aircraft that we have already announced with some different aircraft that would be amenable to the kinds of markets that we want to pursue. I'm being vague intentionally because we have certain business planning (with) which we are going to address certain markets with certain aircraft ...
Q. Can you tell me more about other places that you might be starting routes to?
A. We do have a number of prospects that we are looking at very seriously. No. 1, for competitive reasons, I prefer not to announce those now. And No. 2 is I'm really concerned about distracting our employees who are working full-out to execute properly a very ambitious program that we have set for this year and next.
Q. Hawaiian and Aloha each gave different reasons for the merger's failure. But several different sources said that Hawaiian's decision to change the terms of the deal, including making you the chairman of the merged airline, ended the proposed partnership. Can you comment on that?
A. I'm somewhat restricted in the breadth of the answer I can give ... because ... litigation has been threatened. ... But within the context of that, let me try to explain our position in the merger.
Any complicated corporate transaction of this nature is, as you know, quite risky. And there is a certain momentum to this kind of transaction such that if you don't complete the transaction within a given period of time, not only does the transaction itself start unraveling, but the parties to it start losing value. A good example of that is, we've lost our CEO as a result of this. Management and employees start being distracted from what they do on a day-to-day basis, and those members of management who don't feel that they are going to survive start thinking about other things, as Paul indicated before.
Each of the parties, recognizing that, decided to name April 19 as a day beyond which they would reconsider what (were) the risks and benefits and chances of this transaction being successful. Sometime in March of this year, Mr. (Greg) Brenneman (the consultant orchestrating the merger) came to us and said that it was clear that he would not be able to complete the transaction by April 19, and not unreasonably asked our board to commit to an extension of the time at that date — that is, in March. He accelerated the time.
Now remember: Each of the parties wanted the right to review it on that date, and he said to us, "Please review it now and tell me whether you can commit to extending it."
Q. What you are saying is that he did not want to give you until April 19 to see how things were going?
A: He was working very hard, as we all were. And he said, "Listen, that's" — I don't know exactly what time it was — "that's six weeks away, but I know now that I can't get done what's necessary to get done to close the transaction. So rather than me and everyone spending all this time spinning our wheels, let us know if you're going to extend the time." ...
The contract said that this transaction would be done by April 19. Everything would be done. We would have approval of the Justice Department, approval of the DOT (Department of Transportation), approval of the state of Hawai'i agencies ... that we would have restructured our financing and the like. And the contract said that if that isn't done by April 19, any party to the contract can decide not to go forward.
And not unreasonably, as soon as Mr. Brenneman realized he could not get it done by April 19, he said, "Listen, it's not going to be done and I want you to, now, in March, waive the April 19 period to, I think it was, June 1. Extend it out."
Recognizing that this transaction was very risky and that there were an enormous amount of things yet to accomplish ... just bearing in mind the political atmosphere of the state at that time — and all the other elements of the transaction, which were significant, our board unanimously — and representing such constituencies as our unions, we have three unions on our board, representing the special committee of board members, representing the minority stockholders, independent members of the board and AIP representatives — we all unanimously decided that the risks inherent in a successful transaction were greater than what they wanted to assume going forward, that they authorized me to negotiate with Aloha in an attempt to reduce the risks that were perceived to be in the transaction.
My negotiations were unsuccessful and the transaction came apart.
Q. Some have said that, as plans for the merger progressed, that you in particular had become, for want of a better word, disenchanted with Mr. Brenneman as a person who would be leading a merged airline.
A. Mr. Brenneman is a very talented airline entrepreneur and executive. He brought his enormous efforts and talents to this transaction, and in a period of time he had accomplished an awful lot. The board, however, looking at ... what things had not been accomplished and what further things had yet to be accomplished to make a successful transaction, decided that they could not in good faith extend the time period. ...
Q. My understanding is that (Aloha consultant) Mercer Management and Aloha had approached Hawaiian before Sept. 11 on the possibility of a merger and you turned them down. But after the attacks the idea of a merger seemed a much better idea, let's put it that way. Do you think you overreacted at that time, and did you back out of the deal because you realized that Hawaiian could go forward on its own by March?
A. We have for five years thought it was a good idea. The problem that we had prior to Sept. 11 was the risks inherent in trying to do it — from a political standpoint, from an antitrust standpoint and also from a point of view of being able to agree on the structure going forward. Sept. 11 seemed to offer the opportunity of overcoming much of that. The merger was a much more compelling story. As time went on, it became clear that the risks that we were concerned about — getting approvals from government agencies, the political environment — were still very formidable. And we concluded that the risks of not being successful were, therefore, still inherent.
Q. Just to clarify, when you talked about the political climate: The governor was behind the merger and Sen. (Daniel) Inouye, two of the most powerful men in Hawai'i. So to what are you referring — the Legislature's concerns, the opinion of the people who were in the public, the consumers who seemed to be against it?
Casey: You know, we were in the middle of a legislative session, and a year in which every single elected official in the state is up for re-election, and a merger was not seen to be in the interests of the general public. And so the general public are the constituents of these legislators. And although many of them said privately, "We think it's a good idea," publicly, because of the reaction of their constituents, they were against it. So it was a very difficult — that's what John is referring to as the political environment, because of the legislative session. ...
Adams: And I think beyond that, when I talk about the political environment, I'm including our employees' reaction to the merger. There was a lot of dissatisfaction within our group of employees about the terms of the merger and the transaction itself.
Q. Had you expected that?
A. Any time there is significant change as this represented, you're going to have employees who are concerned about the transaction. I think the depth of the concern here and the breadth of the concern here surprised me. ...
That was a very important element of the board's reaction — that the employees felt that they had sacrificed for the betterment of the company; the company had turned the corner and become a financially sound operation again, and they were concerned that all they had done and the position of the company would be jeopardized by a transaction.
Q. Would you talk for just a few minutes about the holding company — why you created it? There's talk that Hawaiian has an interest in buying National Airlines based in Las Vegas and that the holding company would be a good precedent for purchasing that airline.
A. Well, it would set up the mechanism for it. But we actually did about a year and a half, two years ago, take a quick look at it and rejected it as a natural thing for Hawaiian Airlines to do.
Q. You mean the holding company or purchasing National?
A. Purchasing National Airlines.
Q. You rejected it.
A. We did. There was nothing formal about it. Some of the creditors involved in it said, "Listen, we would like you to take a look at this. You've done really well in reorganizing Hawaiian Airlines and giving it direction and bringing in new equipment. Would you take a look at this?" And we did for about a couple of days and decided fairly early on that it wasn't the appropriate direction for Hawaiian Airlines. And there's absolutely no truth to any current rumor that we are interested in National Airlines.
Q. What about other airlines?
A. I will not say never, ever, because that's too strong of a statement about purchasing any airline. We have an ambitious business plan. It revolves around our service to Hawai'i and around the islands and we are focusing on, concentrating on, executing properly that plan and are not looking at any other airline.
Q. Do you see both Hawaiian and Aloha surviving in this market?
A: I think that there's room for two airlines to prosperously operate in the Islands. I think what we need to do is to rationalize our interisland operations, to become profitable and to continue to expand outward to bring people back to Hawai'i. And I think if both airlines execute their business plans well, and can solve the interisland problems, that there's room for two prosperous airlines.
Q. As I understand it, you originally saw Hawaiian as an investment opportunity for your company. Would you consider selling Hawaiian? I ask you that because you've gotten much more involved in Hawaiian and perhaps it's no longer just an investment.
A. Perhaps I've fallen in love with the state of Hawai'i and the airline.
Q. So would you consider selling Hawaiian?
A. I've become very fond of both this airline and the state of Hawai'i. We believe that there is a lot of value inherent in Hawaiian Airlines and it's not reflected in the stock market today. But we believe that if we execute our business plan going forward, that eventually it will be reflected and at that time we will consider selling our interest.
Q. Hawaiian's stock price before the merger announcement was about $2.50. It went up to about $4.50-$4.25 during the merger. Now it's down to $3.25. Where would you like to see the stock?
A. $12. No, I'm being a bit facetious. Actually, being a public company ... it would be inappropriate for me to say what our goals are specifically in terms of stock price. When we bought our position at $1.10, which is public record, six years ago, if someone said, "Well, you could sell it for $3.25," I would have said, "Well ... that's not bad."
But I look at the airline today and I know there's a lot more value in it. And one of the reasons that I'm becoming more involved in it is because I find it a fascinating project in a wonderful state, but also I'm determined to have this company recognize its full value.
