Hawaiian Airlines is hit with additional setbacks

By David Butts and Kelly Yamanouchi
Advertiser Staff Writers

Hawaiian Airlines' troubles deepened yesterday when it reported losing nearly $60 million last year and a federal bankruptcy judge said allegations of management misconduct at the company are "serious" enough to consider replacing its chief executive officer with a trustee.

Hawaiian Airlines and other carriers have not yet recovered from the downturn in business since Sept. 11, 2001. Unlike several of its competitors, Hawaiian did not apply for a federal loan guarantee. Advertiser library photo

For the fourth quarter alone, Hawaiian reported a net loss of $15.1 million, or 53 cents per share, compared with a net loss of $10.7 million, or 31 cents, in the last three months of 2001.

"Our disappointing results for 2002 reflect the ongoing economic crisis in our industry," Hawaiian CEO John Adams said in a statement.

In an even darker statement of its condition, Hawaiian said in its annual report filed yesterday that there is "substantial doubt about our ability to continue as a going concern," raising uncertainty about its ability to emerge from bankruptcy successfully. But spokesman Keoni Wagner dismissed the comment contained in the filing as "common language."

The company blamed its losses, in part, on the expense of its $1-billion-plus fleet modernization program completed this year. Aircraft rental expense increased in 2002 by 108.8 percent to $83.5 million from $40.0 million in 2001, the company said.

When Hawaiian Airlines filed for Chapter 11 reorganization on March 21, it sought the bankruptcy court's help in renegotiating leases with Boeing Capital Corp., the leasing arm of the airplane manufacturer, and other aircraft suppliers.

Hawaiian and Boeing Capital have resumed talks on renegotiating the leases. But Boeing questioned Hawaiian's assertion that it needed concessions from the aircraft manufacturer when the airline had paid stockholders $25 million in a share-buyback plan nine months earlier.

In June, the airline purchased 5.88 million shares from stockholders at $4.25 per share, or 31 percent more than what the shares were trading at when the buyback was announced. Hawaiian is majority-owned by Airline Investors Partnership, a company headed by Adams, which was among the beneficiaries of the stock buyback.

At a hearing yesterday, U.S. Bankruptcy Judge Robert Faris said Boeing Capital's questions about Hawaiian's stock buyback "are serious allegations." Faris said he believes there is "initial support" for the complaint by Boeing Capital.

Boeing Capital asked Faris last month to appoint a trustee to replace Hawaiian's management, including Adams, while the company reorganizes. A hearing on the trustee motion will be held May 8.

Faris questioned whether a trustee would be good for Boeing Capital, saying "if a trustee is appointed, you wouldn't really know who your long-term customer is."

Asked about the statements in court, airline spokesman Wagner said: "We take the Boeing assertions very seriously, and we are taking our time to address each of them properly, which we will do in court in due course. Then everyone will have the benefit of hearing our side of the story."

Hawaiian's new fleet was put in place to replace its aging DC-10 jets and reduce fuel and maintenance expenses. The carrier said its aircraft fuel expense decreased by $16.4 million to $95.5 million and its aircraft maintenance expense declined by $8.8 million to $90.2 million in 2002.

Hawaiian said it also took an $8.7 million restructuring charge through early retirement of eight DC-10s , and $10.1 million charge for future lease commitments on the DC-10s, lease conditions, severance costs for 150 DC-10 pilots and other costs for the planes.

Hawaiian also reported that its cash and cash equivalents fell from $95.1 million, including $23.2 million of restricted cash at the end of 2002, to $63 million including about $34 million of restricted cash as of March 31, 2003.

Hawaiian attributed its decline in liquidity to seasonal fluctuations, an increase in escrow deposit requirements by credit card processors and others since the Chapter 11 filing, and other bankruptcy-related expenses.

Hawaiian noted in its annual report that absent other adverse developments, its cash would be sufficient to pay for current operations through 2003.

The company said its average percentage of seats filled remained constant year-over-year at 76.9 percent.

Hawaiian also suggested it was at a disadvantage because competitors, including Aloha Airlines, received federal loan guarantees and restructuring "could enable them to substantially discount fares or compete in other ways in which we could be adversely affected."

Hawaiian did not apply for a federal loan guarantee.

Boeing Capital said it will discuss with Hawaiian the possibility of extending a 60-day window provided under bankruptcy rules to continue lease contract talks.

Boeing Capital can reclaim aircraft unless Hawaiian repays the more than $18 million it owes to the aircraft manufacturer through May 20 or both parties come to some other arrangement.

"We will discuss with the committee and the debtor a two-week extension," said Steve Hedberg, an attorney for Boeing Capital.

Boeing Capital spokesman Russ Young said the extension offer was made because "we realize that the timing is very tight, particularly if a trustee was appointed."

Hawaiian and Boeing Capital will submit documents and written testimony to the court before May 8. Among the documents Boeing has requested are materials on "Hawaiian's declining financial status and key financial decisions made by Hawaiian's board of directors and senior management since 2002," including the stock repurchase last year, payments made, concession requests and banking and loan transactions and communications.

"They've asked for basically all communications that Mr. Adams has had with any related party," said John Karaczynski, an attorney for Hawaiian. Faris gave the company more time to comply with Boeing's request but directed Boeing Capital to limit the number of documents it is seeking.

Boeing Capital is also planning to ask for depositions from some members of Hawaiian's board of directors.

Brett Miller, an attorney for unsecured creditors in the Hawaiian bankruptcy case, told the court he was concerned about the timing of the hearing because the ability to repossess aircraft means "Boeing is holding a hand grenade and the pin has been taken out," he said.

The timing may mean Hawaiian must have a deal with Boeing by the end of the negotiating window — or May 20 — or face the possibility of having planes repossessed.

Faris said it is up to Boeing to extend the negotiations deadline.

"I can't put the pin back in," Faris said.

Miller said the situation "is a little scary. ... I really hope and I caution the debtor that it has some sort of realizable fall-back plan."