Aloha may add flights if Hawaiian cuts back

By Kelly Yamanouchi
Advertiser Staff Writer

Aloha Airlines is preparing a contingency plan to increase its interisland service if Hawaiian Airlines reduces flights as it restructures under Chapter 11 bankruptcy protection.

Aloha Airlines' chief executive Glenn Zander said the interisland business is "progressing toward profitability." Advertiser library photo

Hawaiian filed for bankruptcy protection on March 21, citing its inability to renegotiate its aircraft leases with Boeing Capital Corp. and other companies.

Hawaiian and Aloha each operate about half the flights operating interisland.

"We have taken a very hard look at what the potential would be if in fact the outcome in the court was substantial reduction in capacity because of the disputes with the aircraft lessors," Zander said. He said Aloha is working with pilots on a plan to increase the carrier's share of interisland flights if needed.

"Not only would we use more of the aircraft, we would also lengthen the day to provide more seats," Zander said.

Zander said he is not trying to predict or influence the outcome of Hawaiian's bankruptcy case and a motion filed by Boeing Capital Corp. asking that a U.S. trustee be appointed to replace Hawaiian management.

But "we felt it was prudent on our part to look at contingency plans to assure that people can get around the Islands," he said.

Aloha would likely not increase trans-Pacific flights to the Mainland if Hawaiian cut back because those flights would likely "be soaked up by the major carriers in short order if in fact there was a need to do so," he said.

Zander said if Hawaiian's airplanes are repossessed, the airlines may need to give notice of a suspension of the yearlong federal interisland cooperation agreement granted last September. The agreement allows the two local carriers to coordinate seat capacity on interisland flights.

Aloha, meanwhile, has its own losses to grapple with. The carrier lost $43 million last year, including $29.8 million in the fourth quarter ending Dec. 31.

That showing compares with an $11.1 million loss in 2001, including $12 million in the fourth quarter. "The best thing I can say about 2002 is it's over," Zander said.

The reasons for the loss were numerous. "The fallout from 9/11, continuing problems with the U.S. economy, decrease in Japanese traffic, relatively high fuel prices — all of those things contributed to the losses in 2002 as well as 2001," Zander said.

Last year's figures also include about $4 million in legal fees and other costs for an attempted merger with Hawaiian last year that proved unsuccessful, Zander said.

The last year in which Aloha made a profit was 1998 when it earned $5.3 million. The airlines' losses have steadily increased from $1.8 million in 1999 to $4.3 million in 2000 and $11.1 million in 2001. Aloha has also expanded its trans-Pacific flight service since 2000.

Although Aloha is privately held, its financial results are collected and released by the federal Bureau of Transportation Statistics. Aloha's year-end figures included an accounting change for maintenance charges in the fourth quarter of 2002 that added about $17.4 million to expenses.

Aloha reported an operating loss of $22.7 million for the year, including $3.8 million in the fourth quarter. The airline had operating losses of $24.5 million in 2001 and a $16.5 million operating loss in the fourth quarter of that year. Operating loss is the loss from air transportation and does not include nonoperating income and expenses such as income taxes.

Operating revenues amounted to $329 million for 2002, including $84.9 million in the fourth quarter. That compares with $306.1 million in 2001 and $68.7 million in the fourth quarter of that year.

The airline held more than $30 million in cash at the end of the first quarter ended March 31, "which by Aloha standards is very robust," Zander said. But that is also a decline from $37 million at the end of 2002 attributed to a drop in ticket sales and losses.

Zander said he believes Aloha will post a profit this year, though the outlook for early 2003 remains troubled for the struggling airline.

Zander said he does not expect Aloha to break even or regain profitability until the second quarter of this year. Second-quarter results will include an infusion of cash from federal aid to the airline industry, which Zander expects will be more than the $10 million Aloha received after Sept. 11.

Zander expects a continuing slump in Japanese tourism through this year. While traffic from the Mainland is rebounding, it does not make up for the drop in Japanese interisland travelers because many domestic visitors take direct flights to Neighbor Islands, he said.

Both Hawaiian and Aloha have cut unprofitable interisland flights since securing a federal antitrust exemption to cooperate on capacity for some routes. Zander said there are no plans to further reduce interisland flights, but he said the interisland business is "progressing toward profitability."

Zander said 2003 results would be helped by labor cost reductions and improved access to capital. Aloha negotiated 10 percent pay cuts from its employees and struck cost-saving deals with its equipment lessors and guarantors. The moves helped the airline secure a $45 million loan backed by a $40.5 million federal guarantee last December.

The labor concessions cut Aloha's monthly costs, which amount to about $12 million to $13 million a month, by about $1 million, Zander said. Labor and fuel are the two largest costs for airlines.

"From our perspective things have changed dramatically" because of the labor concessions and loan guarantee, he said.

Some observers say Aloha is in a relatively better position than rival Hawaiian because of the cuts it made early to its operations and its receipt of the federal guarantee.

Zander said Aloha also made the decision not to modernize its fleet as Hawaiian did.

"We elected to continue operating our 737-200s, which while not bright and shiny and new, are more economical," Zander said. Aloha decided as well to use smaller aircraft for Mainland flights to smaller airports.

"Because it turned out to be a shrinking market, because it turned out to be very tough times, having that smaller size base was the right answer," he said. "It's a free enterprise economy and each management makes their own decision. ... I guess we had a somewhat better crystal ball perhaps."