Aloha Airlines seeing profits on the horizon

By Kelly Yamanouchi
Advertiser Staff Writer

While other airlines are cutting back in a struggle to survive, Aloha Airlines is on firmer ground since a federally backed loan allowed the carrier to expand its fleet and essentially maintain its services, the company's president and chief executive said.

From his Waterfront Plaza offices, Aloha Airlines CEO Glenn Zander can envision the airways opening up for new destinations on the Mainland and in the Pacific. Gregory Yamamoto • The Honolulu Advertiser

The effort by Hawai'i's No. 2 carrier to qualify for the guaranteed loan had forced Aloha to cut costs far ahead of other airlines, including competitor Hawaiian Airlines, which continues to bargain for concessions with labor groups and the companies it does business with.

To secure the $45 million loan backed by a $40.5 million federal guarantee last December, Aloha extracted 10 percent pay cuts from its employees and struck cost-saving deals with its equipment lessors and guarantors.

Now Zander said Aloha will double the number of planes it leases for long-range flights from five in April 2002 to 10 by the end of this April. The carrier also plans to buy two more airplanes, he said.

The airline, which employs nearly 3,000 workers, plans to use the aircraft for new destinations on the West Coast and in the Pacific.

The expansion follows moves by Aloha to extend its reach in California. The carrier this month began operating four flights a week between Burbank, Calif., and Kahului, Maui, and is moving to daily flights March 13. On April 18, it will add a flight from Burbank to Sacramento, Calif.

Aloha earlier announced the start of its first nonstop flights to Lihu'e, Kaua'i, from Oakland four times a week starting in June. It also will increase its Oakland-to-Kona, Hawai'i flights from four times a week to daily.

Much of this expansion has been made possible by the federally backed loan.

"Capital markets are basically shut down as far as airlines go," Zander said, so the government-backed loan was critical to Aloha's survival strategy. Aloha has 41/ years to pay back the loan.

While other airlines continue to cut labor costs, Zander said the concessions secured last year for the Aloha loan are sufficient. The carrier has historically paid lower wages than other airlines.

"There was tremendous inflation in airline pay, commencing with United pilots. Aloha's labor agreements have never followed that pattern," Zander said.

The pay cuts at Aloha Airlines are part of agreements that last three years and include profit-sharing for all employees.

"All in all we just accepted the fact that the industry's in chaos right now," said Steve Brenessel, communications committee chairman for Aloha's Air Line Pilots Association. "The company is doing with the money what they said they were going to do. They're expanding, they're getting more routes, they're getting more airplanes. ...

"Whenever you're growing and everybody else seems to be furloughing and cutting flights and all that, you at least feel pretty good you're bucking the trend, and that's what we want."

Owns three planes, leases rest

Aloha bought its two Boeing interisland aircraft through the negotiations leading up to the loan approval, bringing the total number of aircraft it owns to three. Aloha leases the rest of its aircraft.

The carrier is also maintaining in-flight services such as free meals and mai tais, while other airlines have cut back and begun charging for meals.

"There will be carriers that offer bare-bones service," Zander said. "We think there's also room for what we're doing."

But Aloha continues to suffer from many of the problems other airlines have encountered after a sharp drop in travel brought on by economic and geopolitical uncertainty and the Sept. 11 terrorist attacks.

Aloha, a privately held company, earned $693,616 in the third quarter of 2002 after three quarters of losses. Financial results for 2002 have not yet been released.

"We were definitely not profitable last year. Last year was a very tough year," Zander said. This year's first quarter will also likely yield a loss, but Zander said Aloha is on track to break even or make a profit in the second quarter and beyond.

Aloha derives about 53 percent of its revenue from interisland flights, 34 percent from long-range flights, 8 percent from freight shipping and 4 percent in contract service work for other air carriers.

As Aloha adds more flights to the Mainland and other destinations in the Pacific in the next five years, Zander said long-range flights would make up 50 percent of the total revenue.

On the other side of the ledger, Aloha's failed attempt at a merger with Hawaiian has been among its most costly ventures.

"We spent millions on what turned out to be wasted money on the merger," Zander said. Beyond cash outlays, he asks: "What's the cost of having your entire management team devoted to a merger instead of running the business?"

Interisland flights

Aloha is continuing to adjust to changes in its interisland flight operations after gaining federal approval to coordinate seat capacity with Hawaiian. Both airlines cut the number of interisland flights late last year, saying they had long lost money on the business.

In spite of residents' and tourism industry complaints about the dwindling number of interisland flights, Zander said he does not plan to increase flights beyond that already planned.

He added while Hawaiian cut the number of flights it runs to Hilo daily, Aloha has slightly increased the number of its Hilo flights. Zander said this stems from a difference in philosophy.

While Hawaiian executives have said flights between the Big Island and Honolulu are not profitable even when full, "we don't look at each city pair as a different market," Zander said.

"You can't stop serving a single point in the Islands and be a viable interisland carrier," he said.

In January Hawaiian and Aloha also stopped issuing interisland coupons because the system that allowed travelers to hop ontoany available flight was costly and made it difficult to gauge when and where passengers would fly. Since the previously purchased coupons will still circulate for several months, they will continue to take their toll on the carrier's bottom line.

Who are the passengers?

Load factors, which measure the number of seats filled, average 80 percent on Aloha's interisland flights, Zander said. About 40 percent of the seats are filled by residents, 40 percent by North American travelers and 20 percent by Japanese travelers.

"There is an adequate number of seats to meet demand," he said. "When you have 20 percent of your seats vacant it doesn't seem there's really a need for additional demand."

Aloha does plan to increase interisland flights in March to match anticipated interest in spring break travel. But Zander warned that a war with Iraq may lead to another cutback in flights. The reduction, however, should be less than 10 percent, he said.

Reach Kelly Yamanouchi at 535-2470, or at kyamanouchi@honoluluadvertiser.com.