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The Honolulu Advertiser
Posted on: Tuesday, March 25, 2003

Stock buyback criticized

By Andrew Gomes
Advertiser Staff Writer

The largest secured creditor of Hawaiian Airlines has hinted it may fight the airline's attempt to reduce airplane lease payments through bankruptcy, citing the airline's use of $25 million in cash to pay Hawaiian owners a premium for their stock less than a year ago.

Boeing Capital Corp. attorney Steve Hedberg at a hearing on Friday called the buyback a potential fraudulent stock transfer, resurrecting criticism of Hawaiian rewarding investors last year while the airline industry was struggling to pull out of a financial crisis.

But proving it was Hawaiian's intent to repurchase stock so as to reduce assets that might be available to creditors in bankruptcy is a complicated task, according to bankruptcy attorneys not affiliated with the case.

A spokesman at Boeing Capital said the company would not elaborate on the issue. Hedberg did not return a call for further comment.

Keoni Wagner, a spokesman for Hawaiian, said the buyback was validated by an independent advisor as a good investment to enhance shareholder value at the time and is unrelated to the bankruptcy case.

The airline started repurchasing stock after the cancellation of a planned merger with Aloha Airlines last March, spending $3.1 million to buy nearly 1 million shares at varying market prices that averaged $3.17 between April 19 and May 7.

On May 31, Hawaiian said it would repurchase another 5.9 million shares for $4.25 each, a $1 premium per share at the time, and completed the $25 million deal July 8.

The buybacks reduced Hawaiian's cash by $28 million to $53.7 million at the end of September.

Wagner declined to disclose how much cash the company has on hand now, but said in hindsight that the buyback's only influence was to perhaps move up the need to file for bankruptcy a couple of months.

"The buyback has an impact on the company's cash position, but it really has no bearing on the company's business plan or viability," Wagner said.

Hawaiian said in its bankruptcy filings that it lost $58 million last year, at the end of which it had $256 million in assets and $399 million in debts.

Still, the perception among some observers is that Hawaiian management irresponsibly spent cash on the buybacks after receiving $30.1 million in federal air transportation stabilization benefits between late 2001 and August 2002.

Wagner said economic projections for Hawai'i at the time were for tourism to improve, and that no one predicted the industry would be thrown into another crisis by a war in Iraq. He added that Hawaiian still would be trying to negotiate new aircraft leases had the company not bought back its stock.

The airline said high aircraft lease costs are among factors that have led it near the brink of financial peril, along with decreased revenue and higher insurance, security and fuel costs.

Hawaiian started updating its fleet in late 1999, swapping old interisland DC-9s for 13 new Boeing 717s. In late 2001 the company began replacing its transpacific fleet of DC-10s with 16 new Boeing 767s.

The $1 billion fleet replacement program was intended to save operating expenses by reducing rising maintenance costs, but the new lease payments became a hardship given the prolonged industry turmoil.

"Because the aircraft lease costs are grounded in economic assumptions that have failed to materialize, the debtor has been forced to shoulder the crippling costs of over-market leases," Hawaiian said in bankruptcy filings.

Boeing Capital is one of three companies leasing aircraft to Hawaiian, and with a claim of more than $10 million is the airline's largest unsecured creditor. The Boeing Co. subsidiary has $476 million in lease agreements with Hawaiian over 18 years, and counts the airline as its fifth-largest customer.

Hawaiian said it filed for bankruptcy after a breakdown in lease renegotiations. The airline declined to say how much in aircraft lease concessions it needs to remain viable. In the last two months, Hawaiian renegotiated employee labor agreements to save $15 million, though some unions were reluctant to make concessions because of the stock buyback.

The publicly traded airline is majority owned by Airline Investors Partnership, a company headed by John W. Adams, a Manhattan private investment specialist who arranged an infusion of capital for Hawaiian a year after it emerged from bankruptcy in 1994. He became chief executive of the airline last May.

Adams, whose company received $17.1 million in the buyback, including $4 million in premium, has previously defended the buyback as important to compensate shareholders for their support and patience after they invested $50 million in Hawaiian six years ago.

Hawaiian shares, before trading was halted Friday, last traded at $1.50, representing a roughly $50 million reduction in shareholder value compared with last May at the time of the buybacks. Trading had not resumed as of yesterday.