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The Honolulu Advertiser
Posted on: Sunday, September 23, 2007

Deleted files at heart of Hawaiian v. Mesa trial

By Rick Daysog
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Passengers wait to check in at Hawaiian Airlines, which has filed a lawsuit against Mesa Air Group for misusing confidential files

ADVERTISER LIBRARY PHOTO | March 21, 2003

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HAWAIIAN AIRLINES

Founded: 1929

CEO: Mark Dunkerley

Employees: 3,500

Daily flights: 145

Number of aircraft: 29

2006 Assets: $820 million

2006 Revenues: $888.1 million

2006 Loss: $40.6 million

Source: Hawaiian Airlines

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MESA AIR GROUP

Founded: 1982

CEO: Jonathan Ornstein

Employees: 5,000

Daily flights: 1,100

Number of aircraft: 198

2006 Assets: $1.2 billion

2006 Revenues: $1.3 billion

2006 Loss: $33.9 million￿

Source: Mesa Air Group

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Hawaii news photo - The Honolulu Advertiser

Mesa Air Group, with CEO Jonathan Ornstein, denied it used any of Hawaiian's confidential material and relied on public data.

ADVERTISER LIBRARY PHOTO | June 7, 2006

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About a week after Hawaiian Airlines sued Mesa Air Group for misusing confidential business files, Mesa's Chief Financial Officer Peter Murnane e-mailed a friend asking for his help in deleting a computer file "so that it appears they were never on the hard drive."

Three days later, Murnane sent a follow-up e-mail confirming that he deleted the files from his home computer and two laptops.

"Jerry, these work well, the only issue is, once you've identified a deleted file that can be undeleted, how do you permanently delete without having to first undelete and then re-delete," Murnane wrote in a Feb. 24, 2006, e-mail obtained by Hawaiian.

Murnane's alleged conduct landed him a 90-day suspension from Mesa's board of directors. It'll also serve as the key exhibit in Hawaiian's lawsuit against Mesa, which goes to trial Tuesday before U.S. Bankruptcy Judge Robert Faris.

In a recent court filing, Hawaiian's lawyers alleges that Murnane "may have engaged in criminal misconduct" by destroying files that would have shown that Mesa misused confidential information about Hawaiian to plan the start up of interisland carrier go!

Hawaiian also accused Mesa of "gross negligence" since it took no action against Murnane and did not investigate his actions.

"Mesa specifically, Mr. Murnane himself engaged in willful and deliberate spoliation of evidence that existed on three of his computers," Hawaiian's attorney Tom Roesser wrote in a recent court filing. "He did so even though Mesa's in-house counsel explicitly instructed him and others at Mesa to 'preserve any and all documents.' "

Murnane, who could not be reached for comment, has hired prominent criminal defense lawyer Brook Hart, who declined comment.

In a news release on Friday, Jonathan Ornstein, Mesa's Chief Executive Officer, stated:

"Our policy is to comply with only the highest ethical standards of conduct and, if we become aware of potential or alleged violations of such standards, to conduct an appropriate investigation and to take appropriate action when warranted."

POSSIBLE BANKRUPTCY?

Mesa previously denied it used any of Hawaiian's confidential material, saying it relied on publicly available data about Hawaiian and other local carriers when it planned the start-up of go!.

During recent court proceedings, the company's attorney Max Blecher argued that Murnane's actions show "there has been certain hanky (panky) with the computers" but they don't show that the deleted records were actually destroyed. Blecher added that most of the records that Murnane allegedly deleted have been turned over to Hawaiian since it filed its lawsuit.

"Here, we're just flailing around with deletions that took place and probably shouldn't have, but in any event, the real core questions is, what, if anything, has been destroyed and not produced," Blecher said. "All they have are files that have been deleted, but it doesn't mean that Mesa did not have a backup of those files and did not produce the material, and that's our position."

The high-stakes legal battle between Hawaiian and Mesa could have a significant impact on interisland fares and on the bottom lines of the local carriers.

Should Mesa prevail in the suit, local consumers will continue to benefit from the airfare war, in which ticket prices have fallen by half, if not more, since the entry of go!

Local carriers, meanwhile, would continue to bleed red ink. During the past 12 months, Aloha has lost $61 million, while Hawaiian lost $17.6 million. Figures for go! are not available.

If Hawaiian wins the suit, Mesa could be forced to cough up tens of millions of dollars in damages, making it difficult for the company to continue offering cut-rate ticket prices.

Scott Hamilton, a Washington state-based aviation industry consultant, believes Hawaiian's lawsuit could drive go! out of the local market. He noted that Mesa is financially vulnerable these days as its balances have dwindled by about $100 million to $245 million since the start-up of go!

"When you consider the declining cash balance of Mesa since they started go!, I could see a scenario where the damages could equal their cash flow," said Hamilton. "In the worst case scenario ... it could drive them into bankruptcy."

Hawaiian has not publicly stated the amount of damages that it has suffered as a result of the alleged misuse of confidential data. But the company has retained a Mainland airline industry consultant Samuel Engel of New York-based Simat, Helliesen & Eichner Inc., who has calculated the amount of losses Hawaiian said its suffered as a result of the alleged misuse of corporate data.

Hamilton believes that Mesa faces considerable obstacles given Faris' previous findings against the airline.

'TROUBLING' TESTIMONY

In an Oct. 26, 2006, ruling, Faris rejected Hawaiian's call for a one-year ban against Mesa for operating interisland flights but not before saying that Mesa "probably breached the confidentiality agreement by failing timely to return or destroy the evaluation material."

Faris singled out Murnane for a "cavalier" treatment of the confidential data and called Murnane's testimony "self-contradictory and "troubling" and said that Murnane made false statements under oath.

The judge cited a May 2005 e-mail in which Murnane discussed giving then-bankrupt Aloha Airlines "a last push" to drive it out of business.

"I think this is a real black cloud for Mesa as the trial moves forward," Hamilton said.

Hawaiian, the state's largest airline, sued Mesa in February 2006, alleging that Mesa received more than 2,000 pages of confidential financial information about Hawaiian's routes, marketing plans, financial projections and other records when it expressed an interest in acquiring Hawaiian in 2004 when the local carrier was in bankruptcy.

Mesa, whose bid was rejected, was supposed to return the documents or destroy them but didn't, Hawaiian alleges. Mesa later used the records to start go!, Hawaiian said.

Hawaiian emerged from bankruptcy protection in June 2005 under the ownership of California-based Ranch Capital LLC.

In the past, Mesa has argued that losses suffered by Hawaiian or Aloha after go!'s entry were largely self-inflicted because the local carriers increased capacity in response to go!'s entry. Mesa also has said that the local carriers want go! out of the market so they can increase fares.

In its court filings, Mesa and its experts cited a 2005 report by an economist in the U.S. Justice Department's antitrust division that suggested that Hawaiian and Aloha may be working together "tacitly" to keep passenger capacity low to raise fares.

The report noted that fares have risen significantly after Hawaiian and Aloha received a one-year antitrust exemption in 2002 that allowed the local carriers to coordinate passenger capacity on key interisland routes. The exemption, a response to the post-Sept. 11 decline in air travel, lapsed in 2003. But passenger capacity at the two airlines remained low while fares rose, said the report's author Rene Kamita.

"One interpretation of the sustained increase in pricing is that the airlines, having reached an explicit agreement on interisland capacity and perhaps a tacit agreement on fares, found it relatively easy to continue coordination," Kamita wrote.

• • •

Hawaiian vs. Mesa timeline

March 2003: Hawaiian Airlines files for bankruptcy protection.

April 2004: The federal bankruptcy court allows potential investors in Hawaiian to look at the company's books under a confidentiality agreement.

April to May 2004: Mesa downloads more than 60 documents including more than 2,000 pages of proprietary information about Hawaiian's financial performance, projections, and business strategy.

May 2004: Mesa is eliminated as a bidder for Hawaiian.

December 2004: Aloha Airlines files for bankruptcy protection.

April 2005: Mesa starts looking into acquiring or forming a business alliance with Aloha.
Mesa retains GCW Consulting, an Arlington, Va.-based aviation consulting firm, to "look at a possible acquisition or some other structure for entry into the Hawaii market."

June 2005: Hawaiian Airlines exits bankruptcy protection under the ownership of California-based Ranch Capital LLC.

January 2006: Mesa's Chief Executive Officer Jonathan Ornstein tells investors that Mesa's decision
to enter into the interisland market was based on its review of Hawaiian and Aloha Airlines during their respective bankruptcy cases.

February 2006: Hawaiian sues Mesa to bar the company from operating in the interisland market for two years. Hawaiian alleges that Mesa improperly used confidential business data it received when Hawaiian was in bankruptcy. Hawaiian later reduces the length of the ban it seeks to one year.

March 2006: Mesa begins selling tickets for its June 9 launch of interisland carrier go!

March 2006: Mesa files countersuit, accusing Hawaiian of attempting to block competition illegally.

June 2006: Mesa launches go!

September 2006: Hawaiian alleges that Mesa attempted to drive Aloha out of business by citing e-mails in which Mesa Chief Financial Officer Peter Murnane. Murnane's e-mails say: "If we assume Aloha stays in market and in business forever, this project makes no sense. We definitely don't want to wait for them to die, rather we should be the ones who give them the last push."

October 2006: U.S. Bankruptcy Judge Robert Faris rejects Hawaiian's request for a ban but says Mesa "probably breached the confidentiality agreement" by failing to return or destroy material it received. Faris also concludes that "at one time, Mesa hoped to drive Aloha out of business."

October 2006: Aloha sued Mesa alleging that it misused confidential information in an attempt to drive Aloha out of business.

December 2006: U.S. Bankruptcy Judge Faris throws out Mesa's countersuit against Hawaiian.

August 2007: Hawaiian accuses Mesa CFO Murnane of destroyed several computer files that included confidential Hawaiian material.


Reach Rick Daysog at rdaysog@honoluluadvertiser.com.