Hawaii's two carriers seem set to merge, ending over half a century of intense competition
A proposed merger between long-time rivals Aloha Airlines and Hawaiian Airlines is poised to eliminate more than a half century of fierce competition on the heavily travelled routes linking cities on Hawaii's six main islands. The two carriers also serve destinations on the mainland USA and the Pacific region.
The merger - which would create an as-yet-unnamed carrier - would combine publicly held, recently revitalised Hawaiian and privately held, weaker Aloha into a new holding company headed by Greg Brenneman, former president and chief operating officer of Continental Airlines and key architect of that carrier's turnaround. The value of the merger was estimated at almost $200 million.
Brenneman's TurnWorks, a Texas-based private equity investment firm, would hold a 20% share of the new company. Hawaiian Airlines shareholders would receive 52% of the combined company, with the investment group Airline Investors Partnership (AIP) - Hawaiian's current majority shareholder - getting 28% of the combined company and Hawaiian's public shareholders 24%.
Hawaiian shareholders also would get a six-year, 8% note with a face value of $2 per share, and AIP would receive $10 million in cash as merger consideration for its controlling equity interest in Hawaiian. Aloha's shareholders - who are members of two local Chinese families - would receive the remaining 28%.
Because the majority shareholders of both Aloha and Hawaiian are committed to the merger, the outcome of the shareholders' votes is clear. The transaction is also subject to the approval of aviation and antitrust regulatory authorities. The parties to the merger appear to have won support from most key state government officials and legislators.
Officials of TurnWorks and the two carriers maintain that the global economic downturn and a precipitous decline in tourists to Hawaii after 11 September have weakened the airlines, making a merger logical and necessary. Emissaries of Aloha had approached Brenneman last summer about a potential equity infusion, which he turned down. However, he revisited the situation with a merger of both carriers in his sights after the terrorist attacks.
The combination would bring an end to almost 56 years of strong airline competition in Hawaii. Hawaiian's predecessor was founded in 1929 and its history includes a string of firsts: the first airline in the Hawaiian Islands, the first to offer all-cargo flights and the first to have an all-female cockpit crew. Aloha's predecessor was founded in 1946 as a charter carrier and three years later became a scheduled airline, starting the intense competition that has characterised the islands' services ever since.
The combined company would be ranked the 10th largest US domestic carrier, with annual revenues close to $1 billion. Although small by US domestic airline standards, the merger has engendered considerable nervousness among Hawaii's air travellers and shippers, primarily because of the pivotal role air transportation plays in connecting residents and business people on its islands with one another, not to mention the tourism element. This inter-island service currently provides about 240 daily jet flights on routes linking Honolulu on the island of Oahu and other airports on the islands of Kauai, Maui, Hawaii, Molokai and Lanai, serving more than nine million passengers a year. Before a cutback in flights following the terrorist attacks, there were 308 daily inter-island flights.
Even after the scale-back of inter-island services, each carrier has been operating about 20 weekday non-stop flights between Honolulu and Maui, and 15 weekday non-stop flights between Honolulu and Kauai. The distances between points is not great - the longest route flown is less than 350km (220 miles) and the average is about 200km - and flight times average considerably less than a half-hour.
Inter-island bus
"You can't drive to Maui; you can't take a boat," Paul Casey, Hawaiian's vice chairman and chief executive, explained in an interview weeks before the merger was announced. "We are the local inter-island bus service." As a result, residents and shippers are worried that the elimination of competition will reduce flight services, raise fares and shipping charges and have a deleterious effect on business, resident travel and tourism. Many residents commute daily by air to another island to work, some on monthly passes costing $1,000 (or about $45-50 a day).
Brenneman says another 10-12% reduction in inter-island services is a necessity because the carriers are operating some flights at virtually the same time with few people aboard. But he has pledged to hold the line on unrestricted fares for two years and to limit hikes for three more years to increases in inflation and security charges. He also has proposed providing Hawaiian residents with access to inter-island seats at low one-way rates for a five-year period. He expressed interest in a pricing plan that would charge more for peak-period than off-peak flights.
TurnWorks expects the combined company to save an estimated $90 million from the consolidation of operations, elimination of excess aircraft and the co-ordination of schedules, ticket distribution and other functions. Though originally estimating a furlough of 10% of the 6,000 combined workforce - on top of a similar cutback following 11 September - Brenneman now is hoping to minimise lay-offs. TurnWorks has offered furlough protection to the 3,600 members of both carriers' flight-attendant and machinists unions if they would each combine their seniority lists and accept the terms of contracts recently negotiated with Hawaiian.
Merging the pilots' seniority lists may prove more difficult. The two carriers operate very different fleets, and Brenneman has been reticent on the combined carriers' future fleet plans.
Under Casey's leadership since 1997, Hawaiian has in the middle of a total transformation of the airline and its fleet. Last year, the carrier retired its entire fleet of 15 ageing McDonnell Douglas DC-9s and replaced them with 13 new Boeing 717-200s. It also began taking delivery of 16 new Boeing 767-300ER aircraft - three so far - to replace the 15 McDonnell Douglas DC-10s used on routes to the US mainland and to Tahiti and American Samoa in the South Pacific. All DC-10s are scheduled to be out of the fleet by 2003.
The airline, which carried 6.3 million passengers in 2000, garners about 52% of its operating revenues from its flights between Hawaii and Los Angeles, San Francisco, San Diego, Seattle and Portland. Hawaiian has code-share and frequent-flyer links with Continental, Northwest and American Airlines and most recently formed a marketing alliance with Alaska Airlines.
Aloha has continued to use ageing, Stage-2 Boeing 737-200 aircraft on its inter-island service, admitting that it only needs nine of 18 in service. But it now operates five new, narrowbody Boeing 737-700s on longer routes, including services to Midway, Johnston, Christmas and the Marshall Islands in the Central Pacific. It also began to use the new aircraft in 2000 to start transpacific service to Oakland and Orange County, California. In 2000, Aloha carried 5.2 million passengers, all but 200,000 on its inter-island flights. Aloha is tied exclusively into the United Airlines Mileage Plus programme.
Although there had been some diminution in air traffic to Hawaii last year before 11 September as a result of the slowdown in the US economy, the terrorist attacks had a devastating effect on traffic from both east and west. The island chain had always been a popular holiday spot for the Japanese, but after the terrorist attacks and anthrax mail scares, traffic from Japan halved.
Troubles in paradise
Passenger traffic on the inter-island services had also suffered as US carriers began operating flights from mainland cities directly to those on the islands of Maui, Kauai and Hawaii, resulting in a loss of passenger traffic from Honolulu to the islands. Even Aloha cut into the volume of its inter-island services by starting services to Kona, Hawaii, and Maui from its US gateways. Hawaiian serves primarily Honolulu although it has plans to start non-stop service from Seattle to Maui in mid-March.
The two carriers' inter-island services also suffered in a much more exaggerated way from the new security regulations and costs imposed after the 11 September attacks. Because so many Hawaiian residents use the flights as "buses", they often take one-way tickets, buy them at the last minute and use cash receipt-like "coupons," available from banks and ATM machines, and often do not carry baggage. All these elements "select" the travellers for security under new US federal security regulations.
Upon consummation of the merger, both Casey and Glenn Zander, Aloha's president and chief executive, would retire. Aloha has been struggling financially - it lost $1.2 million in last year's third quarter - while Hawaiian's fortunes had considerably improved; after two years of losses, the airline reported a net profit of $12 million in the third quarter.
Most credit Australian-born Casey with Hawaiian's revitalisation. A veteran of Pan American World Airways and Continental, he joined Hawaiian after heading the Hawaii Visitors and Convention Bureau. "It's been four and a half fun-filled years," he says.
"I came in with a mandate to generate revenue and try to instil a sense of trust between management and labour which hadn't existed for a long time," he says. "In general, I think we've accomplished both."
With the merger between Hawaiian and its long-time competitor probable, the new company's owners may have to instil that sense of trust all over again.
Source: Airline Business
