First it was a Japan Airlines subsidiary taking a stake to help Hawaiian buy time in 1988. Then the Ueberroth brothers rode to what seemed the rescue with a posse of California investors. But by 1990 Hawaiian had to sell another stake and five international routes to Northwest to raise cash to keep going.
Two years later, Northwest pulled out when Hawaiian capitalised debts to satisfy creditors. By 1993 Hawaiian was begging its state government to back a bail-out loan. Then it filed for bankruptcy, cancelled all shares, and issued new ones to its latest batch of creditors.
When the airline emerged from Chapter 11 in September 1994, it was debt-free but still cash-poor. A year ago a New York group called Airline Investors Partnership fixed that.
But how long will this latest fix last? Hawaiian may be paying off debts ahead of schedule and heading for what is its first profit in 11 years, but has it solved its chronic problems that, like some Polynesian taboo, repeatedly turn pillars of optimism into sand?
If appearances mean anything, there has indeed been a course correction. Employees no longer change out of uniforms before leaving work to avoid embarrassing association with an airline whose acronym, HAL, stood for 'Hawaiian Always Late.' It used to have one of the worst passenger complaint records, but Hawaiian now rates among the best five US carriers according to the readers of Travel & Leisure and it has landed several other service awards. And after operating losses of nearly $350 million in six years, the company achieved six consecutive quarters of operating profit between April 1995 and September 1996. 'Our balance sheet is now one of the strongest in the industry,' boasts Bruce Nobles, who became chief executive officer just before Hawaiian's bankruptcy. 'We are apparently the only US airline with positive working capital.' On 30 September Hawaiian's working capital stood at $85 million.
The tide began to turn at Hawaiian Air at the end of January 1996, when the carrier succeeded in tying together the strands of four disparate interests - labour, lessor, shareholders, and new investors - in a package that produced $20 million in new equity and laid the basis for a further injection of $39 million seven months later.
This package required concessions from three of the four groups. First, the unions agreed to extend labour contracts until February 2000 and boost productivity without further negotiations or across-the-board pay rises. Then American Airlines, lessor of Hawaiian's nine DC-10s, agreed to take lower lease payments for three years, to waive any security deposits, and to accept a five-year $10 million note in lieu of delinquent payments. Finally, Hawaiian's creditors-cum-shareholders agreed to dilute their interests by authorising more shares and allowing the new investors to take control and chair the board of directors.
As part of this package, Hawaiian gave its employees a profit sharing plan, and agreed to a labour-management work evaluation process. It gave American a lien on all assets plus warrants to buy Hawaiian shares later at the same price offered to the new investors. Finally, to mitigate the dilution of the existing shareholders' equity, the company agreed by mid-year to offer shares only to them so that they could buy back part of their lost control at a discount. With all these pieces in place, Airline Investors Partnership paid in $20 million for an 83 per cent equity stake in Hawaiian Airlines.
Last August, as agreed, Hawaiian offered 12 million shares to all other shareholders, who bought the entire offering and regained a slim majority for $39.3 million. So, with two equity injections in seven months, Hawaiian almost tripled its working capital and could end the old practice of selling discounted tickets to raise cash.
American Airlines could still buy a stake, but this seems unlikely. Half of its warrants have technically expired. American could exercise them only until the end of 1996 and then only if it had entered a codeshare pact with Hawaiian; American' pilot dispute shelved plans for that. Hawaiian extended the deadline for American to exercise its warrants until 31 January, but even that date passed with no resolution. Moreover, buying into Hawaiian would be uncharacteristic for an airline that has shunned most such arrangements.
Following the rights offering, Aviation Investors Partnership remains in effective control with a 49 per cent stake. So long as it owns 35 per cent of Hawaiian's stock, it may keep six seats on Hawaiian's 11-member board. AIP is a limited partnership controlled by Smith Management Co, which is owned by Randolph Smith. Smith's partner, John Adams, is AIP's general partner and chairman of Hawaiian's board. The funds invested in AIP come solely from Smith Management, which has owned banks, healthcare services, and a hotel management firm but never an airline. According to Nobles, Smith's strategy is to invest in good but undercapitalised companies with 'great upside potential.'
Based on the amount AIP paid for its stake in Hawaiian and its value on today's market, Nobles reckons that AIP has already tripled its investment, but he says AIP is unlikely to sell out soon. 'They don't think we've reached our optimum value yet,' Nobles reports. Smith Management's view, he claims, is that 'Hawaiian has now completed its transition and is poised to go out and be successful.'
Nobles certainly takes that view. He sees last year's effort as the final step in a restructuring that started in 1993. That was when Hawaiian withdrew from unprofitable South Pacific routes and signed a series of service agreements with American Airlines that led to phasing out its L.1011s in favour of DC-10s. It also marked the year when Nobles started taking Hawaiian through bankruptcy.
'We developed a fleet strategy, went from four aircraft types to two, negotiated work-rule adjustments with our employees, and cleaned up our balance sheet.' Last year's recapitalisation, says Nobles, 'was the last piece in this bigger transaction.'
Some analysts agree. Raymond Neidl of investment bankers Furman Selz sees this latest recapitalisation as different from earlier, less effective ones. 'Management has done a good job of reorganising the company. They've taken the action needed to turn it around.'
Nobles does not foresee the need for more structural change. Now he is tweaking - working on Hawaiian's first yield management programme, a better accounting system, a line of bank credit at commercial rates, and, most important, tying down a codeshare alliance with American Airlines.
In the past year Hawaiian has entered codeshare deals with Northwest Airlines, Reno Air, and American Eagle carrier Wings West. But inter-island rival Aloha Airlines shares codes and frequent flyer reciprocity with United Airlines, which has dominated West Coast-Hawaii routes for 50 years. Few of the thousands of tourists who arrive in Honolulu on United are likely to switch to Hawaiian for their flight to Maui. Together, Hawaiian's alliances with Northwest and American would match the Aloha-United combination, but that must await a settlement between American and its pilots.
This highlights Hawaiian's lingering vulnerability. United is still number one on the mainland-Hawaii routes, and Aloha is now number one on the inter-island routes. Yet one of Nobles' business axioms is: 'you need to be number one in your markets.'
'We need to capture another 5 to 10 per cent of the mainland-Hawaii traffic to be number one in that market,' Nobles explains, but he cannot identify how to accomplish that. 'We can't raise fares, or lower costs, or raise our loads, which are already at a breakeven point around 80 per cent.'
Hawaiian has looked at other potential mainland gateways to Hawaii, but finds few. Delta abandoned San Diego as unprofitable despite no competition, so Nobles is not anxious to retry that. Hawaiian has started Portland-Honolulu, but Nobles is still not sure it justifies daily service. The carrier has launched twice-weekly Seattle-Maui flights, but they must return via Honolulu because outer island runways are too short for a full widebody. Sticking with 304-seat DC-10s limits Hawaiian to bigger markets. 'We already serve all the major markets to Hawaii,' Nobles says. 'There are no other places where we can be number one or two and still make a profit.'
If Hawaiian cannot feed more mainland traffic to its inter-island routes it must build them some other way. Historically, Hawaiian and Aloha Airlines have battled each other for dominance on those busy routes. In 1988 Hawaiian carried 57 per cent of inter-island passengers but its share plunged to 35 per cent in 1991. Today Hawaiian flies 47 per cent of the seats but only 38-43 per cent of the passengers, depending on whose numbers one accepts.
'We're closing the gap' between ASMs and RPMs, says Nobles, who concedes he needs more aircraft to match Aloha's frequencies. Nobles wants several more DC-9-50s like the 13 Hawaiian already operates, but could use DC-9-30s.
Hawaiian's inter-island breakeven load factor is only in the low 50s, but again, there is little Nobles can change. 'It's hard to raise yield by raising fares in such a competitive situation. We can't lower costs; all the pressures are in the other direction. So the only thing we can do is carry more passengers, which is especially hard in such a short haul, high frequency market.'
His rivals seem to recognise the same thing. Mahalo Air, the third inter-island carrier, has backed away from any goal it ever held of grabbing a bigger slice of the market (see next article).
Douglas Caldwell, the turboprop operator's vice president of sales and marketing, maintains that: 'Taking on Aloha or Hawaiian would be a bloodbath. If you want to go through that kind of money, there are more fun ways to do it.'
It seems that conditions have reached a state of equilibrium - or, depending on one's view, a stalemate. Hawaii is a highly competitive, price sensitive leisure market that has stopped growing. Recognising that, once it finds a few more DC-9s, Hawaiian plans to acquire no more aircraft. Stage 3 noise rules do not apply in Hawaii, but Hawaiian will start facing higher aircraft lease payments in two years when its reprieve from American Airlines ends, and only a year later it must face five long-suffering labour unions who have seen no across-the-board pay rise since the early 1990s.
And yet, there seems little it can do to improve its lot. It has no control, for instance, over the number of US arrivals, which have been flat since 1989. In can do little to boost Japanese tourists, a Hawaiian mainstay, because they are staying home due to the yen's depreciation. As analyst Raymond Neidl notes: 'If the economy and tourism cooperate, Hawaiian should do alright.' And it can do nothing, of course, about its competitors.
'We can only continue the momentum we started in the last couple of years,' says Nobles. 'We need a strong balance sheet, low cost structure, quality management, and efficient employees. We must have these things because we're a high density, low yield airline subject to influences we can't predict or control.'
Even if Hawaiian has finally rectified its internal difficulties, it resembles many other carriers in that it can never completely escape or control the overbearing influence of external events.
Source: Airline Business
