Howzit Howard

Complex impact from Aloha shutdown

The twilight of Aloha Airlines, if it cannot be halted or undone rapidly, will affect the whole state. For example, there are 500 Aloha employees on Maui, where it is the 11th largest employer. Almost 2,000 employees statewide face layoff even though the cargo operations are continuing. Gov. Lingle injected an interesting note Sunday evening when she announced she will ask the bankruptcy judge to order Aloha NOT to shut down until it can show it has exhausted all options. She alluded indirectly to a state law requiring more notice of major layoffs than Aloha has given. But since federal law supercedes state law it would be wise not to assume will automatically save the day. Sources close to the situation say what was different this time, as opposed to the last bankruptcy, is that the capital markets are tighter as a result of the mortgage default crisis, so potential white knights can't access cash as easily as before. In other words, what was different this time was not anything different about Aloha but something different about the rest of the world. Aloha wasn't much changed. Sure, its aging fleet is even more senior than before, and soaring jet fuel prices made that an even bigger deal than formerly, but in many respects the airline operates more economically and efficiently than before. And let's not forget the very real possibility of a substantial monetary judgment if it won its pending lawsuit against go! parent Mesa Air.

Is this an opportunity for any other airline?

If Aloha is unable to find sufficient funds to relaunch its service, who benefits? A little-known fact about the interisland fare war is that go! took a lot of its market share from Aloha Airlines, while Hawaiian Airlines held onto substantially all of its own market share. With higher labor costs but more fuel-efficient jets than Aloha, Hawaiian can afford to add interisland capacity. On Sunday afternoon, CEO Mark Dunkerley announced he was adding 6,000 extra interisland seats effective Tuesday -- a combination of more flights by the existing interisland fleet and putting one wide-body jetliner into interisland service -- to accommodate stranded Aloha passengers. But that still leaves open the question of what Hawaiian will do in the longer term. It's not economical to leave a wide-body jet in interisland service forever. Hawaiian might be content to fill up its remaining seats and leave the rest of Aloha's interisland traffic to go! and smaller carriers. If it works that way, there could be a little more traffic for go!, Island Air, Pacific Wings and go!Express, while all of them plus Hawaiian could afford to charge more. It wouldn't necessarily the partially-free ride we've had in the fare war, but you might see incremental increases to cover more of the soaring fuel bill. Jet fuel is an even bigger chunk of interisland flying than long distance flying because most fuel is used taking off, regardless of the length of a flight. For trans-Pacific service, Hawaiian has an opportunity to pick up some Aloha capacity, but not everywhere. Take Los Angeles. Hawaiian flies to LAX in competition with virtually every major mainland carrier, while Aloha has flown to John Wayne International Airport in Orange County. I always enjoyed flying that route because John Wayne is never too busy and can walk across the street to your rental car. But Hawaiian's jets are too big for the runway. San Diego might be a better opportunity. Hawaiian flies there already but could add capacity to make up for the loss of Aloha, in a healthy market where tourism officials could probably develop more visitor traffic. Aloha has also served Reno by extending its flights to other cities. I don't know much about the Reno airport or market but it seemed like Aloha never prospered enough there to maintain direct service. In his Sunday news conference, asked directly if he was considering expanding to corridors served only by Aloha, Dunkerley replied that he's not focused on that at the moment but he made a point of mentioning that Hawaiian flies to other cities not far from Aloha markets. That's true. Hawaiian doesn't fly to Orange County but it flies to LAX. It doesn't fly to Oakland but it flies to SFO and San Jose. It doesn't fly to Reno but it flies to Sacramento. Dunkerley has always struck me as a complex thinker. I think he has thought this out, several moves ahead. And I think he has no firm view on what to do, and won't, until he has a key piece of information: what it would cost him to lease an extra jet or two. And not from Aloha, since those planes are thirsty ones.

Auwe! Aloha to cease operations

 "We simply ran out of time," said CEO David Banmiller, in his Sunday announcement that Aloha Airlines would cease operations Tuesday.It hadn't been announced and it wasn't widely known, but while others at Aloha Airlines were dealing with creditors and the bankruptcy court, Banmiller was working around the clock courting prospective investors or merger partners. To an outside observer it looked promising. The Sunday announcement, even before a Monday hearing on longer term debtor-in-possession financing, showed that it did not bear fruit, not necessarily because no one was interested but because no one could move fast enough to save the day. Aloha had three things goings against it, but other things going for it, and with more time it probably would have found a buyer.The negatives:

1. Jet fuel has risen by two thirds in the past year.
2. Aloha has an older fleet -- gas guzzlers, in other words.
3. Mesa Air, parent of go!, continues to wage the fare war that, according to an email by its former chief financial officer, may have been designed to produce precisely this result.

Aloha had these things going for it:

1. Its mainland routes are mostly successful and could be profitable even at current fuel prices with more fuel-efficient jets.
2. It has enormous brand loyalty in Hawaii and among Hawaii ex-pats on the mainland. Aloha was founded by ethnic Asians at a time when Hawaiian bumped some people for others, and this led to some family loyalty that exists to this day.
3. While others have spoken of the contracting interisland market, the fact remains that there is enough interisland business to support two carriers if, again, the jets are fuel-efficient. Some people just won't fly smaller aircraft between islands and are not lured by go!, Island Air or other players at any price.
4. Later in the year it has a suit against Mesa, which already lost an $80 million judgment against Hawaiian. Aloha could use the same evidence Hawaiian found, including the smoking gun email, which, while described at one point as a joke, was backed up by charts and graphs showing how to use Mesa's deeper pockets to muscle Aloha to the sidelines. (The eventual judgement could even be larger than $80 million since the judge refused to award damages for current or future operations, only for demonstrable predatory pricing going back in time.)
5. Aloha is second only to Hawaiian as the most on-time airline in the republic, and has the lowest complaint ratio of any airline.

Other media have recommended against what they called a state bailout for Aloha, but two points should be made. First, the state bailed out Hawaiian Airlines with loan guarantees not so long ago, so it would have been unfair not to extend similar assistance to Aloha, not for its sake but in the enlightened self-interest of saving 3,500 jobs. Second, a key bit of assistance that the legislature was moving to offer -- and it needs to be said, the legislature was really moving quite rapidly, even if it proved not fast enough -- was merely to level the playing field in one key respect. Current law taxes interisland jet fuel but not jet fuel expended to fly out-of-state; exempting interisland fuel from taxation makes economic sense for an archipelago state. Even now I wouldn't rule out a relaunch of Aloha by a new owner using more fuel-efficient jets. I haven't looked into their economic ability to manage such a deal this year but from an operational point of view it would be interesting to see such a deal with Southwest, Alaska or JetBlue. I would add JAL, ANA or even Qantas, KAL or PAL, but there is a U.S. law barring majority ownership of a U.S. airline by foreign interests.

Always look on the bright side of life

I know that anyone who likes Monty Python will read this post after recognizing, as its headline, the title of the song that the condemned men sing and whistle while nailed to crosses in "The Life of Brian." My former Pacific Business News colleague and Hawaii Public Radio alum Chad Blair discussed it with Ian Lind, who mentioned it recently on his blog http://ilind.net. If you did not see it, "Life of Brian" was widely slammed as a satire on the life of Jesus. Though an irreligious man myself, I found it more pointedly directed at extremism and fatuity, therefore supportive, in a mischievously underhanded way, of religion's finest traits, including faith. Seeing it reminded me of a news conference I covered when Rev. Jerry Falwell, come to national celebrity as head of the Moral Majority, called a news conference to denounce TV shows that undermined family values. Falwell and some other guy offered a list of the worst shows. Reporters didn't understand and asked who was surveyed. No one was surveyed; they made the list up -- examples of bad shows. Like that sitcom where a single mom was raising two daughters and one of them ran away with her boyfriend. It set a bad example. Wait a minute, I said. I saw that show. At the end of the episode, she had learned her lesson and returned home, giving a fairly eloquent speech about the reasons why what she did was wrong. The last scene could have been written by the Moral Majority. Wouldn't that make it an example of good television from their point of view? Rev. Falwell looked at the other guy. The other guy said maybe so. I didn't press the point, being impressed he didn't try to talk his way out of it. But I never forgot how easily, and with so little thought, people could condemn something as wrong-thinking. Even I'm capable of considering something to be arguably sacriligious. I'm one of the few people who actually read Salman Rushdie's "The Satanic Verses," and to me it was unquestionably sacriligious. It's also hilarious, but that's another thing entirely. I just think that reserving judgment on such things might be a good idea once in awhile. I could live without sitcoms but I wouldn't want Rushdie novels or Python movies banned, because then someone would probably ban "The Screwtape Letters" by C.S. Lewis and then where would we be?

Hawaii, sugar, and biofuel

There is a lot of excitement in Hawaii about using agricultural lands to grow fuel. This excitement is not unwarranted, provided everyone keeps a clear head. Otherwise we could go through the old rollercoaster cycle of exaggerated promises, disappointment, and cynicism about real prospects. Gay & Robinson, the Kauai sugar producer, is looking at growing sugar for fuel. Alexander & Baldwin's Hawaii Commercial & Sugar, the Maui grower of turbinado cane for "Sugar in the Raw," sees potential in burning sugar cane waste to produce biofuel or electricity. There has been active discussion of biofuel production on Oahu. This has run parallel to mainland enthusiasm about ethanol made from corn. On Wednesday, the largest European oil company, Shell, announced it was launching a venture to explore the use of sugar cane to make gasoline. Hawaii has some things going for it, and some things going against it, if this sort of thing goes further. First the negatives:

• Land is scarce, land costs are high, and any company growing fuel in Hawaii will find that some of its costs are higher than in Iowa.
• Farmers in Midwestern states have political clout because of their numbers and their big contribution to breadbasket economies. Here, farmers are a minority economic sector.
• We seem to be married to the idea that if we grow fuel we will do it with crops that we traditionally grow like sugar and pineapple. I hear certain grasses may actually be more efficient here.

Here are certain things working in Hawaii's favor:

• While the whole country frets about "energy independence," we also are concerned with "food independence," which leads us to feel protective toward all local agricultural operations. This can offset the small size of the ag sector and bring legislative support.
• The fact that land is scarce, and that a great deal of very nice land is under heavy development pressure, has made support of farming a strategic maneuver for land use planners: tying land up with farming puts it off-limits to development, and usually farmland looks almost as scenic as land left well and truly alone.
• We're a tropical clime and can grow several crops a year on the same field, while a similar farm in a temperate zone is fallow in winter.

I note with interest that corn, wheat and certain other agricultural commodities cost several times what they did a year ago, because of growing global demand for these crops for human food and animal feed, combined with the added demand of biofuel operations. The whole idea that ethanol was a viable idea was based on cheaper prices, and the only reason this hasn't been more of an issue is that oil prices on the New York Mercantile Exchange have been soaring along with the stuff they buy and sell on the Chicago Board of Trade. Proponents of biofuels always stress that existing engines can safely switch to the new fuels. At this point I'd be equally concerned that a biofuel plant at Campbell Industrial Park can safely switch from burning sugar cane chaff to something else if sugar prices skyrocket.

The Ilikai: see what develops

Since it has come to my attention that some mainlanders have become regular readers of this space, I begin with this: remember the beginning of "Hawaii Five-O"? Steve McGarrett (Jack Lord) in his trademark blue suit is standing on the balcony of a tall building looking intently at the camera, which appears to be on a helicopter. Remember this? O.K. That's the Ilikai. As you drive across the canal into Waikiki on Ala Moana Blvd., the first hotel on the right is the Hawaii Prince. The Ilikai is the second. Brian Anderson, his daddy a famous developer on Kauai, bought the Ilikai with plans to renovate it and make it a mecca for hip young singles. He's been frustrated at approximately every step of the way. Anderson has now canceled his original plan, complaining that he did more than a dozen versions of the plan without ever winning the support of the people who own individual units within the original three-wing hotel. He was going to renovate their units without charge but now he won't. He'll renovate the units he owns -- roughly a third of them -- and leave the common areas as they are. He had a vision for the common areas. But others like the common areas. What they don't like is the way Anderson allowed the second building, called the Marina Tower, is fall into separate ownership. Those mainland investors control the common pool. The owners of the Japanese restaurant that used to be there were upset because construction work in the common area made many people think they were closed. As you can see, the lack of unity among owners and tenants has gone far beyond even what is seen at other hotels. Anderson is not blameless. His basic idea is flawed. How do you brand a hotel as a Young and the Restless mecca when the back doors open onto a parking lot instead of a beach? The independent unit owners and Local 5 of the hotel workers union scheduled a protest demonstration Thursday. Meanwhile, the management laid off two thirds of the remaining housekeeping staff, citing very low April bookings that could lead to an occupancy rate of 30% or less.

Hawaii per capita income rises

Hawaii's inflation rate slowed in 2007, and is expected to slow further this year. Now we're told that per capita income rose at a good clip last year.  Hawaii personal income rose 20% more than inflation last year, the Commerce Department reported Wednesday. Hawaii had a per capita income growth rate of 6% last year, tying for eighth place with Massachusetts and Iowa. Louisiana was first (9.2%) as it rebounded from Katrina, New York was second (7.6%), and Mississippi was third (6.7%) due to recovery from the hurricane. Connecticut (6.6%), North Dakota (6.4%), Wyoming (6.3%) and Utah (6.1%) also outperformed inflation. If you want to nyah-nyah someone, the lowest per capita income growth rates, below 4% and therefore well below inflation, belonged to, in increasing shallow-pocketedness, Colorado, Michigan, Nevada, Delaware, Tennessee and Arizona. Nationwide income grew 5.2%, btw. These are percentage rates of increase and have nothing to do with per capita incomes in actual dollars. Here are the states ranking highest for that:

1. Connecticut: $54,117.
2. New Jersey: $49,194.
3. Massachusetts: $49,082.
4. New York: $47.385.
5. Maryland: $46,082.
6. Wyoming: $43,226.
7. California: $41,571.
8. New Hampshire: $41,512.
9. Virginia: $41,347.
10. Colorado: $41,042.

Thank God for Small Favors Dept.: Hawaii didn't make bottom 10, either. Don't read too much into this, good or bad. Your personal income and inflation rate will never gibe precisely with the formulas the government uses.

Extra credits (in books)

A really nice guy I used to work with at the Mutual Broadcasting System wrote a book called "Tape: A Radio News Handbook," which was used as a textbook in some college broadcasting programs despite being written in plain English by an actual working newscaster. During the years I knew him, his publisher induced him to write a new edition of the book, and he asked me to review a copy of the manuscript and make suggestions. Now, Samuel Johnson told his Boswell of a college professor who gave this advice to write well: go over what you have written, find the part of which you are proudest, and take it out. In this case, I urged my friend to remove my favorite part of his book. It told how to disable the phone in a phone booth so no one can use it but you. The idea was to ensure access to a phone when a dozen reporters rush out of a courtroom trying to file stories at the same time. This was before cell phones. I was afraid the telephone company would sue him over something like that, and suggested he take it out. He did, and put me in the credits for the book. It was the first time my name had appeared in a book. The second time just happened, in Jill Engledow's "Island Life 101," subtitled, "A Newcomer's Guide to Hawaii." Engledow, a Maui resident who first came to Hawaii when she was 13, seeks to tell Hawaii's stories from all the key points of view. She asked permission to mention a thesis I propounded in a Pacific Business News column, itself based on an earlier speech, suggesting that the Big Five corporations of Hawaii, which once controlled life in the state, had been replaced by five new power centers: the banks, the unions, the military, environmentalists, and Native Hawaiian activists. It's all on page 62, where Jill also accuses me of being "an astute observer." I deny being guilty of this more than some of the time but it's for no want of trying. The book, which has been out for about a month, is published by Maui Island Press. As for "Tape: A Radio News Handbook," I think it's time for my friend to work on a digital editing handbook.

A tale of two shutdowns

Outrigger is closing a Waikiki hotel, probably for more than a year, to thoroughly renovate it. No one is being laid off. Molokai Ranch is shutting down, laying off 120 people, after seeing it might not win immediate approval to build hundreds of homes on the southwest corner of Molokai, around La'au Point. What's the difference between the two companies? The answer turns out not to be financial health, because there is way more wealth behind Molokai Ranch than behind Outrigger. The difference is that Outrigger is based in Hawaii while the ultimate owner of Molokai Ranch lives in Malaysia. I'm not saying he's some kind of evil guy, only that it's human nature to care about what happens in your backyard and less about stuff that happens several time zones away from you.  Molokai Ranch is owned by Molokai Properties Limited, and it in turn is owned by GuocoLeisure, an international investment company based in Singapore. GuocoLeisure's parent company Guoco Group is traded on the Hong Kong Stock Exchange, but its ultimate holding company is Hong Leong Co. of Malaysia.  The top five executives of GuocoLeisure make $500,000 a year or more. Deputy Chairman Philip Burdon is a former New Zealand minister of commerce. The man at the top of this empire is Quek Leng Chan, whose net worth, according to Forbes magazine, is $2.9 billion. Guoco Leisure describes itself as "an active investor with strategic shareholdings and active investment management aimed at extracting and maximizing shareholder value." It owns or operates 39 hotels in Britain, owns a resort on Fiji, and has a stake in some oil and gas holdings in Australia. In 2007 the company made a profit of $13 million, down from $57 million in 2006. It said in its annual report that the Molokai operation would remain cash positive through 2007 through the sale of "non-strategic subdivided land" and the sale of a large agricultural parcel to Monsanto. The parent of the parent, Hong Leong Group, is one of the largest conglomerates in Malaysia, into construction materials, furniture and newsprint. It owns one of the world's largest semiconductor subcontract assembly operators. It is the Malaysian maker of Yamaha motorcycles. My take on the tycoon, based on his own publicity, is that he might easily have bought Molokai Ranch and turned it over to the residents of Molokai as a charitable act if it had occurred to him or been presented to him that way. Instead it was presented as a development investment so he and the rest of the company have been focused on "extracting value." There was anguish over the La'au Point proposal even before the opposition to it cost 120 jobs. Opponents knew all the people who work for the Ranch -- everybody knows everybody else on Molokai, which has a population of only 7,000. They knew the company wasn't happy with subsidizing its hotel, golf and ranching operations with land sales. I'm not sure opponents thought the owners would close everything, even though they threatened to more than once, perhaps believing that no business could be so petulant. It could. It not only announced full closure, it made a point of saying it would padlock the gates, which means it will be limiting access to La'au Point. I've walked out to La'au Point and the only reasonable way to get there begins with a drive over roads on Molokai Ranch property. Outrigger, by contrast, has worked hard through the entire Beach Walk renovation to save as many jobs as possible, and has some very loyal employees as a result. In fairness, Molokai Ranch employees were loyal, too, working gently but persuasively in the community to argue that 200 homes at La'au Point, coupled with the permanent set-aside of a very large amount of land, would be a better outcome than anything else that might happen. They failed to persuade the community only because the compromise seemed based on a sense of the inevitability of development and the unavoidable change to way-of-life, and residents just weren't ready to accept that. If Quek Leng Chan lived on a beautiful island like Molokai, he might not find it easy to take, either.

Why Wall Street ' s concerns needn ' t be yours

Bear Stearns shareholders are fairly happy now. Instead of getting $2 a share for their stock, they'll get $10 a share. J.P. Morgan quintupled its offer after investors, apparently considering $2 too much of a fire sale price even amid the current credit crisis, began buying shares of the company. Even though $10 a share is still only a third of what Bear was trading for  on the Friday before the Fed brokered the Morgan deal, Wall Street grew positively giddy about the change, and the Dow rose more than 200 points. The dollar stopped falling and and crude oil fell to $10 less than its record. Giddy-up! There was other good news. Sickness is healthy for Walgreen's, which reported 5% higher same-store sales on heavy ring-ups at the drug counter. And Tiffany stock rose 11% on news that its profit fell 16%, because investors expected worse. An analyst predicted that Bank of America will post a $6.5 billion loss, but that didn't seem to bother investors so much. Wall Street was in the mood to be in a good mood, and picked good news to react to. So, should you be giddy as well? Your household and your business will be driven mainly by the price of fuel, which is mostly driven by demand. It's true that most of the recent run-up was driven by institutional investors pulling money out of the stock market and putting it into oil futures, and now some of that money is going back into stocks. But mostly oil costs more because the world is clamoring for more of it. Your own finances could also be affected by what happens to tourism -- a cool, gentle easing that the local economy can handle, or something more precipitous. It's worth noting that Wall Street is a mob, and tends to overreact to news in both directions. A week ago the Bear Stearns cash crunch felt like some kind of death knell. Now some are acting like everything is fine again. We weren't crashing then and we're not fine now. Let's be measured in our response.