What really happened to Aloha Airlines

Entering its final two years of existence, Aloha Airlines was a company with two key weaknesses and two key strengths. The former overwhelmed the latter when two new negative factors came into play, leading to the collapse of the carrier one year ago today. Aloha's weaknesses were these: old planes, and insufficient cash to replace them. The jets were gas guzzlers, a particular problem on interisland flights, since the lion's share of fuel spent on a flight is spent getting off the ground, and the most fuel-efficient part of a flight is the middle when you're cruising. On interisland flights, you take off and then you land. There is no middle. The airline's strengths were its management and its employees. Its top executives were highly experienced and CEO David Banmiller had run a number of airlines with similar issues. At the next level, Aloha managers were focused and responsive. Together, and with extra effort by rank-and-filers determined to save the company, they improved performance to the point where they occasionally bumped Hawaiian Airlines from its accustomed position as the nation's on-timest airline. Then Mesa Air Group came into the market. Mesa, which makes most of its living on the mainland as an outside contractor providing regional feeder flights to larger airlines, presented itself as a potential buyer of both Hawaiian Airlines and Aloha Airlines during their last bankruptcies. Though it never bought either carrier, it got to see their books, including their strategic plans, the terms of their contracts with suppliers and codeshare partners, and the expiration dates for such contracts. One of the things this information made clear was that Aloha had a lot less cash than Hawaiian did. Mesa CEO Jon Ornstein would later tell some of his own prospective investors that he knew his go! project could succeed because he had seen the inside information on its two legacy rivals. His chief financial officer wrote and emailed a memo which said the market could not support three interisland carriers but Mesa could become one of two by using fare wars to drain one of the legacy carriers of its remaining cash. Ornstein once told me the email was a joke, but it turned out later that the email was not a few dashed-off lines but a full report with charts and everything. Ornstein later said Mesa management later came to feel the market could support three carriers. But Hawaiian Airlines later sued Mesa and won roughly $80 million in damages (settling for less in order to get cash to cover its fuel bills when jet fuel peaked last year) in a judgment that left out damages beyond the date of the decision, allowing for more damages later. Aloha also sued, and after it collapsed the prospect of damages from that suit proved to be an asset. Its mainland shareholders acquired the suit and settled for cash and part-ownership of Mesa. Mesa denied engaging in predatory pricing for the purpose of driving Aloha out of business, but I am surprised that the feds never went after the company for it. Predatory pricing is notoriously hard to prove, but this is a rare case where a memo seems to be a smoking gun. Though Aloha may have survived without the go! factor, there was a second additional negative factor, and that was the incredible run-up in fuel prices last year. As we shall see, this did not merely add mightily to Aloha's own costs, it also disrupted efforts to find a buyer for the airline. Media reports of recent days have referred to a mysterious prospective buyer for Aloha, but there is no mystery to it -- I reported many months ago that the buyer was United Airlines. The principals can't openly confirm it because they signed documents at the time promising to keep the talks confidential. But United it was. United was then the second largest airline in the world (since overtaken by Delta/Northwest) and could easily absorb Aloha's costs. United also was and is the largest single provider of air seats to Hawaii, so it could benefit more than any other mainland carrier from owning an interisland airline here. Owning Aloha would have given United the option of replacing some direct flights to neighbor island airports with service to Honolulu and an Aloha transfer to Lihue, Kahului, Kona or Hilo. This would, I might point out, save United a lot of money right now, in this recession. Aloha Senior Vice President Thom Nulty, a former senior executive of American Airlines, made a number of trips to Chicago at about this time, so I assume he was actively involved in the talks since United is headquartered there. And it's now known that Aloha's unions were involved because the two airline's union leaders had reached agreement on a structure for Aloha to continue to operate as an independent entity rather than being absorbed into United.  It all came apart in March of last year because United began to have its own cash flow problems with soaring jet fuel prices. Aloha CEO David Banmiller spent the next several days speaking with virtually every conceivable merger or acquisition partner.  Aloha had been operating with cash from its California investors, and this is when they decided to shut off the financial spigot, triggering Aloha's sudden bankruptcy filing and collapse. It could be that Aloha was doomed, with its old planes, its fuel bills, and its upstart rival prepared to operate at a deficit for longer than Aloha could afford to do the same. But it is amazing to consider how close it came to surviving anyhow.

Comments

[Greg Chilson]

Thanks for the story Howard. You're spot-on with your commentary - all of it. I appreciate your candor and clearly deliniated factual point-of-view.

[Stan]

Howard.

I think that the items that you state were the principal reasons for the collapse were only side issues to what really happened to Aloha. This comes in two points:

1. Aloha for many years was able to purchase their fuel on credit, with receivables covering the bill when they came in. When the fuel companies demanded that Aloha pay cash upon delivery of fuel, that started the slide toward shutdown. In essence, there is only so much cash that the airline had on hand, and it burned through that, and double that through Ron Burkle's bank account before things finally started to come to a head. Unfortunately, if Aloha had maybe one more year of pretty much unlimited credit, the crisis in fuel would have passed. Unfortunately, it did not; this leads me to No. 2:

2. The credit market literally collapsed for Aloha, and was the canary in the mine that should have signaled that something bigger was about to come down nationally. GMAC was one of a number of creditors who had fed money to Aloha in this time. GMAC as you know ran into trouble with its own business way before the current banking crisis, and therefore they decided to stop feeding Aloha money from its credit line. Did Aloha have a viable credit line? I argue yes, but GMAC in it's own crisis mode had to cut and sell off what it could in order for that entity to survive. Unfortunately, surviving means you have to cut long time entities that might have a return later on. "Might" in the days of $147 a barrel oil becomes "never" when your own business is quickly dying.

My father, who was a vice president for Aloha, suggested that Aloha could have survived if it had pretty much dumped the Interisland market, or really reduce it down to bare flights. Yeah, that would have meant that Mesa and Hawaiian would have taken over the market, but Aloha would have still lived with its mainland service, which by the way was making money.

There is another side to the story regarding potential buyers and purchases. Before the run up in gas prices, there was talk that ATA's Hawaii operations were up for sale, and that Aloha was one of the leading buyers for that operation - dovetailling ATA's routes and equipment to the mainland - Oakland and B-737-800's with Aloha's more expansive West Coast presence. Aloha could have gotten rid of the -700's, which were okay to operate but still problematic for long-distance overwater operations (Forman details this on his blog) and utilized the -800's that Aloha should have exchanged out once that model was ready to fly.

Unfortunately, time and patience wore out with the creditors, and on this day one year ago a Hawaii institution died. Should Hawaiian be the winning bidder on the copyright items, expect the name of Aloha to become a museum attraction in Hawaiian's terminals at Honolulu, rather than a new airline.

It is sad....so sad.

[The writer is Stan Fichtman, former researcher for Pacific Business News, who has broad knowledge of the Hawaii airline industry, especially the costs associated with the aircraft local airlines have used. HMD]

[Chris]

What a great summary of a complicated and somewhat slow death of an airline. Ever consider writing a book with Peter Forman?

[I very much hope Forman is writing his own book. If I had had the time I would have written a book about the Central Pacific acquisition of City Bank, another fascinating tale. HMD]

[El DE]

Thanks for the insight, was wondering about this...

[Mike]

Howard, you are spot on except for a few details. The management team was not an asset but a liability, it was not a good fit, Prior to David Banmiller, the start of Aloha's demise was largely on the shoulders of Mr. Glenn Zander. Both, with vast prior airline management experience with defunct airlines are equally responsible for the failure of Aloha Airlines. The lack of trust between management and labor to come together and reinforce the urgency to remake and change Aloha contributed to the shutdown. One other note is the failure of the local families of the Chings and Ings to comprehend the direction the airline under the helm of the the management teams of Zander and Banmiller. Thank you for your insight and perspective into a great Hawaii local company.

[Although I stand by my more positive assessment of Banmiller -- not so much of Zander -- readers should know that Mike's view is widely held among some quarters of the Aloha rank-and-file. I think they had a long history of blaming the brass for everything. But they were on the inside and may have seen things I never knew about. HMD]

[Mike]

Howard, I take offense to your comment, " I think they had a long history of blaming the brass for everything." That is an ignorant statement. I do not blame the brass for the demise of Aloha. It was the lack of LEADERSHIP from Management i.e. Zander and Banmiller to create and foster trust between management and labor and convey the urgent need to work together. I believe any MBA would agree that leadership is the utmost responsibility for any company CEO. As for your assessment of Mr. Banmiller ability to manage. Let the record speaks for itself. How many U.S. airlines has Mr. Banmiller managed as CEO is still in business today?

Answer: zero

[Stan]

Howard,

I wanted to at least make a general comment on the Ing and Ching families involvement in the airline and the role that Zander and Banmiller played. It is more complicated, and the four players are quite intertwined.

When Hung Wo and Sheridan died in the 90's, their heirs, Sonny, Han and the Ing families were what one could call "absentee landlords" when it came to the airline or its operations. There were stories that I heard from the rank and file of Aloha that the Ing and Ching heirs, "God bless their hearts," never had the heart to really oversee the operations of the airline. During the 90's and even during the early 2000's, there were rumors that the Ing and Ching families were looking to offload their inheritance at a good price.

My read on Banmiller's hiring comes in the form of "well, we have to try something, anything at this point" because it was widely known that Aloha's financial records from the DOT reports showed an airline bleeding as early as 2003/2004. When Banmiller came in, he did what he had to do, throw the airline into bankrupcy and pray that the process scrubbed the debt off the books (as happened with Hawaiian) for it to emerge a viable operation.

Does Glenn Zander deserve the blame? I would say partially, but it is not totally his fault. Aloha as a private entity did not give creditors (who might have been able to come in during a better credit market and upgrade the fleet, for instance) the ability to see the financials and the possibilities of investment from a public perspective. I am sure that Zander, due to the controlling interest of the Ching and Ing heirs, had his hands tied a bit trying to get new money into the airline as its CEO.

Unfortunately, nothing really came to pass, and either due to just sheer "deer in the headlights" thinking or, unfortunately, a lack of interest by the heirs to run the airline, things fell apart and the end happened on March 31, 2008.

[mitch hazama]

Howard,

Enjoyed reading your accurate synopsis on the demise of AQ. Having worked for them from 1970-2008, I was able to see alot. Your assesment of the "old fleet" and the lack of funds to purchase a new one clearly sums up the true reason for the collapse.
Believe me, we had many dedicated employees who gave their heart and soul to make the company survive but in the end, the escalating fuel prices and the gas guzzling fleet was simply impossible to overcome financially.

I will say one thing: A. Maurice Myers our CDO in the 80's and early 90's really put us on the map and his departure actually triggered our slow demise. If Maury had stayed, I'm sure he would have arranged and convinced financial institutions or investors to bankroll a new fleet of aircraft prior to the 2001 debacle that eventually led to the rising fuel costs of the decade. AQ was a great company with a wonderful history and many truly nice employees. It was a true honor to work for Aloha.