=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2004/08/06/f= inancial0910EDT0042.DTL --------------------------------------------------------------------- Friday, August 6, 2004 (AP) Hawaiian air attracts interest SUSAN CAREY, The Wall Street Journal (08-06) 06:10 PDT (AP) -- With few exceptions, investing in airlines is a treacherous pursuit. Hen= ce the joke: How do you become a millionaire? Start with $1 billion and buy an airline. Yet Hawaiian Airlines, which has been in bankruptcy-court protection for the past 16 months, is attracting interest from potential investors who want to bring it out of Chapter 11 bankruptcy-court protection this year. Unlike far bigger rival UAL Corp.'s United Airlines, which also is parked in bankruptcy court, or Delta Air Lines and US Airways Group, which are threatening to file, Hawaiian is profitable and expanding, and its biggest restructuring efforts are behind it. Though two formal reorganization plans already have been filed in U.S. Bankruptcy Court in Honolulu, five potential investment groups last month proposed competing outlines of reorganization plans. The bankruptcy trustee overseeing Hawaiian and the airline's creditors' committee are narrowing the list, hoping to team up with one of the investor groups by the end of this month and lob in a joint plan of reorganization. That is a lot of attention for an airline that is in its second trip through Chapter 11, produced just over $700 million of revenue in 2003 and recently marked its first full year of monthly operating profits in its 75-year history. But Hawaiian, which has about 50 percent of the market of interisland flights in the Aloha State, is the second-largest provider of service between Hawaii and the U.S. mainland. It also flies to Sydney, American Samoa and Tahiti and is seen as a relative jewel in the troubled industry. "It's small. It's easy to understand. It's not an enormous investment," says Larry Hershfield, founder and chief executive of Ranch Capital LLC, one of the investor groups preparing a reorganization plan. Ranch, backed by 10 hedge funds, spent $41.4 million in June to buy 10 million shares of the airline's parent, Hawaiian Holdings Inc., in a privately negotiated transaction with its then controlling shareholder, AIP LLC. Hawaiian Holdings, whose stock is traded on the American Stock Exchange, didn't file for Chapter 11 last year, but its Hawaiian Airlines unit filed in a bid to renegotiate the terms of its aircraft leases. Dissatisfied with the two plans already filed with the court, the bankruptcy trustee, Joshua Gotbaum, and the airline's creditors opened up Hawaiian to a beauty contest of other potential investors. More than 25 signed confidentiality agreements. Thirteen then filed formal preliminary expressions of interest. Four proposals ultimately were submitted, say people familiar with the process, including plans from: Wexford Capital LLC, a private-equity and hedge-fund manager that owns regional carrier Chautauqua Airlines; American Capital Strategies Ltd., a buyout and financing fund; investment bank Jefferies Group Inc.; and Indigo Partners LLC, a private-equity firm that was founded by the former chief executive of America West Airlines and that sometimes does deals with a founding partner of Texas Pacific Group. Two weeks ago, Mr. Gotbaum said he and the creditors will continue to wo= rk with two of the four finalists, in addition to reviewing a proposal from Ranch, which now controls Hawaiian Holdings. People familiar with the matter believe the two finalists are Jefferies and Indigo. Jefferies declined to comment, as did Indigo. It is possible that Wexford and American Capital could file improved plans of their own, independent of the trustee and creditors. Wexford and American Capital also declined to comment. For now, it looks as though Ranch Capital is the one to beat. Hawaiian Holdings' former controlling shareholder, AIP, is led by John Adams, the airline's former chairman and chief executive. As part of the deal with Ranch, Mr. Adams agreed to vote AIP's remaining 4.2 million common shares and 100 percent of the preferred shares for Ranch, giving the new investors control over the airline's parent. As a result of Ranch's purchase, Mr. Adams stepped down and Mr. Hershfield, Ranch's chief executive, is now chairman and chief executive of Hawaiian Holdings. A few days ago, Donald Carty, the former chairman and chief executive of American Airlines parent AMR Corp., purchased 350,000 Hawaiian Holdings shares for $2 million and was elected a director, joining Mr. Hershfield and another Ranch principal on the board. Mr. Carty didn't return phone calls. Ranch is betting that Hawaiian Holdings' existing equity will have value if the company's reorganization plan allows it to emerge from Chapter 11 with "reasonable costs and a reasonable balance sheet," Mr. Hershfield says. Ranch hopes to persuade the airline's trustee to support its reorganization plan, which "will include an additional equity investment," he adds. If Mr. Gotbaum and the creditors back another plan, Mr. Hershfield said, Ranch "most likely" will file a competing plan with the court by the Aug. 30 deadline. Hawaiian Holding shares, which traded as low as 65 cents a year ago, took off like a rocket after Ranch made its purchase, paying $4.14 a share. The shares reached a 52-week high of $7.40 each on June 30. Yesterday, the stock fell 16 cents, or 2.5 percent, to $6.26, still bullish, on Amex. Such a run-up for a stock that could be canceled when the airline steps out of Chapter 11 is raising eyebrows. "I can't think of any situation when an airline's stock had any value when it emerged from bankruptcy," says Betsy Snyder, an airline bond analyst for Standard & Poor's Corp. Already on record with a reorganization plan is aircraft lessor Boeing Capital Corp., which teamed up with Corporate Recovery Group LLC in a proposal to invest $30 million in new capital in the airline, give major investors subordinated notes and new stock warrants and smaller creditors cash settlements of 50 cents on the dollar, and extinguish the existing shares in Hawaiian Holdings. But as the airline has thrived in Chapter 11, that plan, filed with the court in February, began to look too skinny and the two proponents have said in recent court filings they intend to sweeten their offer. The Boeing Co. unit, which leases 14 of Hawaiian's 25 jetliners, could jump to another investor group. But Corporate Recovery Group, a Wilson, Wyo., turnaround firm that raised the $30 million to back the bid, would have the right to match that competing plan and would be in line for a $3.5 million breakup fee from Boeing Capital. The second plan already filed with the court is more quixotic: It was put forth by a group led by a Hawaiian Airlines pilot, and proposes no outside capital for the carrier -- just raising money from existing shareholders and employees. Mr. Gotbaum, a former investment banker, took the job of running the airline a year ago, shortly after the bankruptcy judge granted a motion by creditors that an independent party be appointed to manage the company. Boeing Capital, the largest creditor, claimed that Mr. Adams, the former chief executive, had, in connection with a 2002 share buyback, committed acts of fraud and self-dealing, allegations Mr. Adams says are untrue. The Securities and Exchange Commission last fall told Hawaiian Holdings that it and several of its officers were under investigation in relation to the stock buyback. Mr. Gotbaum last November filed a related lawsuit against Mr. Adams. Hawaiian faces some other challenges, too. Though it was the most punctu= al airline in the nation for the past seven months and routinely wins service awards, it like other carriers has been hurt by rising fuel costs. And several large airlines have boosted their capacity to Honolulu and other destinations on the islands, bringing more competition to already low-yielding routes. The carrier also recently was slapped with a $129 million tax claim by the Internal Revenue Service, has an underfunded pilots' pension plan and its labor contracts are coming up for renegotiation. Still, compared with the problems plaguing larger airlines, "it looks li= ke a good business coming out of bankruptcy," Mr. Gotbaum says. ---------------------------------------------------------------------- Copyright 2004 AP