REAL WORLD PROOF 'ALOHA AIR BANKRUPT"

BY RICK DAYSOG
Advertiser Staff Writer

Hawai'i's economy, reeling from the loss of thousands of jobs with the demise of Aloha Airlines' passenger service, the closure of Molokai Ranch and NCL America's decision to pull out two of its ships, now faces the loss of a vital transportation link with the shutdown of Aloha's cargo operations.

Aloha abruptly closed its profitable air freight business yesterday after its lender, GMAC Commercial Finance LLC, cut off financing.

The shutdown means the loss of 300 jobs and the end of a business that handled more than 100 million pounds of cargo each year — about 85 percent of all goods flown between O'ahu and the Neighbor Islands.

The impact will be felt by retailers and wholesalers of time-sensitive consumer items such as baked goods, produce, meat, medical supplies, newspapers, auto parts and construction materials. The move also will affect movement of interisland mail and the flow of cash between local banks and their Neighbor Island branches.

"This is a critical link in the state economy," said Leroy Laney, professor of economics and finance at Hawai'i Pacific University.

"The shutdown will definitely impact the local economy, and with medical supplies, it could lead to life or death situations."

Gov. Linda Lingle said in a news release that she has had discussions with other cargo operators to find shipping alternatives since Aloha filed for bankruptcy.

Maui Mayor Charmaine Tavares said the impact will be especially hard on local entrepreneurs and farmers who rely on Aloha's daily service.

"I am concerned for both the employees of Aloha Airlines cargo as well as for the many small businesses that will be impacted," Tavares said.

Founded in 1946, Aloha was the state's second-largest airline until it shut down its passenger service on March 31 and terminated 1,900 employees. The closing came 11 days after Aloha filed for Chapter 11 bankruptcy reorganization. Aloha said it lost $120 million in two years because of soaring fuel prices and a costly interisland fare war.

Yesterday, Aloha flew its final two afternoon cargo flights. The company canceled six nighttime cargo flights.

Aloha said last night that it was in the process of informing cargo employees about the layoffs.

sale may be affected

The shutdown could also jeopardize the sale of Aloha's 1,100-employee contract services division to Los Angeles-based Pacific Air Cargo.

Pacific Air last week agreed to pay $2.05 million for the unit, which handles ticketing, baggage services, ramp duties and other ground services for carriers that serve Hawai'i.

The deal, which was approved last week by a federal bankruptcy judge, will now have to be reviewed again by a court-appointed bankruptcy trustee.

As of last night, the company's contract services division remained opened.

The layoffs are more bad news for an economy shaken by the shutdown of Molokai Ranch, which resulted in the loss of 120 jobs, and the grounding of Aloha's passenger service, which represented the state's largest-ever mass layoffs.

State lawmakers are now bracing for the impact of the pullout of Norwegian Cruise Lines' two ships, which could rival the 2,200 total jobs lost at Aloha.

"This is one more indicator that our economy is suffering," said state House Speaker Calvin Say.

"It is also a wake-up call for all of us on the importance of our transportation infrastructure."

closure a surprise

The Aloha cargo closure took employees, customers and creditors by surprise, especially because Aloha had at least two bids for its profitable cargo unit.

On March 27, the Seattle-based owner of Young Brothers/Hawaiian Tug & Barge, Saltchuk Resources Inc., signed a letter of intent to purchase the cargo division for $13 million.

And last week, locally based Jupiter Holdings Group bid $13.65 million for the division.

James Wagner, Jupiter's attorney, said the company was prepared to go through with its purchase as recently as yesterday afternoon. But GMAC unexpectedly upped the price to $15 million and required a higher deposit, he said.

Saltchuk, meanwhile, pulled its bid last week after Aloha and GMAC changed the terms of the bidding.

"This all has to do with other parties changing the deal without any warning," Wagner said. "I've been in practice over 30 years and I've never seen a case end like this."

GMAC took the lead in the sale talks because it is owed $44 million by Aloha and has provided money to keep the cargo operations flying after it filed for bankruptcy protection on March 20.

The lender previously threatened to pull the financing for the cargo operations after a dispute with Aloha's pilots.

Aloha pilots laid off with the closure of the passenger service wanted the option to work for the cargo division. Last week, the pilots' union threatened to strike over the issue.

Attorneys for the pilots union and Aloha's unsecured creditors said in bankruptcy court that Aloha will get less than $13 million by shutting down the cargo operations and selling its equipment.

"For GMAC to walk away from legitimate offers makes absolutely no sense at all," added pilot John Riddel. "It's a travesty. This should have never happened. Hundreds of dedicated employees are being victimized today."

Paul Brewbaker, chief economist at the Bank of Hawaii, said it may be some time before competing carriers and cargo operators fill the void left by Aloha.

"This is huge," said Brewbaker. "I don't doubt that somebody will come in and fill the void but in the short-term, anyone who wants to go to market is hung up."

Aloha used six Boeing 737-200 planes solely for interisland cargo. Hawaiian and other carriers take cargo in their passenger planes and don't have aircraft dedicated to cargo.

Brewbaker said it will be more difficult to attract a new competitor to the interisland cargo market than several years ago given turmoil in the nation's credit markets and high fuel prices.