Ueberroth’s Touch With Hawaiian Air Hasn’t Been Golden
It’s the bottom of the ninth for Peter V. Ueberroth’s first airline venture. The game isn’t over yet, but it looks as though he might lose.
The former baseball commissioner and his associates are pinning their hopes on a long ball in the form of fresh financing from Hawaiian Airlines’ lender. But even with that, Hawaiian still faces big problems.
Nine months after Ueberroth and his golfing buddy, J. Thomas Talbot, bought it, Hawaiian is losing gobs of money; its $26.9-million loss for the quarter that ended in June set an all-time record. It is in default on its loans, and it needs a cash infusion to survive.
The airline’s woes must certainly be a test for Ueberroth, whose celebrated Midas touch as president of the Los Angeles Olympic Organizing Committee made the Olympics a huge financial success.
It was Ueberroth’s 14-karat reputation that led such heavy hitters as ex-Seattle Mariners owner George Argyros and department store magnate James F. Nordstrom to invest in Hawaiian.
Resort developer Christopher B. Hemmeter invested around $500,000, he says, “purely because of Peter Ueberroth.”
The investment hasn’t worked out as hoped, but Hemmeter isn’t upset. “We’re big boys. We understand there will be ups and downs. Right now,” he adds, “it’s down.”
The question is whether Hawaiian can go up. There were some indications over the past week that the airline’s situation might be improving.
Its unions--whose members include the pilots, flight attendants and mechanics--agreed to 10% wage cuts and productivity improvements that will lower the airline’s labor costs by $4 million to $8 million.
The concessions clear the way for Hawaiian to negotiate new terms on its $111-million loan from Security Pacific Bank. The loan financed the leveraged buyout by Ueberroth’s group and provided financing for Hawaiian’s operations.
Even if Hawaiian gets the money it needs to keep it going, its troubles are far from over. The airline faces tough competition in its all-important intra-island market, and in its routes between the mainland and Hawaii.
Its relationship with employees is strained. Thirty percent of its workers have been let go since January. Those who remain must work for less. “Aloha spirit only goes so far,” says Samson Poomaihealani, chief negotiator for the mechanics and also a Hawaiian director.
Ueberroth said he couldn’t discuss Hawaiian because he wasn’t close enough to the situation. “I’ve probably spent two days in Hawaii since we bought it.”
He referred questions to Talbot, his investment partner. Talbot took Ueberroth’s place as chairman in a management shift that also turned day-to-day control of Hawaiian’s operations over to Ueberroth’s brother, John.
Insiders say Ueberroth is more involved with the airline than his infrequent trips to Hawaii suggest. He chats with Talbot and his brother by telephone almost daily, and is playing an important role in negotiations with Security Pacific.
Talbot, in a meeting with Hawaiian’s pilots early this year, described Ueberroth’s role this way: “He is going to hit the home runs for us.”
There isn’t any question that Hawaiian needed a power hitter. The airline was in deep trouble before Ueberroth and his associates bought it. Its costs were too high, it was losing money and it had lost its lead in Hawaii to rival Aloha Airlines.
Ueberroth first looked at the airline in early 1989 and considered making a small investment through his Contrarian Group, an investment and management firm. In May, he later teamed with Talbot--his partner in a failed bid for Eastern Airlines--to buy control of Hawaiian.
Talbot took over the day-to-day management of Hawaiian. A wealthy developer of industrial parks, Talbot had a hand in starting AirCal and Jet America, two California airlines that merged with bigger rivals in the late 1980s. He sat on the boards of AirCal and Jet America, but didn’t get involved in managing either.
At Hawaiian, Talbot, the airline entrepreneur, found himself in the unfamiliar role of turnaround artist. He plunged into Hawaiian’s day-to-day dealings--at least initially. He sold his Orange County home and moved to Hawaii, where he worked 12-hour days that often started at 6 a.m. It wasn’t unusual for him to drop by the airport before his evening drive home to chat with mechanics and flight crews.
What Talbot found in his early months was a heap of trouble.
Hawaiian was so disorganized that it took three months to find out how many different kinds of tickets existed. The answer: 27. Fares were set seemingly by whim; a new software program that would have helped didn’t work on Hawaiian’s computer.
The fleet needed a lot of work. Maintenance records were so sloppy that the military suspended its charter contract with Hawaiian for three months, costing the airline $9 million.
Talbot, short on help, flew 40 mechanics from the mainland to help repair the airline’s aging Lockheed L-1011s, Douglas DC-8s and DC-9s to satisfy military inspectors. The bill to pay, feed, house and transport the mechanics for three months came to $3 million.
Hemmeter warned Ueberroth that he might find problems at Hawaiian. He offered to buy the airline in 1987, but changed his mind after he got a look at the airline’s books.
Hemmeter said he had serious questions about the airline’s maintenance records, operating costs and earnings projections. “I told Peter to be sure that the due diligence period was spent wisely.”
Asked if he paid too much for Hawaiian, Talbot says, “It’s easy to (be a) Monday morning quarterback.” He adds, “We might have done things differently.”
There were other problems that were outside Hawaiian’s control. Jet fuel prices surged following Iraq’s invasion of Kuwait, pushing up the airline’s costs.
A new airline, Discovery, started intra-island flights in March with cut-rate fares that Hawaiian and its larger competitor, Aloha, were forced to match.
Hawaiian filed two lawsuits to shut down Discovery. It argued that Discovery got most of its financing from a Japanese firm, in violation of federal rules that restrict foreign ownership. In July, the Department of Transportation agreed, and grounded it until a buyer is found.
Talbot says Hawaiian’s problem is its image. He doubled its advertising budget to $4 million, but his efforts were undercut last month by the FBI’s arrest of 22 Hawaiian baggage handlers, who have been accused of participating in a theft ring. The airline cooperated with the investigation.
Hawaiian’s woes have caused it to put the skids on its plans for growth. Under John Ueberroth, the airline halted its flight to Australia, a much sought-after destination for U.S. airlines and one Talbot had targeted for growth.
The airline also cut back its daily round-trips from Los Angeles to one from two; Talbot planned to increase the number of round-trips to three.
The moves allowed Hawaiian to lease more planes to the military for use in the Persian Gulf during the traditionally slow fall travel season. But it greatly reduced Hawaiian’s visibility in its biggest mainland market.
Talbot said Hawaiian intends to resume its flight to Australia at some point. It is in negotiations with Northwest Airlines over letting Northwest take over the route for now.
HAL AT A GLANCE
HAL Inc., parent of Hawaiian Airlines, based in Honolulu
Quarter Quarter ending ending June 30 June 30 1990 1989 (millions) (millions) Pretax net profit (loss) ($26.9) ($4.3) Operating profit (loss) ($23.9) ($11.7) Operating revenues $79.6 $160.7
Fleet: Five L-1011s, six DC-8s, ten DC-9s, three SDS-30s and eight DHC-7s. HAL owned two of the planes and was leasing the other 30. Three of the leased planes were subleased to others.
Employees (as of Dec. 31, 1989): 3,075
Stock: Closed unchanged Thursday at $8.50 a share, its 52-week low. The high during the year period was $23.375 a share. Traded on American Stock Exchange.
