Apr
30
Mesa Air Group and Hawaiian Airlines have settled their differences out-of-court, under circumstances that leave Mesa’s Go as a local market player.
Hawaiian, which won a damage judgment of roughly $90 million, will settle for $52.5 million. It agrees to drop its damage claims against Mesa and Go. It gets cash now, when it needs it due to soaring jet fuel prices and whatever overtime it’s racking up filling needs created by the collapse of Aloha.
Mesa, which had a lot of money tied up in a bond posted with federal court during appeal, admits no guilt while settling the matter. If it failed to win reversal on appeal, damages would likely have grown based on harm done since the original ruling.
Aloha Airlines still has a suit pending against Mesa, which may yet go to trial late this year unless it, too, settles out of court. The possibility of damages is the last best hope for some kind of return on investment for the last owners of this company.
This is what Mesa did.
When both Hawaiian and Aloha were in their earlier bankruptcies, Mesa came forward as a buyer. It saw the books of both companies, and the strategic plans. It knew the revenue-split on codeshare deals with other airlines. It need the terms of vendor agreements and when those contracts would expire. It saw research on the market and on the customers.
Reviewing such inside information is called due diligence, and it is customary to sign a promise not to use the information against the company if the prospective buyer fails to actually buy the company. The promise applies regardless of whether the would-be buyer walks away, or has its bid rejected as too low. Mesa signed promises to both carriers.
It is not unusual in bankruptcies for competitors to step forward as prospective buyers. They see valuable information. They’re not supposed to use it, but they can’t forget it. The promise not to use the information against the bankrupt company typically comes with a commitment to return all documents within a year, but even if you keep no copies, you’ve still learned what you’ve learned. Misuse of confidential information is therefore very hard to prove.
The Mesa case was sharply different. A memo to his own prospective investors sent out over the name of Mesa CEO Jon Ornstein, when he was seeking funds to found a third Hawaii interisland carrier, explicitly said he knew the market because he had seen the plans of Hawaiian and Aloha. Whole paragraphs of Hawaiian materials were found in a Mesa memo long after the original text should have been returned.
Mesa’s chief financial officer wrote an email which appears to describe a plan to use a fare war to weaken the legacy carriers and drive one out of business. Mesa described the email to me later as having been a joke, but it came complete with charts. I had pictured a brief, facetious email, but it turned out to be a detailed battle plan report that was merely transmitted by email. It didn’t help Mesa’s case that the chief financial officer tried to erase his hard drive (the company later said he was deleting porn.)
The judge in the case found Mesa guilty and awarded damages.
It is not illegal to sell plane tickets at a loss. You may be doing it for a promotion, or to introduce the service to new passengers, or to hold onto market share. But to sell tickets at a loss for the purpose of muscling a competitor to the sidelines is considering predatory pricing, and that is illegal. Go is a smaller service than either Hawaiian or Aloha pre-shutdown, but its parent company is bigger, and the corporate pockets were deeper. That’s why Aloha ran out of cash before Go did.
Still open to argument is to what extent other factors played a role, especially soaring jet fuel.
Apr
30
When does a job change but not change?
Filed Under Sunrise on KGMB9 | 1 Comment
Ever heard of Metro Networks? It’s a company that started as a common source for traffic reports for broadcast stations in a given market. A roomful of people would gather traffic information, share it with each other, than each one would have one or more stations to broadcast on. A small radio station might share the same person reporting on two other stations. A big station might demand one person’s exclusive use. The reports would be transmitted from the central location on broadcast circuits to the various stations. Metro Traffic, as it was then called, would then sell 10-second commercials to be delivered live with the reports.
Then its managers thought, what else can we send over these lines that we already have? And they began marketing themselves as an outsource for news and sports.
I was working for a radio station in Washington, D.C., when its sportscasters suddenly began getting their paychecks from a company like Metro Networks — indeed, one that wound up merging with it — while continuing to do the same work they always did, on the same station.
For many office workers at Hawaii Medical Center, the former St. Francis hospital system, that is what could happen to them June 28.
Hawaii Medical has hired Nashville-based Perot Systems to take over most of its office functions, including admission. Almost 100 people have gotten layoff notices, but many if not most could wind up doing the same work as before, just getting paid by Perot instead of by Hawaii Medical.
This kind of thing is a good news-bad news story. Sometimes when this happens, the new employer offers less pay. On the other hand, if you’re going to outsource a lot of jobs, better to keep those jobs in Hawaii than to move them offshore.
The new company may increase productivity — i.e., make people work harder — but the old employer might have done the same thing. The new company could also offer transfer opportunities to other cities, though I suspect this is a bigger benefit in every other market they serve (”Hey, can I transfer to Hawaii? Pretty please?”)
Apr
29
Less than a month after Aloha Airlines closed its passenger operations forever, it was forced to shut down its air cargo division as well. Now Hawaii shippers have a variety of not-so-good choices.
The end came Monday afternoon when GMAC Commercial, the company lending money to Aloha, turned off the spigot. The bankruptcy judge elected not to order the tap turned back on, and that was that.
This was the sequence of events:
- Several companies expressed interest in buying the cargo operation, and two of them bid more than $13 million.
- GMAC held out for $15 million but neither prospective buyer felt able to go that high.
- Absent a buyer, GMAC then decided there was no reason to go on funding the operation.
The purchase price, whether $13 million or $15 million, would have been a small chunk of change compared to the cost of recovering lost business and restoring the health of the division. So why would a price difference of less than 8% be a deal breaker?
One answer: a labor issue, pertaining to pilot seniority and compensation.
Aloha pilot salaries ranged, according to seniority, from $30,000 to $82,000 for first officers and from $90,000 to $120,000 for captains. My thanks to a laid-off Aloha Air Cargo pilot for more specific data than I originally had in this paragraph! Cargo crews usually made overnight differentials as well, extra pay for working crazy hours.
Their contract allowed pilots to choose their assignments based on seniority, and senior passengers pilots chose to bump into the cargo division rather than be laid off. (Some senior pilots were already working cargo as a matter of personal preference.) This alone probably would not have been a deal breaker, either; GMAC several times demanded resolution of the issue but did not dictate any terms. It just wanted something settled and set.
In recent days, however, the Aloha chapter of the Air Line Pilots Association sued the airline over the issue, and took a strike authorization vote, despite the fact that Aloha was already training senior passenger pilots on cargo planes. Why was the union unwilling to take “yes” for an answer? It’s possible that the national union wished to stand firm on an issue important to its members.
But to some extent what happened was the inevitable result of human nature being what it is, both for union members and for business people.
It is human nature that when things go horribly wrong we look for someone to take the blame. To be victimized by venal or incompetent management is somehow less scary than to be thrown out of a work by happenstance. And, in contract talks, both sides tend to bluster in the early stages.
It would have been all too easy to assume that Aloha was in better shape, and its prospective buyers more deep-pocketed and eager, than anyone would admit. But this wasn’t reality.
Reality check: management was canny and creative in keeping Aloha funded and alive for a very long time, and it avoided layoffs that other managers would have undertaken long ago.
The other human nature factor: people who own or run non-union companies inevitably believe that a union will interfere with the orderly operation of their business.
For the companies bidding to buy the air cargo division, the pilots union squabble, and especially the strike vote taken after pilot training on cargo planes began, signaled a troubled company that would be a hassle to manage.
By the way, this senior-pilots-bumping issue will be repeated all over the country this year. Most of the mainland giants plan to cut domestic capacity. Senior pilots who until now have elected to fly the routes that will chopped will keep their jobs, bumping onto other routes, and junior pilots will be the first to go if there are furloughs.
Seniority is so important to pilots that American Airlines spent years merging seniority lists after acquiring TWA, US Airways has spent years sorting out seniority after merging with America West, and after more than a decade I think there still isn’t full resolution of seniority issues for a regional carrier that Northwest Airlines acquired. When and if Delta Air Lines merges with Northwest, the merging of seniority lists will be a headache for years.
It’s possible that Aloha Air Cargo might be more attractive in pieces if Chapter 7 allows a purchaser to pick up the pieces without picking up the pilot contract. But if there is the slightest possibility of being saddled with that contract, some prospective buyers will decide it’s more trouble than it’s worth.
This is, of course, for the pilots themselves, an unsavory message, but labor unions, like businesses, do best when they fully understand the costs of doing business.
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