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Island Air files bankruptcy amid aircraft lease dispute

Updated: 
October 17, 2017 - 4:23pm

Island Air, which brought in a new fleet of larger aircraft this year amid its aggressive expansion strategy, filed Monday for Chapter 11 reorganization bankruptcy.

The state’s second-largest airline said the bankruptcy filing was caused by threats of legal action to ground the aircraft and strand hundreds of passengers. Island Air said the filing prevents the threatened action and allows it to continue interisland service for its customers.

During the reorganization, Island Air said it expects to fly its scheduled routes as normal and honor all previously purchased tickets and confirmed reservations. In addition, there will be no changes to the Island Miles frequent flyer and other customer service programs, including Kupuna & Keiki Saver Fare, Island Biz corporate travel program, and military and group travel programs.

Island Air, which had never filed for bankruptcy in its 37 years of existence, has lost money for 17 straight quarters.

The airline said that while negotiating its Bombardier Q400 aircraft leases Thursday with its lessor, it was “very surprised that the lessors served them with notices of termination of the leases and demands to surrender its airplanes.”

Three of the aircraft are being leased through Elix Aviation Capital Ltd. of Dublin, Ireland. The identity of the lessor or lessors of the two remaining aircraft was not immediately available.

Elix Aviation Commercial Director Tom Dalton said Island Air leased three Bombardier Q400 aircraft from Elix with deliveries in December, January and April.

“Details regarding these lease agreements are confidential and Elix cannot comment on the recent action by Island Air,” he said via email.

Island Air President and CEO David Uchiyama said its customers, employees and vendors will be the company’s main priorities during the reorganization.

“Once we have completed the reorganization process, Island Air expects to emerge as a stronger airline with a solid financial structure that will allow us to continue to meet the demands of Hawaii’s dynamic interisland market, while positioning us for future growth and expansion,” Uchiyama said in a statement.

In its filing, Island Air listed both assets and liabilities of $10 million to $50 million and from 200 to 999 creditors. The largest creditor is the state Department of Transportation, which is owed just over $1.5 million. Aircraft manufacturer Bombardier Aircraft Services is next at $703,281.

The airline offers about 200 flights a week between Honolulu, Kona, Kahului and Lihue. In the second quarter, the airline flew 181,903 passengers versus 107,751 in the year-earlier quarter.

Timing questioned

Island Air is the third local airline to file for Chapter 11 since 2003.

Hawaiian Airlines, the state’s largest carrier, filed for reorganization in 1993 and again in 2003. And Aloha Airlines filed in 2004 and in 2008 before ultimately switching the 2008 reorganization filing to a Chapter 7 liquidation 10 days later and subsequently going out of business.

Honolulu attorney Ted Pettit, who is representing Island Air, filed a motion Monday seeking a “first-day hearing” as early as Wednesday on various motions to minimize disruptions to the airline’s operations. Among the motions is the continuation of the company’s payroll, a routine request that is typically granted.

The bankruptcy filing comes less than a week after Southwest Airlines announced it would begin selling tickets to Hawaii next year and was exploring competing in the interisland market. Hawaiian Airlines is the dominant carrier in the interisland market with a roughly 90 percent market share with Island Air second, Mokulele Airlines third and Makani Kai Air fourth.

Hawaii aviation expert Peter Forman questioned the timing of the Elix-Island Air lease dispute.

“I find it extraordinarily coincidental that the termination of leases took place on the same day Southwest officially announced their plans to enter Hawaii service, including possible interisland serv­ice,” Forman said. “I think it’s too much of a coincidence to ignore.”

Elix’s Dalton, though, said the timing of the lease dispute has “nothing at all to do with Southwest.”

On Labor Day, Island Air announced it had completed the makeover of its fleet, retiring the last of its 64-seat ATR-72 aircraft on that day to complete its conversion to a new fleet of five Q400 turbo­props. The transition began in January when the first 78-seat Q400 started service.

Island Air has been transforming itself since a majority stake in the company was acquired by Hono­lulu venture capitalist Jeffrey Au and other investors in February 2016 from billionaire Larry Ellison, who remains a minority investor in the airline with at least 10 percent, according to one of Monday’s filings. Ellison also owns 98 percent of the island of Lanai.

Since the ownership change, Island Air has increased its workforce to 453 from 256, restored service to Kauai and Kona, and had planned to begin service later this year to Hilo.

George Szigeti, president and CEO of the Hawaii Tourism Authority, encouraged travelers to continue flying Island Air.

“Island Air is a valued travel partner whose service is essential to keeping residents and visitors connected within the islands,” Szigeti said in a statement. “As the airline reorganizes under the court’s protection, we encourage travelers to continue utilizing its daily flights and support the jobs of its 400-plus employees.”

In the second quarter, Island Air earned $12.5 million in revenue that marked its highest quarterly total in more than a decade but saw its quarterly loss widen to $8.2 million from a $5.1 million loss in the year-earlier quarter. Expenses rose nearly 60 percent to $20.6 million from $12.9 million after the company incurred a $3.2 million early lease termination charge in May related to the phasing out of its ATR-72s.

Forman said he doesn’t think the bankruptcy filing will deter passengers from flying on Island Air.

“I think Island Air travelers are so used to air carriers going into Chapter 11 that it shouldn’t be much of a deterrent,” he said. “At one point, more than half of the U.S. air carriers were operating in Chapter 11 in recent years.

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