Island Air allowed limited use of cash for payroll

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HONOLULU — Island Air received interim financial relief Wednesday when it was granted authority by a federal Bankruptcy Court judge to use its cash collateral for a “limited period” to meet business operations and payroll.

HONOLULU — Island Air received interim financial relief Wednesday when it was granted authority by a federal Bankruptcy Court judge to use its cash collateral for a “limited period” to meet business operations and payroll.

But the state’s second-­largest airline is facing yet another hurdle after an attorney for one of its aircraft lessors argued in court that the airline is operating and generating revenue from three aircraft that it is no longer entitled to fly.

Island Air, which has lost money for 17 quarters in a row, filed an emergency Chapter 11 reorganization Monday to avoid its planes being seized by Dublin, Ireland-­based aircraft lessor Elix Assets 8 Ltd. amid a lease dispute. First-day motions heard Wednesday included an agreement by the aircraft lessor’s trustee to allow Island Air to make its payroll this week by releasing $300,000 deposited in a bank account following the bankruptcy filing.

Honolulu attorney Jesse Schiel, representing aircraft trustee Wells Fargo Bank Northwest, said in an objection filed Wednesday that creditors are considering their options to recover three of the airline’s five Bombardier Q400 turboprops that were put into service this year.

Island Air CEO David Uchiyama declined Wednesday to disclose the status of the company’s two other Q400s that it leased from Nordic Aviation Capital.

“We are here because of a very serious threat to seize and grab the aircraft,” Honolulu attorney Ted Pettit, who is representing Island Air, told Bankruptcy Judge Robert Faris at the start of Wednesday’s hearing. “This was an emergency filing. We had no preparation.”

Faris indicated Wednesday he was putting Island Air on a short leash to use the cash collateral and scheduled another hearing for 10 a.m. Friday to further discuss that matter.

Island Air is owned by PaCap Aviation Finance LLC and Malama Investments LLC, two investment groups led by Honolulu venture capitalist Jeffrey Au; and Ohana Airline Holdings LLC, the company owned by billionaire Larry Ellison.

In an order issued late Wednesday afternoon, Faris approved a motion from two of the airline’s secured creditors, PaCap Aviation and Ohana Airline subsidiary Carbonview Limited LLC, to use cash collateral until at least Nov. 15. The motion also said PaCap Aviation and Carbonview are owed $4 million that they loaned to Island Air prior to the bankruptcy.

The crux of the bankruptcy hinges on a leasing dispute between Island Air and Elix. The aircraft lessor said it is entitled to take back the airplanes after Island Air defaulted on $4.58 million in payments and failed to satisfy conditions under a deferral agreement. Elix said Island Air breached its obligations to pay the monthly rent and maintenance reserve payments owed under each lease agreement.

Elix said after Island Air failed to remedy its payment defaults, the lessor attempted to accommodate Island Air by entering into a lease payment deferral and amendment agreement on Sept. 15 as well as other transactions to provide the necessary liquidity to the airline.

Island Air, though, says Elix is in breach of the lease agreements and the deferral agreement.

Faris said he would allow Island Air to use the cash collateral for a limited time until it can come to an agreement on the leases.

“If this (use of the cash collateral) goes on for a period of days, maybe a week or so, I think there is very little risk,” he said. “For a short period of time, I’m comfortable with that action. For a longer period of time, I need to know more about what’s going on with (Island Air). Is it making money, it is losing money, is the cash position going up or down? … On Friday, we can have additional discussion on what the next step will be.”