Aloha Airlines Back in Bankruptcy

Hawaii's Aloha Airlines became the first U.S. carrier to seek bankruptcy protection because of the current surge in fuel prices, but so far its filing appears to reflect local conditions rather than suggest another cycle of insolvencies is coming.

The 61-year-old airline, which filed last week in Honolulu and won court approval to continue operating while it seeks additional investments, got caught in a squeeze from which it could not escape, with fuel costs rising while intense competition is keeping inter-island fares low.

Aloha CEO David Banmiller blamed Mesa (MESA Quote), which chopped fares on inter-island routes when its subsidiary Go! began flying them with 50-seat aircraft in 2006.

He said it was a "travesty and a tragedy" that Mesa's actions and "other factors completely beyond our control have forced us to take this action. We are reaching out to all our friends here in Hawaii and around the world to continue to support Aloha."

Last year, a bankruptcy court judge in Honolulu ordered Mesa to pay $80 million to Hawaiian(HA Quote) because it misused confidential information it obtained as a potential acquirer of its rival. Mesa is appealing that decision. Aloha has a suit against Mesa that will be heard in October.

Aloha's actions reflect "the difficult operating environment in Hawaii's airline industry," said Hawaiian CEO Mark Dunkerley, in a prepared statement. "It is extremely challenging and marked by high operating costs, record high fuel prices and a very competitive pricing structure."

In February 2006, Aloha emerged from 17 months in bankruptcy after cutting costs, primarily labor expenses, by $75 million annually and jettisoning about $250 million in debt. But it still lost $81 million in 2007, after losing $46 million in 2006.

Aloha's sensitivity to fuel prices is considerable because it operates 14 aging Boeing 737-200 jets among the Hawaiian islands, as well as eight 737-800 jets to six mainland destinations in California and Nevada.

Although Aloha is seeking a buyer or investor, Avondale Partners analyst Bob McAdoo says it will be tough to raise money. The company has less than $4 million in cash, its assets are encumbered and its principal owner, Los Angeles-based private equity firm Yucaipa Cos., has invested heavily to keep the carrier operating, he says. In a recent report, McAdoo wrote: "We doubt it will operate for long." Avondale Partners makes a market in Mesa.

Despite widespread speculation about additional airline bankruptcies, McAdoo says he doesn't know of any others who appear to be in critical condition.

Most carriers are cash-rich and can continue to operate at current fuel prices for many months, McAdoo says. Additionally, many airlines continue to be relatively successful in passing on fuel cost increases to customers. AMR's(AMR Quote) American Airlines, for instance, said Monday that it will end the first quarter with about $4.8 billion in cash, and that first-quarter passenger revenue per available seat mile will rise between 6.9% and 7.9%.

However, in a recent report, Credit Sights analyst Roger King wrote that while RASM strength "has been reassuring given the need to raise fares to cover fuel costs, February yield, load factor and capacity data place a little raincloud over a parade marching into economic and fuel thunderstorms."

McAdoo recommends Hawaiian and Mesa, saying they could benefit were Aloha to cease operating. Since the bankruptcy filing was announced last Thursday, Hawaiian shares have gained about 16%, while Mesa is little changed.