Kitty Hawk Grounded: Trading Suspended After Bleak Announcement

Purchase of Kalitta Cos. may have sent carrier into nose dive.
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You know what really irritates me? Ill-conceived mergers by companies that should know better.

In the case of

Kitty Hawk

(KTTY)

, the merger two years ago with the

Kalitta Cos.

-- a merger that we and many others had serious reservations about -- may be the undoing of what was once a very profitable cargo carrier.

Last quarter, after yet another warning and disappointing results, we finally threw our hands up in disgust, despite having held out hope

since 1997 that the company would overcome the merger-related operational and financial obstacles.

Lately the stock seemed to show signs of being a good potential trading buy because it had been sold off dramatically and has a relatively low float. Even better, the company had hired Paul Tate, the respected former CFO of both

Reno Air

and

Atlantic Coast

(ACAI)

, to come on board and get the company on the right track.

Wrong.

Late this afternoon, trading in shares of Kitty Hawk was suspended, and at 3:34 p.m. EDT, the company announced that:

  • It will be restating its 1999 earnings.
  • It will have a much-larger-than-anticipated loss for the first quarter.
  • Its auditors, Ernst & Young, will include a statement on earnings for this quarter on whether the company can continue to operate.
  • The maintenance needed on its L-1011 aircraft (which Kalitta brought to the merger) is so expensive the company may just write off the aircraft completely. (In 1997, when the fleet was appraised as part of the deal, the L-1011s were valued at approximately $124 million. You can bet your Tender Vittles that the fleet is worth less than half that amount today -- if not less. In other words, the entire fleet is worth less than the cost of the maintenance now required to keep the craft airworthy.)
  • It will not be able to meet its interest payment of $17 million, which is due on May 15.
  • It may not have enough cash to continue operations.
  • Oh, and by the way, Tate -- the man with the excellent industry reputation who started work as CFO at Kitty Hawk 11 days ago -- has resigned.

This was truly one of the most brutal press releases I've ever read about any company. Period.

This Kalitta hairball is stuck in Kitty's throat and may prove to be its undoing.

OK, so let's assume the worst. Let's assume that Kitty has to sell assets to keep afloat. Let's assume that Kitty has to sell all of its assets.

Financial issues notwithstanding, Kitty Hawk is the world's largest air-only freight dog. Underlying all this mess that the Kalitta merger created, the company has some very good clients, and has, at least in the past, enjoyed a generally good reputation with customers.

Which raises the question: Who might be interested in picking up the company -- as an add-on to an existing business?

I can guarantee that the bean counters at more than a few competitors are contemplating the possibilities right now.

Holly Hegeman, based in Barrington, Rhode Island, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.