Plans to add planes sent Island Air into nosedive

Island Air shutting down in November after trying to stabilize finances in bankruptcy shocked customers, employees and the general public. But internally, the company had been battling to stay aloft since at least July.

David Uchiyama, president and CEO of what had been Hawaii’s second-largest interisland airline, described the company’s downfall under questioning Thursday by an attorney and court-appointed trustee working to liquidate Island Air assets for the benefit of creditors.

Uchiyama also tried to explain why the company falsely told its 423 employees that their medical insurance coverage would last through November.

The explanations Uchiyama gave under oath provide new insight to what U.S. Bankruptcy Judge Robert Faris called “a catastrophe” earlier this month.

Island Air, which tried to suggest it was in a fairly good position in bankruptcy, failed to pay its employees for their last 10 days of work, misplaced employee 401(k) contributions and couldn’t let workers access those retirement accounts.

Uchiyama summed up the demise of the 37-year-old company by saying that delays implementing a plan to fly newer, bigger planes this year put the airline in a financial pinch that it couldn’t straighten out by raising more investment capital.

Island Air was being positioned for profitability with an investment and business plan from Honolulu venture capitalist Jeffrey Au, who in 2016 led a group that acquired a two-thirds interest in the carrier from tech billionaire Larry Ellison. But Uchiyama said delays deploying the new planes this year threw off projected financial improvements, and no one was willing to put more money into the company to see the plan through.

“We didn’t raise the capital we needed,” he said.

In July two board directors representing Au and Ellison, former University of Hawaii athletic director Jim Donovan and Ellison business associate Paul Marinelli resigned over concerns about the company’s viability, Uchiyama said.

To sustain Island Air at that point, the company was trying to sell plane parts, revising flight schedules, reducing overtime and considering not stocking some plane parts, according to Uchiyama.

Shortly before the company filed Chapter 11 bankruptcy on Oct. 16 in an effort to reorganize finances while continuing service, Uchiyama said the company was concerned it was going to run out of money to pay employees.

Island Air also was delinquent on lease payments for its planes and faced a roughly $400,000 insurance premium bill that it couldn’t afford and hoped to negotiate, the CEO added.

On Nov. 10 the overwhelmed airline conducted its last flight. That day Island Air issued a news release that said “employees’ existing health care insurance benefits will expire on Nov. 30, 2017, at the earliest.”

But the company hadn’t paid for that insurance, which was due Nov. 1. Uchiyama said Island Air had been paying medical premiums late, around midmonth, and intended to pay for the November coverage even though it ceased operations Nov. 10.

Uchiyama added that the company had enough money to pay the medical premiums when it shut down, but no one arranged to do it because no one was working any longer.

“Under the circumstances, we shut down on the 10th, and there was nobody there to execute payment,” he said.

Simon Klevansky, an attorney representing trustee Elizabeth Kane, noted that Island Air executives had control of the company until Judge Faris approved a motion converting the bankruptcy case to a Chapter 7 liquidation on Nov. 15. Island Air filed the motion to convert Nov. 12, and Uchiyama said he turned over all his company keys Nov. 13.

Health insurers since have said they will retroactively cover former Island Air employee premiums for November, but the dropped coverage also made those workers ineligible for COBRA, a federal program that allows displaced employees to continue health coverage at group rates for up to 18 months.

Kane and Klevansky aim to sell as many Island Air assets as they can and repay some creditors. Hawaiian Airlines has offered $750,000 for certain assets, including a certificate that allows interisland air service. It is unclear whether any of those proceeds will flow to employees.