Posted on: Tuesday, March 29, 2005

Hawaiian must pay only $23M of $129M tax claim

By Dan Nakaso
Advertiser Staff Writer

Hawaiian Airlines will only have to pay $23.2 million toward a $128.9 million tax claim filed by the Internal Revenue Service, a U.S. Bankruptcy Court judge has ruled.

The order that Judge Robert Faris signed yesterday ends a contentious issue in which the IRS argued that Hawaiian owed $84.1 million in overdue excise and corporate income taxes, $40.5 million in penalties and $4.3 million in interest.

Hawaiian will pay the $23 million over several years, plus interest, said Josh Gotbaum, Hawaiian's court-appointed bankruptcy trustee.

Gotbaum originally argued that the IRS was entitled to just $23 million and not the larger amount the IRS was seeking.

"We think it's important that Hawaiian pay the taxes that it should pay and not pay those that it shouldn't," Gotbaum said.

With the IRS claim behind him, Gotbaum can concentrate on the last major hurdle to bringing Hawaiian out of bankruptcy: a new contract with pilots.

Gotbaum met with representatives of the Air Line Pilots Association yesterday in anticipation of a hearing before Faris this morning that likely will focus on the pilots' contract.

On Friday, Hawaiian pilots narrowly voted down a new contract that would have cleared the way for Hawaiian to emerge from bankruptcy protection.

RC Aviation LLC, an arm of San Diego-based Ranch Capital LLC, has won preliminary approval to take Hawaiian out of bankruptcy on Friday on the condition that each of Hawaiian's six unions ratify new contracts. Hawaiian's pilots are the last holdout.

"Without contracts in place, Hawaiian isn't getting out of bankruptcy because, among other reasons, the plan (by RC Aviation) brings financing into Hawaiian conditioned on having contracts in place," Gotbaum said. "... What we've said to the judge is that the test in bankruptcy for the imposing of a labor contract is that it has to be necessary to reorganize the company and that it has to be fair. We think the proposal meets the test. If he's not convinced, then he won't grant the relief that the company has asked for."

Gotbaum has argued that Hawaiian's contract terms were better than any other airline has offered to its pilots in the past two years and would have left Hawaiian's pilots as the best paid in the airline industry.

Capt. Kirk McBride, chairman of the Air Line Pilots Association International's Master Executive Council for Hawaiian Airlines, said yesterday: "We'll see what happens. As everyone knows, courts are a risky venue. It will be interesting."

After Friday's vote, union leaders met with Mark Dunkerley, Hawaiian's president and chief operating officer, and told Dunkerley that pilots turned down the contract for several reasons. They include:

• Anger over recent management bonuses.

• Changes to retirement and disability benefits.

• Changes in medical coverage that would require pilots to pay more.

Negotiators for both sides had met nine times when Gotbaum first asked Faris to intervene and force the pilots to accept a new contract.

Both sides last month were scheduled to start what could have been a three-day hearing on the issue when Faris urged them to continue negotiating, saying he could render a decision that favored one side or another — or that neither side liked.

Union and Hawaiian negotiators finally reached a tentative agreement that side-stepped the emotional issue of creating a two-tiered pension plan that union officials said placed greater financial risks on pilots under age 55, who make up the overwhelming majority of Hawaiian's pilots.

But pilots voted 120 to 144 on Friday against the new terms, setting the stage for today's court hearing.

"We negotiated very, very hard to cut the best deal we could with the company and it didn't pass ratification," McBride said. "That's where we're at."

Yesterday, Hawaiian officials also announced that the company led the airline industry in filling seats in February, with an 83.7 percent "load factor."

For the first two months of the year, Hawaiian has averaged an 84.4 percent load factor, almost 3 percentage points over its 2004 performance.

For February, Hawaiian was followed by JetBlue (83.3 percent); Spirit (79.2 percent); Northwest (77.6 percent) and America West (75.6 percent).

Hawaiian's revenue passenger miles in February also improved by 4.3 percent and its available seat miles increased by 3.2 percent.

Reach Dan Nakaso at 525-8085 or dnakaso@honoluluadvertiser.com.