Hawaiian Airlines pays $24M in fees

By Rick Daysog
Advertiser Staff Writer

The tab for Hawaiian Airlines' two-year bankruptcy has soared to $24 million, making it the most expensive reorganization in Hawai'i history.

What Hawaiian paid in fees put it in the top 20 percent of similar sized bankruptcies, said Lynn LoPucki, a bankruptcy expert and law professor at the University of California Los Angeles.

"This is a case with extremely large fees for a case that size," LoPucki said.

Generally, high bankruptcy costs mean that the company will have less cash to fund future operations.

"This is money that could have been used for expansion, for acquiring new equipment, and it certainly could have been used for funding of employee programs," said Kirk McBride, chairman of the 380-member Hawaiian unit of the Airline Pilots Association, which fought management's attempt to freeze its pensions.

Josh Gotbaum, Hawaiian's bankruptcy trustee, defended the expenses, saying Hawaiian's bankruptcy was extremely complicated and involved many layers of legal and consulting services. He said that the fees are justified by the end result, where creditors will receive 100 percent of what they are owed once the airline exits bankruptcy. Hawaiian, the state's largest airline, is scheduled to end more than two years under court protection on Wednesday.

"Everyone recognizes that this bankruptcy has been larger and more complicated than others, but the end result for our creditors, shareholders and employees was a lot better, too," Gotbaum said.

Gotbaum also noted that a portion of the fees included in Hawaiian's bankruptcy case — such as calculating taxes and negotiating aircraft leases and labor agreements —Êare part of the airline's ordinary course of business.

On the other hand, the $24 million figure likely will increase in the coming months as the last of the outstanding legal and accounting bills come in. The fee total also does not include Gotbaum's $600,000 a year salary and a success fee he is entitled to seek.

The Advertiser's study of Hawaiian's expenses found that five of the outside firms Hawaiian hired have been paid in excess of $1 million. They are:

• The airline's lead bankruptcy counsel, Los Angeles-based Hennigan, Bennett & Dorman LLP, which charged more than $6.3 million. Hennigan Bennett, whose partner Bruce Bennett charged an hourly rate of about $665, submitted one bill for the month of October 2004 that asked for $695,000 and included nearly 300 pages of billing records.

• The accounting firm of Ernst & Young LLP, whose top partners charged more than $600 an hour, charged the airline more than $4.7 million for matters relating to bankruptcy and tax disputes with the Internal Revenue Service.

• Simat Helliesen & Eichner Inc., a New Jersey-based airline consulting firm, generated nearly $3.5 million in fees for its work with Hawaiian's aircraft leases.

• New York-based Giuliani Capital Advisors LLC, formerly known as Ernst & Young Corporate Finance LLC, received more than $1.5 million for working on the airline's restructuring plan.

• The local law firm Carlsmith Ball LLP billed nearly $1.3 million for its work on the reorganization.

LoPucki, the UCLA law professor, said Hawaiian's $24 million in fees far outstripped what similar sized companies have paid when they went through bankruptcy.

Heartland Wireless Communications Inc. and Home Holdings Inc., two Mainland companies which filed for bankruptcy protection in 1998, are about the same size as Hawaiian but their bankruptcy fees amounted to about $2 million for Heartland and $4.8 million for Home Holdings, LoPucki said.

LoPucki added that Hawaiian's costs are comparable to TWA Corp.'s fees in its 2001 bankruptcy. TWA, whose assets were listed at the time at $2.1 billion or about 10 times Hawaiian's, had fees of about $23 million, he said.

US Airways, which filed for Chapter 11 in 2002 with assets of $7.8 billion, paid about $58 million in legal and other bankruptcy-related fees, he said.

Tom Roesser, a Carlsmith Ball partner, contrasted the Hawaiian case with Liberty House. He said the Hawaiian case was much more complicated because it involved tax issues, union negotiations and aircraft lease talks.

For instance, Gotbaum sued the airline's former Chairman John Adams in November 2003 to recover $28 million that was diverted from the airline. The suit was settled more than a year later with Adams agreeing to pay $3.6 million.

The airline's accounting expenses ballooned after the Internal Revenue Service filed a $128.9 million claim against Hawaiian in June 2004. Bankruptcy Judge Robert Faris later reduced the tax bill to about $23 million.

John Candon, president of Candon Consulting Group LLC, said the high fees are partly due to the billing rates of Mainland law firms. While most local attorneys charge between $200 and $350 an hour, senior partners at Mainland law firms double that rate, said Candon, who was the court-appointed fee administrator in the Liberty House bankruptcy.

One attorney, William Kilberg at the Washington, D.C., firm of Gibson, Dunn & Crutcher LLP, billed Hawaiian at a $725 an hour rate, bankruptcy court records show.

But while the fees may be high compared to local standards, they appear to be reasonable, Candon said.

When a company emerges from bankruptcy, creditors often receive 50 percent to 65 percent of the amounts they are owed. Hawaiian, which owes about $246 million to about 1,100 creditors, will pay off all of its debts.

"If this bankruptcy results in recovery of the operations and the payment of all the creditors then it would be difficult to fault the court for approving the fees, especially given how quickly this (reorganization) happened," Candon said.

Rick Daysog can be reached at 525-8064 or rdaysog@honoluluadvertiser.com