As Delta and Northwest press employees to take deep pay and benefit cuts, their lawyers and consultants are asking bankruptcy court judges to approve $59 million in fees and expenses for 3 1/2 to 4 1/2 months of work.
Complicated bankruptcy cases commonly generate big fees for lawyers - so it might not be surprising that, by the time the two airlines exit Chapter 11, the tab could be $276 million or more. But such bills also routinely draw criticism from employees, creditors and other parties - and with Atlanta-based Delta Air Lines Inc. and Eagan, Minn.-based Northwest Airlines Corp. asking employees for wage concessions, legal fees are indeed an issue.
"It's hard for us to fathom," said Terry Trippler, an industry expert who runs travel Web site cheapseats.com. "It's difficult for the airline employees. It's difficult for the average Joe consumer."
In Delta's case, the airline wants an arbitration panel to throw out its pilot contract so it can impose up to $325 million in long-term cuts on its 6,000 pilots. A decision is expected by April 15. The pilots union says it will strike if its contract is voided. Other Delta employees also have taken deep pay cuts over the last year or two.
Delta's lead bankruptcy lawyer, Marshall Huebner, said it's understandable that some people are perplexed by the size of the professional fees.
But, he said, "Restructuring is expensive, especially a restructuring of this size. But the work we are doing is critical to return Delta to financial viability."
It should be noted that even if the bills continue at the rate so far through their exit from Chapter 11, the projected total for the two airlines combined could be $276 million. That would still be lower than the $335 million UAL Corp.'s United Airlines spent on its bankruptcy case during the 38 months it was in Chapter 11.
Northwest has said it hopes to finish its reorganization plan by the end of this year. Delta has said it hopes to emerge from bankruptcy in the summer of 2007.
The court has the final say on what lawyers will get paid, and in some cases they are only given 80 percent of their expenses and fees up front and have to come back for the rest later.
William Whitford, a law professor at the University of Wisconsin who has studied the issue, said more could be done to police the expenses charged by bankruptcy attorneys and consultants.
"They have an incentive, these big firms, to send these lower lawyers off to the library to write this memo and that memo because every memo they write, the law firm is making a profit," he said. Many of those help the debtor's case, he said. But some probably aren't.
"That's where all the gray areas of judgment are, and it's very hard for the process to police," he said.
For instance, one law firm billed Northwest $130 for long-distance faxes, at $1.25 per page. It charged 10 cents for each photocopy, adding up to $17,309. It billed more than $183,000 for online research.
Billing records show 59 lawyers from Bruce Zirinsky's law firm alone working on the Northwest case. Zirinsky himself so far has logged 706.8 hours at $800 an hour. That added up to $565,440 in 3 1/2 months. Zirinsky did not return a phone call seeking comment on the fees.
The money can be well-spent if it helps a company reorganize and turn a profit again, said Douglas Baird, a law professor and bankruptcy expert at the University of Chicago. He said a company's largest creditors often have a lot of say over which bankruptcy attorneys are hired.
"These aren't widows and orphans. These are very sophisticated parties who don't want to throw away money," he said.
He said JPMorgan has been hiring Delta's firm, Davis Polk & Wardwell, for years.
"JPMorgan is a lot of things, but it is not a sop. It is not someone who is going to be paying too much," he said.
Twenty firms that provide legal, financial or consulting services have petitioned a bankruptcy court judge in New York to approve $43.6 million in initial compensation for providing services in Delta's bankruptcy case. The amount covers just the first 4 1/2 months of work. A hearing on the fees is scheduled for April 3.
The fees and expenses could reach $205.9 million if the bills continue at the same rate until Delta exits bankruptcy, which it expects to do in the summer of 2007. The total assumes Delta exits the first day of summer next year, June 21. A Delta spokesman, Michael Freitag, said the airline has not released its own projection.
For Northwest, 18 firms or committee members have requested approval of $15.9 million in fees and expenses for the first 3 1/2 months of work. Zirinsky has said the company hopes to propose its bankruptcy exit plan by the end of this year. Projected through Dec. 31, Northwest's total fees and expenses could reach $70.3 million. Eighty percent of the initial fees and 100 percent of all the expenses have been approved so far.
Huebner predicted that Delta's fees will likely be much smaller in the middle of its case than at the beginning, which could lessen the total amount of fees and expenses once the case concludes. Whatever the final number, it will be big, he acknowledged, though he said it's necessary.
"The professional fees helped Delta borrow the money that it needs to turn the company around, because without financing you're out of business," Huebner said.
One deal the lawyers brokered - renegotiating lease terms on 88 aircraft - has saved $200 million a year for the next five years, Huebner said, adding that a lot of work has gone into providing the airline the legal and financial services it needs in bankruptcy.
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On the Net:
Delta Air Lines Inc.: http://www.delta.com
Northwest Airlines Corp.: http://www.nwa.com
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