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AMR Offers Pension Freeze to Jump-Start Labor Negotiations

AMR Corp. (AAMRQ)’s American Airlines said today it would switch from terminating pensions to freezing them for most employees, seeking to hasten agreements on $1.25 billion in concessions sought in bankruptcy.

The Transport Workers Union, the largest labor group at American, reached a tentative agreement on the freeze after it was offered. American said it will seek additional capital to fund the frozen pensions, without being more specific. The freeze doesn’t apply to pilots.

American has made little progress in talks with its unions since proposing concessions on Feb. 1, and has warned the clock is ticking on securing consensual agreements. Labor givebacks and work-rule changes are a key part of a plan to cut costs by $2 billion a year and raise an additional $1 billion in revenue as parent AMR restructures after filing for Chapter 11 on Nov. 29.

“We believe this solution would remove a major obstacle to reaching consensual agreements and help to spark needed urgency at the bargaining table,” Jeff Brundage, American’s senior vice president for human resources, said in a letter to employees. “It’s time to move to the next phase in the restructuring process.”

The change in Fort Worth, Texas-based AMR’s position was a collaborative effort among American, the Pension Benefit Guaranty Corp. and the unsecured creditors committee in its bankruptcy, said Bruce Hicks, an American spokesman. He declined to be more specific.

‘Drew a Line’

The company won’t increase the $1.25 billion in concessions it’s seeking from the unions, even with the change to frozen pensions. Freezing the pensions will cost about $800 million more than terminating them, American has said.

The TWU, whose members include mechanics, baggage handlers and other airport ground operations workers, said its negotiators “drew a line in the sand” when it came to terminating pensions.

“We would have preferred to keep the existing defined- benefit plan in place, but that simply was not possible,” Jim Little, TWU International president, said in a statement. “We’re still discussing how to handle retirement savings going forward, as well as a very wide range of other issues. We are not out of the woods.”

Migrating to 401(k)

Freezing benefits would allow employees to keep full benefits accrued before the date they’re stopped. American would continue to administer the plan, and its unfunded pension liabilities would remain on the company’s balance sheet. AMR, which plans to switch to a 401(k) structure in the future, no longer would pay into the pension funds.

“Bankruptcy forces tough choices, but that doesn’t mean pensions must be sacrificed for companies to succeed,” Josh Gotbaum, director of the Pension Benefit Guaranty Corp., which insures pensions, said in a statement. “We will continue to work with American and the other participants in the bankruptcy to ensure that success.”

If the pensions are terminated, the PBGC takes over administration of the plans and retirement payouts are capped at certain levels. Those caps won’t exist if plans are frozen.

American doesn’t want to freeze pilot pensions because of an existing lump-sum retirement payout option for pilots. Freezing the pensions without changing that option could leave the carrier vulnerable to a large number of pilot retirements in a short period.

Pilot Options

Mass retirements “would have a severe, detrimental impact on our operations and is a risk that the company simply cannot afford to take,” Brundage said in a separate letter to pilots.

The airline is continuing to work on options for pilot pensions. American has 5,207 pilots over 50 and with at least 10 years of service who are eligible for retirement, the company said today.

The Allied Pilots Association told members today its advisers had concluded it wouldn’t be possible to preserve the lump-sum payout option. As a result, affected pilots will vote on whether to support freezing the “A Plan” and giving up that option, union President David Bates said.

“By voting to support a freeze, thousands of pilots will preserve their earned annuity benefits by avoiding plan termination and the much lower annuities based on PBGC limitations,” Bates said in a message to pilots.

The Association of Professional Flight Attendants was analyzing the freeze proposal’s effect on its members. Union President Laura Glading called AMR’s offer “a small first step toward compromise” and said the union was committed to resolving issues outside of the bankruptcy court.

If American can’t reach agreements with its unions on concessions, the company can ask the bankruptcy court judge to throw out the current contracts and allow it to impose new terms. AMR’s attorneys are scheduled to update the court on labor issues at a March 22 hearing.

The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomerg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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