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AMR’s American Denied Court Leave to Toss Pilot Contract

AMR (AAMRQ) Corp.’s American Airlines was denied approval from a federal bankruptcy judge to cancel its pilot contract and impose cost reductions after the union refused to accept concessions.

AMR didn’t prove that a successful reorganization depended on being able to end restrictions on domestic airline-marketing accords and pilot furloughs, U.S. Bankruptcy Judge Sean Lane in Manhattan said yesterday. AMR pared those demands in later talks with pilots and said it will propose the changes and submit a new request to Lane by tomorrow.

Contract talks between management and the union for American’s pilots began in 2006 and dragged past AMR’s Nov. 29 bankruptcy filing. The narrowness of the points raised by Lane means that the Allied Pilots Association can’t claim victory, said Ray Neidl, a Maxim Group LLC analyst in New York.

“It sounds like the judge wanted some modifications made and that American can still achieve the goals they are looking for,” Neidl said in an interview. “But nobody should be celebrating. They still have to negotiate a contract after this.”

AMR will impose new cost-saving contract terms once it secures Lane’s approval, General Counsel Gary Kennedy said. The Fort Worth, Texas-based company said it hopes the judge will set a hearing within 14 days and rule shortly afterward.

Photographer: Andrew Harrer/Bloomberg

American Airlines Inc. planes at Ronald Reagan National Airport in Washington, D.C. Close

American Airlines Inc. planes at Ronald Reagan National Airport in Washington, D.C.

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Photographer: Andrew Harrer/Bloomberg

American Airlines Inc. planes at Ronald Reagan National Airport in Washington, D.C.

“We think it’s a relatively easy fix,” Kennedy said on a conference call. Kennedy said Lane “agreed on virtually everything” in AMR’s motion to void its pilot contract except for points related to furloughs and so-called code-sharing.

Marketing Agreements

Furloughed workers are those who have been laid off and are offered their jobs back before new employees are hired. Code- sharing is the industry practice of agreements between airlines to put each other’s codes on flights and book passengers on those planes.

“The court concludes that American’s proposed changes to furlough and code-sharing have not been justified,” Lane said in his opinion. “Given the significance of these two provisions collectively to American’s proposal, the court finds that American has not shown that the proposal is necessary as required.”

APA members on Aug. 8 rejected a sweetened offer that would have eliminated furloughs and given them a 13.5 percent stake in AMR after it emerged from court protection. Even if Lane eventually allows AMR to void the pilots’ current contract, the company still would have to negotiate a long-term deal.

Kennedy said the airline prefers to do that in bankruptcy, though there is no legal requirement for it to do so.

Flight Attendants

The labor spotlight at the third-largest U.S. airline now shifts to flight attendants, who finish voting on Aug. 19 on what American describes as its final contract offer.

Members of the Association of Professional Flight Attendants shouldn’t assume that Lane would prevent the voiding of their current labor agreement if they reject the latest plan, said Denise Lynn, senior vice president, people. The issues Lane raised in yesterday’s ruling are specific to pilots, she said.

“We will be doing what we can to make sure employees across the company understand the nature of Judge Lane’s ruling as clearly as possible,” Lynn said. “We’ll be paying close attention to it and making sure we’re doing what we need to do to make sure we get accurate information to the flight attendants.”

Members of the Transport Workers Union, American’s other major union, have already ratified new contracts that include givebacks.

US Airways

The TWU, APA and APFA have also all reached tentative labor accords with potential suitor US Airways Group Inc. (LCC) as the Tempe, Arizona-based carrier studies a takeover attempt. It hasn’t made a formal offer because AMR holds the exclusive right to propose a restructuring plan through the end of this year.

“For many months now, we’ve emphasized that AMR management has overreached in their desire to extract more concessions than are warranted to support their reorganization plan,” Keith Wilson, the president of the pilots’ union, said in a message on the union website. “Management went well beyond what is the industry standard for bankruptcy contracts, and the judge recognized this in his decision today.”

Lane said American has established that the pilots’ labor agreement needs “significant changes,” citing the “undisputed fact” that American’s expenses for pilots are some of the highest among its peers.

Reaching Agreements

American needs to end its disputes with unions, either by agreement or by canceling contracts, to move on with its reorganization and consider strategic alternatives, Jack Butler, an attorney for the committee representing unsecured creditors, said in a statement. The committee expects AMR’s revised proposal for the pilots to be approved by Lane, he said.

The judge’s decision “makes clear that American’s business plan is well-grounded, that its plan for success is reasonable, and that it has approached the sacrifices required of its employees in a fair and equitable way,” an AMR spokesman, Bruce Hicks, said in a statement.

AMR blamed its bankruptcy on labor costs that it said exceeded competitors’ by as much as $800 million a year. The carrier originally said it would cut 13,000 jobs, or about 18 percent of its workforce, under a plan to reduce annual operating expense by $2 billion. Labor made up $1.25 billion of the total, including $990 million sought from union workers.

Modified Demands

American later modified its demands, agreeing to freeze rather than terminate employee pensions and lowering total cost reductions sought to 17 percent from 20 percent for each work group. For some unions, planned furloughs were cut or voluntary buyouts were offered.

“Given American’s extreme losses over the past decade and that the requested changes are necessary to bring American generally in compliance with the labor costs and structure of its competitors, the court finds the proposed uniform cut of 20 percent is fair and equitable,” Lane said in his decision.

APA members on Aug. 8 voted 61 percent against the airline’s final contract offer, prompting the union board to seek the resignation of President David Bates. Bates had been a major proponent of a merger with US Airways, and APA said that commitment would not change with new leadership. American has more than 8,000 pilots.

Lane’s decision adds another chapter to the turbulent relationship between pilots and American management that dates back to a dispute over the 1998 acquisition of Reno Air Inc.

Pay Dispute

A dispute over pay and how to integrate Reno pilots into the APA seniority list led to an 11-day sickout by American pilots in February 1999 that forced the cancellation of 6,600 flights and cost the carrier about $225 million. In 2003, pilots and other union workers gave $1.6 billion in annual concessions to keep AMR out of bankruptcy.

During court hearings in May, Lane urged the two sides to reach agreements on concessions before his ruling, noting that if he allowed American to tear up existing contracts, they still would have to negotiate longer term accords.

American earlier said it would use an April 19 contract offer as the basis for imposing pilot concessions, including allowing larger jets to be flown at commuter partners, establishing domestic marketing agreements with other U.S. carriers and increasing employee medical costs. Work-rule changes to boost productivity may lead to as many as 400 furloughs.

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

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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