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AMR in Stalemate in Bid for $800 Million Labor Savings

AMR Corp.’s American Airlines, saddled with the U.S. industry’s highest labor costs, now faces contract negotiations stalled so badly that federal mediators have walked away from the talks.

A stalemate with three unions is thwarting American’s bid to chop what it says is an $800 million-a-year disadvantage to rivals in labor expenses. Pilots say “considerable gaps” remain as they meet with executives at a rural Texas resort this week to assess what to do next in bargaining that began in 2006.

Unions for the pilots, flight attendants and ground workers want to recoup at least part of the $1.6 billion in annual concessions made to avert bankruptcy in 2003. Fort Worth, Texas-based AMR seeks productivity gains to cut labor bills that are helping drag it to a fourth straight annual loss.

“Not only do they need to be able to exact some cost savings out of labor agreements, but they need certainty to navigate what’s ahead,” said Brian Nelson, president of equity research at Valuentum Securities Inc. in Chicago. “While they do have a large cash position, their cash-flow generation is faltering. I would put labor near the top of the priority list.”

AMR will be alone among peers with a 2011 loss and won’t post a profit in 2012, based on analysts’ estimates compiled by Bloomberg. Its labor spending last year equaled 30.9 percent of sales, the most among the six largest U.S. airlines, according to data compiled by Bloomberg.

Union Template?

“The breakthrough would be if you got the pilots to do some concessions,” said Henry Oechler, an attorney with Chadbourne & Parke LLP in New York who has handled airline labor issues. “That could serve as a template for the other unions.”

By law, airline contracts don’t expire, so existing pay scales and work rules stay in place pending a new accord. American has flown for years under terms it wants to change while working on deals with three unions whose members make up 73 percent of employees at the third-largest U.S. carrier.

A National Mediation Board mediator recessed talks last month between American and the union for 11,000 mechanics over a lack of progress and didn’t set new sessions, after a similar outcome for baggage handlers in July. An April NMB session ended with no dates for more talks with 17,000 attendants.

American and its pilots have been on their own for talks since October, when the NMB abandoned those negotiations.

‘Very Challenging’

“As tough as 2011 has been, 2012 is shaping up to be another very challenging year,” Jeff Brundage, American’s senior vice president for employee relations, said in an e-mail before he and Vice President Mark Burdette gathered this week with pilot leaders at Rough Creek Lodge & Resort in Glen Rose, Texas.

While Brundage said American was “working as quickly as possible with our unions,” the Allied Pilots Association said it didn’t see any agreement soon.

“We’ve got considerable gaps between our positions on some of the big areas,” Sam Mayer, a union spokesman, said in an interview. “I don’t think either side has an expectation of getting there in one week, but we’ll have a better idea if both sides think they have a way to bridge the gaps.”

A contract with American’s 8,700 active pilots can’t come too soon for the airline, which hasn’t posted an annual profit since 2007 and saw competitors return to profit in 2010.

Stock Performance

AMR is the worst performer on the 10-carrier Bloomberg U.S. Airlines Index in 2011, tumbling 55 percent before today. The shares closed yesterday at $3.52, compared with $24.69 when talks started with pilots on Sept. 20, 2006.

Most American rivals were in bankruptcy then or had exited within 12 months. Avoiding Chapter 11 meant American couldn’t chop costs in court protection. Then it missed out on consolidation such as last year’s United Airlines-Continental Airlines merger, which created the world’s biggest airline.

AMR should end 2012 with $4.4 billion in liquidity, “so no financial risk” now, Dan McKenzie, a Rodman & Renshaw analyst in Chicago, said in a report yesterday. “But the margin for error continues to narrow.”

Through 2015, AMR has $6.37 billion due in principal payments on long-term debt, spokesman Sean Collins said.

Adding to the urgency for a pilot accord is the fact that American has ordered hundreds of Boeing Co. and Airbus SAS jets it can’t fly until new pay scales are negotiated, said Hunter Keay, an analyst at New York-based Wolfe Trahan & Co. who rates AMR as “underperform.” McKenzie recommends holding the stock.

NMB’s Role

The National Mediation Board declined to comment on the status of American’s labor talks. With the freeze, American isn’t getting its sought-after savings, and its work groups don’t have payback for the 2003 concessions or the required federal clearance to move toward a strike.

“We might be sitting on the sidelines for quite some time,” said Sidney Jimenez, president of Transport Workers Union Local 568 in Florida, which represents workers such as baggage handlers.

American has reached agreements with each work group on numerous contract provisions. The unresolved issues are those that often require the most negotiating time, including compensation and retirement.

Laura Glading, president of the Association of Professional Flight Attendants, said it was “baffling” that American hasn’t concluded agreements with its biggest unions.

“All three groups are offering them some increased productivity and efficiency,” Glading said in an interview. “Yet you still don’t do what you need to do to close the deals.”

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