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AMR Risks Cash Drain as Discord Slows Union Concession Talks

AMR Risks Cash Drain
A fuel truck drives past an American Airlines Inc. plane on the tarmac at O'Hare International Airport in Chicago. Photographer: Daniel Acker/Bloomberg

American Airlines’ push for $1.25 billion in labor savings is bogging down, possibly imperiling its turnaround bid, as the union strife that preceded parent AMR Corp.’s bankruptcy spills into a new round of talks.

A failure to win negotiated concessions would force AMR to ask a bankruptcy judge to let it impose new contract terms, adding legal steps to the process and delaying implementation of changes the airline has said it needs to stem losses.

That would erode AMR’s $4.1 billion in cash and short-term investments on hand as of Feb. 29, the same total as three months earlier when the company filed for Chapter 11 protection. The hoard, a record for a U.S. airline entering bankruptcy, has bolstered American’s goal of fending off any suitors and remaining an independent carrier.

“Cash is limited,” Vicki Bryan, a senior bond analyst at New York-based Gimme Credit LLC, said in an interview yesterday. “It’s going to only get worse the longer the beast is bleeding. That hemorrhaging is going to cost money.”

The prospect of a new labor-management standoff echoes the five years of failed contract talks at the third-largest U.S. airline before AMR entered bankruptcy. The Fort Worth, Texas-based company ended 2011 with its fourth straight annual loss, pushing the cumulative deficit over that span to more than $6 billion.

‘Extremely Slow’

While AMR hasn’t said when it will ask Judge Sean Lane in Manhattan for the power to dictate contract terms, it has signaled that such a step is near and noted that losses persist. Bankruptcy law requires a good-faith effort to negotiate concessions first.

“It is vital that we reach consensual agreements very soon with all of our unions,” Bruce Hicks, a spokesman for American, said yesterday in a statement. “We are still a long way from that point and can’t afford to continue at this extremely slow pace.”

Since unveiling a plan for 13,000 job cuts on Feb. 1 and beginning talks, American has been sued by its pilots and challenged last week by work groups representing 49,700 employees to submit to binding arbitration. Labor makes up the bulk of American’s plan for $2 billion in cost reductions.

‘Mutually Beneficial’

“American must acknowledge that its term sheet is not written in stone, but can and must be molded and transformed for creative and mutually beneficial solutions,” Laura Glading, president of the Association of Professional Flight Attendants, told members in a hotline message.

The Transport Workers Union, which represents mechanics and bag handlers, said after the arbitration request was submitted that “all efforts” for direct negotiations had been exhausted.

While protracted legal wrangling with unions may deter possible suitors because of questions about future costs, jettisoning contracts over labor’s objections also may add to the risk of a takeover, said Jeff Straebler, an independent airline analyst in Stamford, Connecticut.

That’s because American’s three major unions and insurer Pension Benefit Guaranty Corp. hold four of nine seats on AMR’s unsecured-creditors committee, Straebler said.

“A potential acquirer could offer a deal that would secure those votes, and would only need one more” to have a majority of the panel, Straebler said. US Airways Group Inc. has said it’s weighing a possible AMR merger, and TPG Capital and Delta Air Lines Inc. also are evaluating bids, people familiar with the matter have said.

Lessons From Delta

US Airways President Scott Kirby said today that building support among bankruptcy constituents, particularly labor, was among the lessons learned from the carrier’s failed 2006 hostile takeover bid for Delta. Kirby, speaking at the JP Morgan Chase & Co. Aviation, Transportation & Defense Conference, declined to comment on AMR.

Even going to court to throw out labor contracts takes time. Once such a request is made, a hearing must begin within 21 days, and the judge must rule within 30 days. Talks could be held during the interval and lead to an agreement before a judicial order.

American and its unions “just have such a long, bad history that it may end up being the judge will have to make unilateral decisions on what ends up being the new contracts,” said Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut. “It’s unfortunate from a labor standpoint.”

The airline has blamed its bankruptcy filing in part on annual labor costs that are about $800 million more than those of its largest rivals, United Continental Holdings Inc. and Delta.

Pension Freeze

With the latest negotiations stymied, American stepped back on March 7 from a demand to terminate its underfunded pensions, saying it would freeze plans for employees other than pilots.

A day later, the Allied Pilots Association, TWU and the flight attendants union asked the National Mediation Board to intervene and send the airline’s job-cut plan to binding arbitration. Neutral examiners would study positions on both sides and craft solutions.

“What they’re asking for is pretty extraordinary,” said Richard L. Wyatt, a partner at Hunton & Williams in Washington who has represented major airlines in collective bargaining disputes. “The NMB doesn’t have that power. American is, for better or worse, under supervision of the bankruptcy court. I can’t imagine they’d agree to this and basically take it out of court oversight.”

March 19 Response

The mediation board asked American to respond to the arbitration request by the close of business March 19, according to the airline, which said it will focus in the meantime on reaching agreements with its unions.

“Bargaining a consensual agreement may not prove to be possible,” APA President David Bates told members last week. The TWU reacted to the pension freeze by calling it a “major move forward” while saying the union still needs “consensual agreements with all TWU-represented work groups.”

United’s former parent, UAL Corp., secured union agreements to help cut spending by $4 billion, including eliminating almost 24,000 jobs, before leaving Chapter 11 in 2006. Delta got rid of 6,000 jobs in bankruptcy.

The former Northwest Airlines chopped its workforce by 22 percent while in court protection and imposed new contract terms on attendants after bargaining failed. A year later, the attendants union was still demanding that then-CEO Doug Steenland resign.

‘Plunging Ahead’

“The history of airlines in bankruptcy has been one of judges plunging ahead and the union and workers be damned,” said Ray Abernathy, a spokesman for American attendants in their 1993 strike who now leads a Washington-based labor communications firm. “That’s happened over and over again. I don’t see anything here that would change that.”

Labor memories also run deep at American, where unions agreed to $1.6 billion in givebacks in 2003 amid an earlier bankruptcy threat. CEO Tom Horton’s predecessor, Gerard Arpey, stirred hopes of management goodwill that year when he took the job after those givebacks.

Pilots saw a similar opportunity with Horton, 50, who succeeded Arpey on the day the company filed for Chapter 11, said Sam Mayer, an APA spokesman.

“In our initial talks with the new CEO that was emphasized: ‘You have an opportunity here to take the first steps to reset the culture,’” Mayer said. “What we have seen in the initial stages of this process is more of the same, almost a doubling down of the old way of doing business.”

Even before last week’s efforts to inject the mediation board into the bankruptcy cuts, the pilots union went to court to challenge American’s right to rework labor contracts, forcing the airline to defend another legal front.

“At the very least, this throws a wrench in the gears,” Robert Mann, a former executive at American who now runs consultant R.W. Mann & Co. in Port Washington, New York. “This is a prima facie example of how toxic the relationship is all across the property. This is just the tip of the iceberg, but it’s obviously capable of taking down the whole ship.”

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