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AMR Risks Bankruptcy Delay on Pilot Rift as US Air Waits

AMR Risks Restructuring Delay on Pilot Rift as US Airways Waits
AMR Corp.'s American Airlines and its pilots began bargaining in September 2006, and even the Nov. 29 bankruptcy filing that AMR blamed on high labor costs hasn’t been enough to break the stalemate. Photographer: Mike Fuentes/Bloomberg

American Airlines’ widening rift with its pilots union threatens to delay the bankruptcy restructuring of parent AMR Corp. and improve the chances for a takeover by US Airways Group Inc.

While AMR’s unsecured creditors committee wants a contract approved by pilots before leaving Chapter 11, Fort Worth, Texas-based American is imposing cost cuts spurned by the union. No new talks are set in bargaining that began in 2006, and the Allied Pilots Association wants members to authorize a strike.

Creditors’ patience may be tested as AMR struggles to show that it can reorganize successfully, said Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tennessee. Even victories such as a new flight attendant accord are tempered by that union’s support for a US Airways merger resisted by AMR.

“Members of the unsecured creditors committee aren’t sitting there with their heads in the sand,” Lowrance said in an interview. “They got the results of the pilot vote -- the sound rejection of the last offer -- and have heard the rhetoric from flight attendants leaders. That’s why it’s hard for me to fathom that we have a stand-alone American after this thing.”

AMR is implementing cuts on pilots as soon as today after winning authorization last week from U.S. Bankruptcy Judge Sean Lane, who approved concessionary contracts with flight attendants and mechanics at a New York hearing today. US Airways has paved the way for a merger with conditional contracts with American’s major unions.

American announced some changes to employee benefits and pensions after Lane’s ruling.

Bonds, Shares

Takeover speculation has buoyed AMR debt this year and helped US Airways shares more than double. AMR’s 6.25 percent convertible notes due October 2014 were unchanged at 66.5 cents on the dollar at 4:20 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. US Airways rose 1.7 percent to $11.82 in New York trading.

For AMR, trying to exit bankruptcy without a pilot deal may discourage potential investors because future costs wouldn’t be known and a walkout would be a possibility, said Hunter Keay, a Wolfe Trahan & Co. analyst in New York. AMR has said its original goal of leaving court protection in 2012 won’t be met.

The creditors committee’s “strong desire” is for a consensual agreement between American and the Allied Pilots Association while AMR remains in court protection, according to Jack Butler, the panel’s attorney.

‘Preferred Course’

“There is a credible legal path to emerge without a deal, but that is not the committee’s preferred course,” he said in an interview.

A consensual agreement also remains AMR’s aim, said Bruce Hicks, a spokesman. A long-term contract would replace the terms being dictated by American and set future pilot costs. Chief Executive Officer Tom Horton has said he must pare annual labor expenses by more than $1 billion to successfully restructure.

“It won’t necessarily be easy,” Hicks said. “But the pilots understand, just as we do, that we both need the assurances of a consensual agreement long term.”

Achieving that would mean mending labor ties that Lowrance said are the worst in the industry. Pilots walked out in 1997 before then-President Bill Clinton intervened minutes later, and staged an 11-day sickout in 1999 that cost American $225 million and led to a fine against the union.

‘New Management’

“Labor needs a new management team to repair the relationship,” Savanthi Syth, a Raymond James & Associates Inc. analyst based in St. Petersburg, Florida, said in an interview. “It’s becoming more evident that it is going to be difficult for the current management to do so. That’s another advantage of a merger -- not just what it brings to the network but from a labor peace perspective.”

US Airways declined to comment immediately, said Ed Stewart, a spokesman for the Tempe, Arizona-based airline.

The APA’s board authorized a strike vote starting today through Oct. 3 in response to AMR’s setting of new contract terms. While federal law prohibits a walkout now, that balloting and the prospect of an eventual strike may scare away investors and passengers.

“It’s going to be an overhang going forward and doesn’t provide a very positive symbol for what is happening at American Airlines now between its pilots and management,” said Dennis Tajer, an APA spokesman. The union has about 8,000 active pilots.

Six Years

American and its pilots began bargaining in September 2006, and even the Nov. 29 bankruptcy filing that AMR blamed on high labor costs hasn’t been enough to break the stalemate. The last contract offer to pilots was rejected Aug. 8 with 61 percent of the vote even though it would have provided a stake in a restructured AMR, raises and protection against layoffs.

“The anger there is tangible,” said Vicki Bryan, a Houston-based senior bond analyst for Gimme Credit LLC. “You can just feel it. It brings into sharper focus the importance of the union relationships with US Airways.”

Excluding any cuts involving pilots, American has won concessions from other unions that will shrink the number of job cuts, to 7,625 from a planned 10,975. Savings from unions will be as much as $900 million a year, and as much as $1.1 billion when non-union workers are included. The amount depends on pilot givebacks, which may total $315 million to $370 million.

Pension Freeze

American will freeze employee pensions on Nov. 1, preserving accrued benefits, the airline told workers in a letter late today. It will create new savings plans with a partial company match and implement changes to medical benefits and retiree medical and life insurance plans, Denise Lynn, senior vice president for people, said in the letter.

One pilot pension plan will be terminated on Nov. 30 and benefits distributed, while a replacement for a second, frozen fund hasn’t been determined. The airline will begin hiring third parties for some maintenance work and shut its Fort Worth, Texas, maintenance base by April 2013, except for a joint venture engine business with Rolls-Royce Holdings Plc.

The company didn’t say how many workers will be laid off, although “many” will take an early-retirement offer or transfers, Hicks said. American has three maintenance bases.

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

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