AMR Pilots Back Contract as Boost Seen in Merger Process

AMR Gets Bankruptcy Boost as American ’s Pilots Ratify Contract
Dallas based American Airlines jet takes-off at Dallas-Fort Worth International Airport in Dallas. Photographer: Matt Nager/Bloomberg

American Airlines pilots approved their first new contract since 2003, securing the labor savings sought by parent AMR Corp. and giving a possible boost to US Airways Group Inc.’s push for a merger.

The accord was approved by 74 percent of those voting, the Allied Pilots Association said yesterday. The six-year contract will give pilots a 13.5 percent stake in the post-bankruptcy company and annual pay raises while freezing their pension and requiring longer work hours.

Pilots became the last work group to accept pay, benefit and work-rule changes as Fort Worth, Texas-based AMR crafts a reorganization plan. Creditors have sought a resolution on labor expenses so they can weigh AMR’s strategy to exit bankruptcy as an independent carrier against a US Airways takeover bid.

“Ratification helps ease the way towards a potential merger,” Jamie Baker, a JPMorgan Chase & Co. analyst in New York, said in a note to investors. “A failure to ratify would have essentially stopped the clock, in our view, further dragging out an already complex process.”

US Airways rose 1.3 percent to $12.77 yesterday, extending a rally that has more than doubled the stock price this year on speculation that Chief Executive Officer Doug Parker would succeed with an AMR takeover. Baker has an overweight rating on the shares.

Combination Studied

“We have been evaluating the merits of a combination under a non-disclosure agreement with US Airways,” AMR CEO Tom Horton said in a letter to employees. “While we are confident the new American will be very strong, we are evaluating whether such a combination could create value for our owners and a positive outcome for our people and our customers. We expect to have a conclusion on this soon.”

The Wall Street Journal reported that US Airways sent AMR a merger proposal in mid-November that called for creditors to receive a 70 percent stake in a combined airline. Andy Backover, an AMR spokesman, and Ed Stewart, a US Airways spokesman, told Bloomberg News they had no comment on the report, which cited unidentified people familiar with the matter.

AMR and US Airways are working to resolve differences in how each company values a combined airline and any financial gains, a person familiar with the matter said. That step must be finished before a merger could be considered, said the person, who asked not to be identified because the talks are private.

No Confidence

American’s pilots union reiterated its backing for a tie-up with Tempe, Arizona-based US Airways, which would create the world’s biggest carrier by passenger traffic, and distanced itself from Horton.

“This ratified agreement should not in any way be viewed as support for the American stand-alone plan or for this current management team,” said Dennis Tajer, an APA spokesman. “We continue to support an American-US Airways merger as the best way to strengthen our airline.”

Combining with US Airways is AMR’s “best chance to achieve competitive scale and any valuable merger synergy benefits under a credible, proven management team that might boost revenue and lower overhead costs,” Vicki Bryan, a Gimme Credit LLC bond analyst in Houston, said in a note to clients.

AMR’s $460 million of 6.25 percent convertible notes due October 2014 rose 3.6 percent yesterday to 79 cents on the dollar, the highest price this year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes traded at 17.75 cents after AMR filed for Chapter 11 protection on Nov. 29, 2011.

Creditors Committee

American’s three biggest unions are on the unsecured creditors committee that has a voice in major decisions in AMR’s bankruptcy. Jack Butler, the panel’s attorney, met with pilots before the vote, warning them of the risks of a contract rejection, said three people familiar with the matter who asked not to be identified because the sessions were private.

The airline said the new contract responds to the priorities of the pilots union, which last agreed on a contract more than nine years ago and had been in talks with American since 2006.

“Ratification gives us the certainty we need for American to successfully restructure, providing opportunity and growth for all of our people and stakeholders,” said Denise Lynn, American’s senior vice president-people.

American’s 8,000 pilots rejected a previous tentative agreement with 61 percent of the vote in August, prompting the third-largest U.S. carrier to throw out the existing contract and begin imposing changes to trim spending.

Labor Costs

AMR said industry-leading labor costs helped push it into bankruptcy. The company sought to pare expenses 17 percent for each work group, including $315 million a year from pilots in pursuit of $1.06 billion in labor savings. The company is eliminating 10,000 positions, with all but 1,800 of the cuts coming through early-out programs and attrition.

APA and American’s other unions agreed in April to contract terms with US Airways, contingent upon a merger. American retains the exclusive right to file a reorganization plan until Jan. 28. A request for an extension to March 11 is pending before the U.S. Bankruptcy Court in Manhattan.

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

Before it's here, it's on the Bloomberg Terminal. LEARN MORE