Bloomberg News

AMR Faces ‘Wide Gulf’ on Pilot Pay as Clock Runs on Talks

November 25, 2011

(Updates with closing share price in fifth paragraph.)

Nov. 14 (Bloomberg) -- AMR Corp.’s American Airlines and its pilot union are haggling about pay and flying rules as the two sides bump up against a company goal of getting a contract agreement this week to end talks that began in 2006.

Negotiations resumed today after Fort Worth, Texas-based American and the Allied Pilots Association recessed for the weekend. The union’s decision to take a break prompted a company hotline message to pilots that action is necessary “not next month, not next year. Right now.”

Compensation and the scope of flying that rivals might do for American loom largest in the pilot talks. The airline is counting on an accord with APA to spur agreements with mechanics and flight attendants and help AMR end annual losses that began in 2008. American and APA said Nov. 9 a deal might come within a week, which would be in time for a Nov. 16 AMR board meeting.

“They can’t afford higher costs right now,” Jim Corridore, a Standard & Poor’s equity analyst in New York, said today in an interview. “They need to right-size their company, and the pilot contract is one way to do that.”

Intraday stock plunges of as much as 41 percent whipsawed AMR last month on concern it would seek court protection en route to a fourth straight annual loss. AMR has said that bankruptcy isn’t “a goal or preference.” The shares fell 4.9 percent to $2.14 in New York, bringing AMR’s 2011 decline to 73 percent.

Bargaining Stalls

While American said it made “significant” movements toward the union position in several areas, bargaining stalled late last week, with the union objecting to the company’s proposals on pay, among other issues.

“It’s a pretty wide gulf,” Tom Hoban, a union spokesman, said in an interview yesterday.

American, the third-largest U.S. airline, wants productivity improvements to pay for raises and help erase what it says is an $800 million-a-year labor-cost disadvantage to peers. Its compensation bill as a percentage of sales is the highest among U.S. carriers.

According to the union, the company is proposing a “concessionary contract” that would save at least $100 million a year before any benefits from expanding so-called code-share flights. That’s the industry practice of allowing partner airlines to book travelers on each other’s planes, which pilots see as eroding job security.

Pay Proposal

The union said American offered a 3.21 percent raise in the first year, taken as a lump sum, a structural rate increase or a combination, followed by three annual boosts of 1 percent each. Pilots sought a 10 percent signing bonus, followed by 7 percent raises each of the next three years.

“I don’t see us moving off that figure,” Hoban said. “It’s a pretty reasonable offer.”

S&P’s Corridore said an agreement that includes the pilot pay plan would help drag AMR into bankruptcy. Absent “significant work-rule changes and productivity gains to cut costs, this contract is a loser,” said Corridore, who recommends holding the shares.

New union accords, including one for the 8,700 APA- represented pilots, are the final piece of a plan to return AMR to profit and make American competitive, according to the airline.

Five Cities

Since 2009, American has focused flights on five U.S. cities most important to business travelers, completed joint business agreements with carriers across the Atlantic and Pacific to capture more international passengers and ordered 460 new aircraft to boost fuel efficiency and reliability.

“To make our major investments pay off, we need to achieve mutually beneficial, transformational labor agreements and now is the time to do so,” said Sue Gordon, an airline spokeswoman.

The union is “ready, willing and able to negotiate as long as meaningful progress continues to be made,” President David Bates told members in a Nov. 11 message. While Bates said he remains “hopeful” of reaching an agreement, “management has not yet shown us a path to an agreement that is close to being acceptable to the APA leadership.”

A new pilot contract might reap savings of “a few hundred million dollars a year,” said Bob McAdoo, an Avondale Partners LLC analyst who is based in Prairie Village, Kansas, and rates AMR as “market outperform.” He said an agreement with pilots may trigger progress in talks with attendants and mechanics.

American’s pilots want to avoid givebacks after joining other unions in providing $1.6 billion in concessions to help AMR avoid bankruptcy in 2003.

The carrier wants to expand a relationship in which its airline code is put on Alaska Airlines flights and to initiate such agreements with JetBlue Airways Corp. and US Airways Group Inc., according to the union.

“It’s significant outsourcing,” said Hoban, the APA spokesman. “It makes the line pilots cringe.”

--Editors: Ed Dufner, James Langford

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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