Bloomberg News

AMR Seeks to Reject Union Contracts in Bankruptcy Court

March 23, 2012

AMR Corp.’s American Airlines (AMR) plans next week to start a bankruptcy-court process for rejecting union contracts after failing to reach a deal to cut labor costs.

American will ask for court approval to void the contracts unless there is a “profound change” in negotiations with unions, AMR’s bankruptcy attorney Harvey Miller said at a court hearing yesterday in Manhattan.

“We must start the process if we are going to bring these cases to a successful conclusion within a reasonable period of time,” Miller told U.S. Bankruptcy Judge Sean Lane.

The plan escalates AMR’s efforts to win lower labor costs in contract talks that began in 2006. AMR is now seeking $1.25 billion in annual labor savings, including 13,000 job cuts, as it reorganizes in bankruptcy.

“A deadline will focus the union leadership teams,” said Jeff Straebler, an independent airline analyst in Stamford, Connecticut. “It will come down to their making a choice of getting the best deal in negotiations or rolling the dice with the judge.”

AMR won court approval yesterday to extend to Sept. 28 its control over the reorganization and retain the exclusive right to file a bankruptcy plan. Jack Butler, a lawyer for AMR’s unsecured creditors, said in court that the plan will lead to “complete conversion” of unsecured debt to equity.

Bankruptcy law permits companies in court protection to seek permission to rework contracts to help them restructure. Bargaining can continue even after the filing of a motion to void labor accords at the third-largest U.S. airline.

‘Real Threats’

American will file a motion seeking to reject collective bargaining agreements next week, Jeff Brundage, AMR’s senior vice president for human resources wrote in a letter yesterday, saying the airline faces “mounting financial pressures and real threats in the market.”

“We are preparing for this step now because we must face our current challenges head on and can no longer afford to wait,” he wrote.

Fort Worth, Texas-based American’s stated aim has been to speed the expense cuts by winning agreements on work rules and other changes through union negotiations. That quest has proved difficult, with the labor-management discord spilling into the latest talks in a rerun of the tensions that preceded AMR’s Nov. 29 bankruptcy filing.

Standing Ready

The Transport Workers Union, whose members include baggage handlers and mechanics, prefers to reach a consensual deal with American while standing ready to “defend our members” by going to court, President Jim Little said in an e-mailed statement regarding AMR’s plan to cancel contracts in court.

“The abrogation scenario is simply not going to fly,” Tom Hoban, a spokesman for the Allied Pilots Association, said in an interview. With the two sides far apart, AMR’s plan to void the agreements is “not entirely unexpected,” he said.

The company “has no interest in achieving a constructive relationship with labor, based on trust and respect,” the Association of Professional Flight Attendants said in an e-mail update to its members. “Instead, it is perpetuating its long- standing practice of preferring contention over consensus. This is regrettable.”

Biggest Work Groups

The three unions are the biggest work groups at American, and the cancellation motion would cover contracts for pilots, flight attendants and seven work groups under the TWU.

AMR filed for Chapter 11 protection after annual losses that began in 2008, making it the last of the U.S. industry’s full-service carriers to seek to restructure in bankruptcy.

Labor was the biggest chunk of $2 billion in proposed expense cuts in the Feb. 1 plan, which would eliminate the jobs of about 18 percent of American’s 73,800 employees. Lower operating costs also will help AMR reap $1 billion more in annual revenue by 2017, Chief Executive Officer Tom Horton has said.

A takeover of AMR looms as a possibility if the carrier can’t restructure successfully on its own. US Airways Group Inc. (LCC) has confirmed its interest in a possible bid, and TPG Capital and Delta Air Lines Inc. (DAL) also are evaluating bids, people familiar with the matter have said.

Hired Advisers

“We have disclosed that we have hired advisers to investigate the American situation,” US Airways CEO Doug Parker told reporters March 21 in Phoenix. “That work continues. I suspect it will for quite some time.”

The company’s vulnerability to a takeover would increase with a successful bid to scrap labor contracts, said Straebler, the analyst.

“The unions would be open to a better deal from a third party like US Airways,” Straebler said in an interview.

AMR moved ahead March 21 with plans to reorganize its American Eagle regional unit, telling the carrier’s unions that annual spending must be trimmed by $75 million while paring as many as 600 jobs. The company didn’t detail plans for American Eagle when spelling out the savings sought at American on Feb. 1.

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

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: John Pickering at jpickering@bloomberg.net; Ed Dufner at edufner@bloomberg.net


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