AMR Corp. (AAMRQ:US)’s effort to reduce labor costs is being considered by a judge after the airline and its employees clashed in court over company claims that the cuts are needed to exit bankruptcy.
U.S. Bankruptcy Judge Sean Lane in Manhattan will decide whether to allow American Airlines to tear up union contracts after American and unions representing pilots, flight attendants and mechanics made closing arguments yesterday on the airline’s plans. Lane said he expects to rule by June 22.
A win for American would allow the carrier to pare labor costs and make changes to operations to boost revenue, aiding its effort to restructure and become profitable after losses and failed labor negotiations drove the company into bankruptcy.
The trial over the contracts ends as US Airways Group Inc. (LCC:US) is pursuing a merger with Fort Worth, Texas-based AMR. US Airways has reached agreements on contract terms with the three unions, which say that they would be better off in a merged company. A combination of the two carriers would surpass United Continental Holdings Inc. (UAL:US) as the world’s largest airline based on passenger traffic.
During closing arguments yesterday, Jack Gallagher, an attorney for American, called the possibility of a merger between the companies speculation regardless of union support for it. Only American’s business plan as a standalone company is relevant to the judge’s decision on the contracts, he said.
“The suggestion that there is a transaction likely with US Airways is wholly speculative, wishful thinking,” he said. “American Airlines is strong as a standalone company. American Airlines doesn’t need a merger.”
Lane urged American and the unions to negotiate a deal as he considers a ruling. Even if the judge lets the carrier tear up its union contracts, the two sides will be “stuck with each other” and have to negotiate new agreements, he said.
“I urge, and cannot urge any more strongly, that parties resolve this dispute where it should be dealt with, at the negotiating table,” Lane said. “That means people are going to have to pocket some really hard feelings on both sides that go back quite a ways.”
The unions already have agreed to take part in talks with American that will be overseen by another U.S. bankruptcy judge.
Talks With Workers
The flight attendants have said they’ll meet with American starting May 29 and the pilots, June 4. A date hasn’t been disclosed for talks with mechanics and aircraft stock clerks, the only Transport Workers Union bargaining units not to approve American’s last contract offer on May 15.
American is seeking to lower costs by $2 billion a year, including about $990 million from the unions, and boost revenue by $1 billion annually. Key to that effort is overhauling collective bargaining agreements that AMR says have saddled it with restrictions on how it operates and the highest labor costs in the industry.
The carrier warned in court papers that it “will have no viable business enterprise” if it can’t void the agreements.
At the trial, which began in April, AMR witnesses, including Chief Restructuring Officer Beverly Goulet, promoted the business plan and explained the need to shrink labor costs. Goulet defended the plan after criticism by unions and their advisers, saying it ensures American will operate profitability over the longterm. When asked if American has a future as a standalone company, she said “absolutely.”
American’s plan calls for cutting as many as 13,000 jobs, changing work rules and benefits it says it can no longer afford, investing in its fleet, growing internationally and making greater use of regional jets.
The unions contend American hasn’t made the case for rejecting the contracts. American designed its business plan and reductions in labor costs without considering a merger that could lessen sacrifices sought from union workers, they argue.
“The company hasn’t shown need. The company hasn’t shown good faith,” Sharon Levine, an attorney for the Transport Workers said.
The case is In re AMR Corp., 11-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan)
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