American Airlines bankruptcy case goes to court today

By Andrea Ahles

Let the arguments begin.

Today, in a New York courtroom, the American Airlines bankruptcy case opens a crucial phase as attorneys for the Fort Worth-based airline make opening statements in a hearing aimed at persuading U.S. Bankruptcy Judge Sean Lane to throw out union contracts.

The event drew a crowd of 300-plus transport workers and flight attendants outside the bankruptcy court this morning, chanting, "We got sold out."

The carrier has said it needs $1.25 billion in employee-related cost cuts to emerge from bankruptcy successfully, including changes in work rules and benefits, the closing of its Alliance Airport maintenance base and freezing pension plans.

But the airline's three major unions have opposed the company's restructuring plans and added to the drama Friday by saying they would support a potential takeover bid by US Airways. Union members are expected to protest today outside the New York courthouse and at major airports including DFW. Attorneys for the unions will present their side in the hearing next month.

American management holds the exclusive right to present a reorganization plan to the court until late September. American's parent company, AMR Corp., filed for bankruptcy in November.

Bankruptcy experts say the hearing is likely to last several weeks, discussing in detail how American's labor costs need to be lowered if the carrier will be able to compete against its chief rivals, Delta Air Lines and United Continental.

"AMR will be under a fairly heavy burden to show the benefits of these cuts outweigh the harm to the union members," said Max Newman, a bankruptcy attorney at law firm Butzel Long.

But based on past cases, American is likely to prevail.

Section 1113

Under Section 1113 of the U.S. Bankruptcy Code, companies are allowed to ask a court to reject union contracts as part of their reorganization. Section 1113 is not used in all bankruptcy cases, and when it is employed, it is usually a last resort by the debtor, experts said.

But the threatened hostile bid from US Airways is likely to add pressure to the case. The judge can extend American's exclusivity period again, but only up to 18 months.

"Rejection under 1113 is the backstop that forces the unions to the table and accept significant parts of what management is requesting," said Ken Malek, managing director at Conway MacKenzie, a financial turnaround and crisis management firm. "The unions are going to have to make material concessions. They have no choices here."

American spokesman Bruce Hicks said the company prefers to make contract agreements with its unions. But it is prepared to carry out the full Section 1113 process.

"We must follow this course to address our onerous labor costs through either consensual agreements or court-imposed reductions to return American to industry leadership as a viable, sustainably profitable airline," Hicks said.

Even as the hearing starts, the two sides are expected to continue contract negotiations outside the Section 1113 process. In some cases, judges bring in outside attorneys or former judges to help the sides reach an agreement without having the contracts rejected, Newman said.

"Things have a tendency to settle on the courthouse steps that may have not settled a long time beforehand," Newman said. "You have to prepare both for the trial and the last-minute settlement negotiations."

The process

The Section 1113 hearing process is expected to last several weeks.

The company plans to spend four to five days presenting its case this week with witnesses including American's senior vice president of human resources, Jeff Brundage, and aviation expert Alex Dichter at McKinsey & Co.

"The hearing itself can be quite long because it's going to get very granular," said Mark Ellenberg, a partner at Cadwalader, Wickersham & Taft who worked on the Northwest Airlines bankruptcy. "It gets deeply into the economics of the airline and the collective bargaining agreements and what is truly necessary, so the hearing can be very lengthy with lots of experts."

The unions, the Pension Benefit Guaranty Corp. and the Unsecured Creditors Committee are scheduled to cross-examine the witnesses. A two-week break will follow before the unions begin their arguments May 14.

Throughout the hearing, the judge will consider whether the "balance of equities" favors rejection of the contracts, said bankruptcy attorney Linda LaRue of Quilling, Selander, Lownds, Winslett & Moser in Dallas.

"The impact of keeping the company from liquidating has to be spread across all the stakeholder groups," including debt holders, lenders and shareholders, LaRue said. "It doesn't have to be equal, but it can't inequitably shift to the union workers."

The judge is expected decide by June 6.

Precedent

Going into today's hearing, the odds are against the unions.

According to the Allied Pilots Association, in the past 33 bankruptcy cases where companies sought to reject their union contracts, the court sided with the companies.

"This isn't a situation ... where the judge can tell the parties where he thinks they should end up or mandate what he believes is a fair solution. It's either reject or don't reject," Malek said. "It's unfair to the employees and it's definitely backed up by history that the company always wins."

If the judge rules in favor of American, the unions are also not allowed to strike. Instead, American will impose contract changes that it had proposed in its Section 1113 motion in March such as freezing its nonpilot union pension plans and outsourcing some aircraft maintenance. American and its unions will then have to go back to the negotiating table to reach new contracts.

Ellenberg said bankruptcy judges tend to side with companies because otherwise, the company's reorganization could be jeopardized.

"I think the momentum of the situation inherently favors the debtor because most judges will err on the side of preserving the company. If they were really wrong, then the union can make it up in the next round of bargaining," Ellenberg said. "This whole process is about getting to agreement as opposed to imposing terms on the unions."

Andrea Ahles, 817-390-7631

Twitter: @Sky_Talk

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