Judge says American can reject pilots union contract

From staff and news service reports

A bankruptcy judge decided Tuesday that American Airlines can throw out its pilots union contract, allowing the carrier to impose cost cuts and other concessions.

The ruling, made by U.S. Bankruptcy Judge Sean Lane after a court hearing, will help American's parent company, AMR Corp., to emerge from Chapter 11 bankruptcy protection either as a stand-alone airline or possibly by merging with US Airways.

"I have a lot of sympathy for the employees and the pilots," Lane said. "It's a set of circumstances that nobody is happy about."

The pilots were the only labor group at American that did not approve a final offer on contract concessions from the Fort Worth-based carrier over the summer, turning down American's offer by a 61-to-39-percent margin. That offer would have provided pay raises and a 13.5 percent equity stake in the new company in exchange for more flexibility to shift flying to partner airlines.

At the hearing, Lane rejected the union's contention that American is doing much better financially than when it entered bankruptcy protection in November and so didn't need to void the contract. American has blamed its November bankruptcy filing on labor costs that it said exceeded competitors' by as much as $800 million a year. As part of its restructuring, American plans to cut more than over $1 billion in annual employee-related costs through layoffs and changes in work rules.

"There is no sense of accomplishment in this outcome," said American spokesman Bruce Hicks. "Judge Lane's ruling is very important because it will allow us to implement the changes that are necessary for our successful restructuring."

Last month, Lane had ruled that American could not reject its pilots contract because it had overreached in proposed changes to furlough protections and domestic code-sharing. But American quickly refiled its request, taking out the furlough policy changes and scaling back the amount of domestic code-sharing.

The Allied Pilots Association argued that the carrier's business plan had changed since it first filed its Section 1113 motion to change its contracts back in March, noting that it had scaled back demands for cost-cutting in union negotiations. But the judge disagreed that the business plan had changed.

"Everybody, including the pilots, was expecting this," said Ray Neidl, an analyst with the Maxim Group. "This will go a long way to help American complete the restructuring plan."

American's management must now decide if it will let its 7,500 active pilots work under the terms of the last offer they rejected, or impose harsher conditions first suggested to the bankruptcy court in April. Hicks said the airline will impose most of the more-severe contract terms established in April.

APA president Keith Wilson told American pilots that it's unclear what will happen next. The union's board has said it will call for a strike vote if the harsher terms are imposed.

"There's no reliable forecast for what to expect next in light of Judge Lane's decision today to grant AMR management's revised motion to reject our contract," said Wilson, adding that he had a brief conversation with AMR's chief executive, Tom Horton, following the ruling. "About the only prediction I'm willing to make is this -- we'll find out whether management decides to proceed with caution, or whether the urge to take punitive measures carries the day."

Wilson said he was encouraged by the testimony of Jack Butler, counsel for the Unsecured Creditors Committee, at Tuesday's court hearing. Butler said the creditors committee is going to require that American has a new contract in place with its pilots before the company is allowed to exit bankruptcy.

This is the first time during an airline bankruptcy case that a judge has rejected a pilots contract. No airline has ever emerged from bankruptcy without a new contract with its pilots in place.

The airline's two other big unions - the Association of Professional Flight Attendants and the Transport Workers Union - ratified concessionary new contracts. The flight attendants contract included a $1,500 signing bonus, pay raises for five years including 3 percent in the first year and $40,000 "early out" incentives to help the company trim jobs.

Mechanics approved a deal that includes an immediate 3 percent pay raise, 3 percent in each of the next three years and 1.5 percent in the next two. But the company plans to cut 2,400 jobs, including the closure of a maintenance base at Alliance Airport.

American is still working to lower other expenses, such as leases on aircraft. But reducing labor expenses is arguably the hardest and most important task for the airline.

Last week, American and US Airways disclosed that they would begin confidential talks to evaluate a merger after US Airways signed a non-disclosure agreement. Such a merger would make the combined airline about as big as the world's largest -- United Continental Holdings Inc. -- and the slightly smaller Delta Air Lines.

Staff writer Andrea Ahles contributed to this report, which includes material from The Associated Press and Bloomberg News.

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