Judge Denies AMR Request To Scrap Union Pact

August 15, 2012

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A US judge on Wednesday denied a request by American Airlines parent AMR to abandon collective bargaining agreements with its pilots' union.

The unexpected decision was a setback for bankrupt AMR in its quest to save more than USD$1 billion a year in labour costs.

In a written ruling in US bankruptcy court in Manhattan, Judge Sean Lane, who is overseeing AMR's restructuring, turned down American's motion in part because it would give the carrier unrestricted ability to lay off pilots and engage in code-sharing.

AMR said it would alter its motion and resubmit the request to terminate its agreements with the Allied Pilots Association by Friday.

"We will ask Judge Lane to consider our request expeditiously," American said in its statement.

AMR declared bankruptcy in November, and says it needs USD$1.06 billion in annual labour savings - including USD$842 million from its unions - to become profitable.

The company is trying to reconstruct its labour cost structure and emerge from bankruptcy, but is facing an aggressive push from US Airways to acquire the company while still in Chapter 11.

While Wednesday's ruling does not directly impact merger efforts, it underscores the instability in AMR's situation. That could boost creditor support for a merger with US Airways, which has already reached tentative deals with AMR's main unions.

Wednesday's ruling comes a week after the pilots' union rejected the company's latest contract offer. While the offer would have cut USD$315 million from the pilots, it also would have given them a 13.5 percent equity stake in the company, matching 401(k) (pension) contributions and raises pay increases.

Regardless of how Lane had ruled, AMR would have had to keep negotiating for a consensual deal with pilots. Had Lane granted the motion, AMR would have had been able to implement a unilateral term sheet with more dramatic cuts that would have governed in the interim. Instead, the union's current collective bargaining deal will remain in place.

Lane acknowledged that serious concessions are needed from AMR's unions, and rejected the unions' arguments that AMR had an obligation to consider a merger with US Airways while still in bankruptcy.

Lane said AMR failed to show that such "unfettered discretion" was necessary for its own operations or that it was common in competitors.

The APA saw the ruling as a victory.

"Clearly management went well beyond what is the industry standard for bankruptcy contracts, and the judge recognised this in his decision today," union President Keith Wilson said in a statement.

But AMR management pointed out in its statement that Lane's denial was without prejudice, meaning AMR can resubmit the request for future consideration.

Bankruptcy laws provide companies the option to scrap labour deals, a threat that can serve to incentivise sides to work out agreements consensually.

Analysts and people involved in AMR's restructuring had expected Judge Lane to grant AMR's request after weeks of court hearings in which the company made its case for the immediate need for drastic cost savings.

Historically, such requests have been mostly granted.

AMR has already reached consensual terms with its ground workers' union, while its flight attendants' union has until Sunday to vote on AMR's latest offer.