American setback on pilots contract seen as temporary

Aug. 17-- AMR Corp.'s bankruptcy reorganization should not be delayed nor overly complicated by a judge's denial of the company's motion to cancel its pilots contract, industry officials say.

"It's an interim setback for the company and a short-term victory for the union," said Jeffrey Erler, a Dallas bankruptcy lawyer. "It's a bump in the road."

Executives at AMR, the parent of American Airlines, said Thursday they would correct the deficiencies outlined by Judge Sean Lane and refile on Friday the Section 1113 motion to cancel the collective bargaining agreement with the Allied Pilots Association.

American's 10,000 unionized pilots rejected the company's tentative contract agreement in voting that ended last week. American executives said the company would ask the bankruptcy judge to cancel the existing pilot contract so American could impose new work rules, wages and benefits.

American spokesman Bruce Hicks said company executives stated from the start of the bankruptcy case that a successful restructuring required significant changes to collective bargaining agreements with its unionized pilots, flight attendants and mechanics.

"Judge Lane affirmed this fact in his ruling yesterday, while asking us to adjust our requests in two clearly defined areas -- code-sharing and furloughs," Hicks said. "We've addressed those items in the revision to the term sheet we presented to the APA today and plan on renewing our 1113 motion with the court tomorrow. In the absence of a ratified agreement, it's critical we proceed with the 1113 process to achieve the relief we need to pursue American's successful restructuring."

Seven Transport Workers Union work groups have approved American's contract offer, but the APA rejected its tentative contract agreement in voting that concluded last week. American's Association of Professional Flight Attendants is voting on its proposed contract until the polls close Sunday.

In his ruling on Wednesday, Lane said most of the changes to work rules and working conditions outlined in the company's Section 1113 motion are necessary to the success of American's business plan.

But American's proposal to remove all restrictions on pilot furloughs and code-sharing -- the ability to outsource flying to cooperating airlines -- is not necessary for a successful restructuring, Lane said.

"American has not established how its code-sharing proposal relates to the showing of necessity set forth in its business plan," Lane said. "American's failure to do so is problematic because of the central role the business plan plays in this Section 1113 proceeding.

"The company claims that it must maintain flexibility to respond to new opportunities that might arise over the next six years (of the APA contract). But while the court understands the need for some flexibility in the future, that flexibility cannot be unlimited or it would render the necessity requirement a nullity. It is the company that presented and relied upon its business plan as the cornerstone of necessity, and it must accept both the benefits and drawbacks of that decision."

Lane also said American's proposal to remove restrictions on pilot furloughs is not needed.

"The APA ... accurately observes that the existing furlough protection clause allows the company to furlough up to 2,000 pilots, five times what the company's business plan requires," Lane said. "While American claims to seek more broad furlough authority to address unforeseen emergencies, there appears to be no need to do so as the existing agreement includes a force majeure (superior force) exception which was used by the company to furlough 2,900 pilots following September 11."

Robert Herbst, an airline analyst and founder of Airlinefinancials.com, said AMR's restructuring won't be derailed by Lane's decision.

"American will modify the minor issues of the furlough and code-sharing amounts, and the judge will abrogate the (pilots) contract," Herbst said. "It will just be a few days longer."

Jake Dollarhide, CEO of Longbow Asset Management Co. in Tulsa, said Lane's decision is "a potential stumbling block for AMR to emerge from bankruptcy as a stand-alone company."

"They wanted the full ability to furlough workers and the full ability to expand their empire without expanding their empire (through code-sharing)," Dollarhide said. "All of its peers fell by the wayside and went through bankruptcy. Now, AMR is in bankruptcy and is in the weaker position because of it."

Erler, the Dallas bankruptcy lawyer, said it is too early to say whether Lane's decision will delay AMR's reorganization plan.

"Anything that does not completely support what the company is trying to do at this juncture has the potential for slowing this (bankruptcy reorganization) down," Erler said.

D.R. Stewart 918-581-8451

[email protected]