AMR bankruptcy route unclear after unions vote

BY JOHN STANCAVAGE World Business Editor
Thursday, August 09, 2012
8/09/12 at 8:18 AM

American Airlines' mixed results on new labor contracts with several of its unions Wednesday likely will not slow down its emergence from bankruptcy, a national analyst said.

Parent AMR Corp. likely will complete its Chapter 11 reorganization in the first quarter of 2013, said Bob Herbst, owner of the consulting firm AirlineFinancials.com and a veteran commercial pilot. That might be a little longer than airline CEO Thomas Horton envisioned when the carrier filed for protection from creditors Nov. 29, 2011.

"Every recent airline bankruptcy has taken longer than expected," Herbst said in a telephone interview.

American employs about 7,000 people in Tulsa, with 5,000 of those mechanics and related workers at its large maintenance base.

Transport Workers Union officials announced Wednesday that mechanics and stock clerks had voted to ratify new contracts. Meanwhile, pilots overwhelmingly rejected their offer.

Flight attendants will complete their voting Aug. 19.

AMR's leaders had hoped to get all union compensation issues solved consensually to increase the airline's chances of leaving bankruptcy as a stand-alone entity, Herbst said. Instead, pilots rejected a sweetened deal that included a promise of a 13.5 percent equity stake in the new company.

Now, pilots will have to face a decision from U.S. Bankruptcy Judge Sean Lane, who has said he will rule by Aug. 15 on AMR's desire to void the current labor agreement and impose a contract that is less attractive.

The members of the Allied Pilots Association favor a merger with US Airways, which has been aggressively courting American.

But Wednesday's vote actually may lengthen the route to such a combination, Herbst said.

"My guess is now that American's leaders have control of the 13.5 percent equity stake, they'll give it to the unsecured creditor's committee as an enticement for the group to go for a stand-alone plan."

Despite AMR management's apparent hesitance, the carrier needs a merger with US Airways, Herbst said.

"American currently is No. 4, behind United, Delta and Southwest," he said. "A merger with US Airways would move American to No. 1 in the world by any metric you want to use."

The pilots' vote of 61 percent against a new contract was designed to send a message to Horton and other AA executives, said Herbst and other analysts.

"It's a strong statement from the pilots union that they are 100 percent behind a merger," Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tenn., told Bloomberg News.

Herbst, who was a pilot for American for 12 years, said he felt sorry for the pilots. On one hand, he said, he understands their frustration, while on the other hand, the group is giving up a valuable perk in the equity share.

"A lot of well-meaning pilots now face the unintended consequences of voting no," the AirlineFinancials analyst said.

Bruce Hicks, an American spokesman, hinted at those consequences in a statement.

"We must now await a ruling by Judge Lane that will allow the company to implement the changes necessary to move forward in our restructuring," he said.

Still, some analysts said the long-term outlook for American becoming an independent, successful business is withering with all of the recent union battles.

"It has a lot to say about the ultimate success of a stand-alone plan with that degree of discord with the front line," Robert Mann, a former American executive who is now president of consultant R.W. Mann & Co. in Port Washington, N.Y., told Bloomberg News.

Even the mechanics, which approved their contract, did so by only the slimmest of margins. That, and the heated campaign between "yes" and "no" members leading up to the vote, diminishes solidarity and morale, observers said.

Herbst said that even with the new contract, American's mechanics will be among the lowest paid in the industry.

The TWU's frustration goes back to 2003, when members accepted a concessionary contract to help keep American out of bankruptcy. It was the last pact they would sign for nine years.

"There was a major misconception among American mechanics in 2003 that they were signing a bankruptcy-type contract. But when you look at the figures for them and other labor groups that were working for airlines that actually were going through bankruptcy, it's just not true," Herbst said.

The American mechanics, even after giving up $1.8 billion in pay and benefits, still were out-earning peers who worked for airlines in Chapter 11, the analyst said.

"As this went on, year after year, American found it couldn't compete because of these labor costs," he said.

Meanwhile, American's rivals emerged from bankruptcy and began growing, leaving AMR to "play catch-up."

That growth by the rest of the industry enabled carriers to increase pay for their unions, while American's TWU members remained stuck at 2003 levels, the analyst said.

Union leaders say there's another factor, though - the large bonuses AMR executives paid themselves over the past decade.

The dispute of who's at fault for American's financial decline is likely to never be resolved, but Herbst said that right now the mechanics union seems to be in a vulnerable place.

"The two biggest outcomes of the new contract and restructuring is that the number of planes that will be outsourced for maintenance will rise dramatically and the new planes being ordered will not need the same kind of upkeep. That is going to be a double-whammy for the mechanics."

Still, a merger with US Airways would at least give American the size needed for the mechanics who are left to negotiate better deals.

"That's the long-term solution to American's survival," Herbst said.

AMR Corp. labor timeline

February 2003: Citing unsustainable losses of more than $5 million a day, American asks its labor leaders and employees for $1.8 billion in annual savings through changes in wages, work rules and benefits. Union members eventually agree to the terms.

August 2010: American Airlines' mechanics reject by a nearly 2-1 ratio a proposed contract calling for wage increases of 6 percent over three years and increased vacation days.

May 2012: Two groups in the American Airlines' Transport Workers Union - mechanics/related and stock clerks - reject the company's contract offer, while five other groups accept terms.

August 2012: Mechanics and clerks narrowly approve sweetened contract offer. Pilots reject their deal.

Sources: TWU, AMR, published reports.

AMR Corp. in bankruptcy

KEY DEVELOPMENTS

Company filed for bankruptcy on Nov. 29, 2011, after losing more than $10 billion in the last 10 years.

On Feb. 1, company announced a plan to cut 13,000 jobs, including 2,100 Transport Workers Union jobs in Tulsa.

Since then, the estimates have been reduced to 9,740 jobs cuts companywide.

US Airways is actively pursuing a merger with American Airlines. In April, US Airways CEO Doug Parker reached tentative contract agreements with American’s Allied Pilots Association, Transport Workers Union and Association of Professional Flight Attendants. The tentative agreements would become effective with the merger of American and Tempe, Ariz.-based US Airways. A merger would result in layoffs of 450 TWU members in Tulsa and 4,900 mechanics, baggage handlers and other ground workers companywide.

American negotiators have reached contract agreements with all seven TWU work groups. The Allied Pilots Association rejected its contract and faces terms being imposed on its members. The flight attendants are scheduled to complete contract voting by Aug. 19.

KEY DATES

On July 19, U.S. Bankruptcy Judge Sean H. Lane in New York approved AMR’s request to extend its exclusive right to present a reorganization plan to the court until Dec. 28 and to extend until Feb. 28 of next year a deadline to solicit votes on that plan.

KEY FIGURES

860: Mechanic/related and stock clerk job cuts planned in Tulsa, with up to several hundred other jobs in other categories also on the line in Tulsa.

$75 million: Money AMR had spent through June on bankruptcy costs.

$10 billion: AMR’s losses in the past 10 years.

$1.06 billion: The money AMR hopes to save in labor expenses on an annual basis.

Original Print Headline: Pilots still up in air

John Stancavage 918-581-8314
john.stancavage@tulsaworld.com

Associated Images:

An American Airlines technician works on a jet engine at the carrier's Maintenance & Engineering Center at Tulsa International Airport. Transport Workers Union officials announced Wednesday that mechanics and stock clerks at AA voted to ratify new contracts. CORY YOUNG / Tulsa World file