Federal Judge Bars American Airlines From Dropping Pilots' Contract, For Now

A federal bankruptcy judge has temporarily blocked American Airlines from throwing out its contract with its pilots and imposing measures that would lower its labor costs.

Judge Sean Lane ruled in New York that American failed to prove that two parts of its proposal - dealing with furloughs and the outsourcing of flying to other airlines - were necessary to rebuild the company. But he said American could fix those elements of its plan and try again to throw out the contract.

That's exactly what American plans to do.

American Airlines spokesman Bruce Hicks said the company would "adjust" the two provisions, make another offer to the pilots' union, and by Friday file a new bid to cancel the union's contract. The ruling came a week after the Allied Pilots Association rejected American's final contract offer.

Statement from American Airlines spokesman Bruce Hicks:

"We appreciate Judge Lane's thoughtful consideration of our Section 1113 motion regarding the pilots' contract.  The judge supported American's business plan throughout his ruling and agreed with the company's position that changes to the collective bargaining agreement were necessary. He ultimately concluded that only two narrowly defined elements of the company's proposal were too aggressive. We will adjust those elements, resubmit the term sheet to APA and, as the Court suggested, renew our 1113 motion for our pilots by Friday.  We will ask Judge Lane to consider our request expeditiously.

Judge Lane ruled that virtually all legal tests and standards under 1113 were met including:

• All but two proposed changes are necessary for the successful restructuring of American.
• All parties are being treated in a fair and equitable manner.
• The company provided complete information necessary for APA to evaluate the proposal.
• We negotiated in good faith and APA did not have good cause to reject our proposal.
• Taking into consideration all the facts, American had clearly support the need for rejection.

"Even regarding the two items on which the Court found that American had exceeded what was necessary, Judge Lane agreed that the status quo was untenable. He concluded that American needs a significant increase in codesharing and latitude to furlough, but he believed that our proposals on both need to be modified. These issues were already remedied in the tentative agreement our pilots recently voted on.  

"The Judge's ruling makes clear that American's business plan is well-grounded, that its plan for success is reasonable, and that it has approached the sacrifices required of its employees in a fair and equitable way. Judge Lane stated that American's business plan is very similar to the business plans presented in other airline bankruptcies and thus provides an appropriate basis for establishing that significant changes are necessary to existing collective bargaining agreements.  The two areas that the judge said needed to be adjusted for pilots – furlough protection and codesharing – are not a part of the flight attendant term sheet.

"We hope our flight attendants see the immediate benefits of an early out, pay increases and more than 2,000 jobs saved in the offer they are voting on this week and that we don't get to the point of Judge Lane having to rule on our APFA motion.

"The 1113 process is a difficult one, and one we hoped to avoid.  We have the Unsecured Creditors Committee's support of our 1113 motion and the savings we've laid out, and will continue to move as quickly as possible to be able to move forward with our restructuring."

Keith Wilson, who was named interim union president when the previous leader was ousted after last week's vote, said he was elated. He called the judge's ruling "a rare Chapter 11 victory for labor" and "a significant setback for management."

Wilson said American went too far in using the bankruptcy process to eliminate union contracts, "and the judge recognized this in his decision today."

Hicks, the American spokesman, said the judge mostly supported American's restructuring plan but in a 106-page ruling decided "that only two narrowly defined elements of the company's proposal were too aggressive."

The judge rejected the union's claims that American didn't bargain, noting that the company agreed to freeze rather than terminate pension plans. He also said American was within its rights to stick to a dollar goal - a $340 million annual reduction in spending on pilots - and was flexible in how the union could meet that target.

"If anything," the judge wrote, "the failure to come to an agreement shows that both sides have become entrenched."

The judge delayed a ruling on the fate of a contract with flight attendants, who are voting through Sunday on American's last offer to their union. Mechanics and other ground workers voted to accept offers from American, the nation's third-largest airline.

The ruling came as parent company AMR Corp., under pressure from its creditors, is beginning to study possible mergers with US Airways and other airlines. AMR CEO Thomas Horton had long preferred to emerge from bankruptcy as a stronger, stand-alone company before considering a merger.

By canceling the pilots' contract, American might have been able to cut costs deeply and make its stand-alone plan look better to creditors than a merger. Now uncertainty hangs over American's pilot costs.

Savanthi Syth, an analyst for Raymond James & Associates, said any savings that American would get from canceling the contract might be outweighed by playing up the airline's poor labor relations.

"How comfortable will creditors be for American to come out of bankruptcy without a labor contract, without labor peace?" Syth said.

While fighting with American, unions for pilots, flight attendants and ground workers all agreed with US Airways this spring on provisional labor contracts that would take effect if there is a merger while American is still in bankruptcy protection.

American said high labor costs were a factor in its slide into bankruptcy protection. The company proposed to eliminate 13,000 jobs and reduce annual spending by $2 billion, more than half from labor. The company later eased some of its demands, including dropping plans to furlough 400 pilots.

Still, 61 percent of pilots voted last week to reject American's last contract offer, which included a 13.5 percent stake in the company but also concessions on outsourcing and pay raises that some pilots considered too meager.

Special Coverage: American Airlines: Turbulent Times