August 15, 2012 / 10:08 PM / 5 years ago

Judge denies American Air request to scrap pilot contracts

NEW YORK (Reuters) - A judge on Wednesday denied a request by American Airlines parent AMR Corp AAMRQ.PK to abandon collective bargaining agreements with its pilots’ union, an unexpected decision and setback for bankrupt AMR in its quest to save more than $1 billion a year in labor costs.

In a written ruling in U.S. 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 furlough 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 $1.06 billion in annual labor savings - including $842 million from its unions - to become profitable.

The company is trying to reconstruct its labor cost structure and emerge from bankruptcy, but is facing an aggressive push from competitor US Airways Group Inc LCC.N 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 labor situation. That could boost creditor support for a merger with US Airways, which has already reached tentative labor 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 $315 million from the pilots, it also would have given them a 13.5 percent equity stake in the company, matching 401(k) contributions and raises.

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.

The term sheet would have imposed dramatic cuts, including hundreds of pilot layoffs, and the elimination of the equity stake, 401(k) contributions and raises.

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. But he said AMR’s term sheet would have given the company too much power to furlough its pilots and engage in code-sharing, agreements under which airlines sell seats on another carrier’s flight as if they were its own.

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 recognized 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 labor deals, a threat that can serve to incentivize 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. But an instance of a denial can be seen as recently as May, when a New York judge denied a contract abrogation motion by Hostess Brands Inc.

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

The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.

Reporting By Nick Brown and Karen Jacobs; Editing by Bernard Orr

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