Bankruptcy judge denies American Airlines' bid to cancel union contract with pilots

DALLAS - A federal bankruptcy judge has temporarily blocked American Airlines from throwing out its contract with union pilots and imposing measures that would lower its labour 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.

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 labour" 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 cancelling 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 cancelling the contract might be outweighed by playing up the airline's poor labour relations.

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

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

American said high labour 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 labour. The company later eased some of its demands, including dropping plans to furlough 400 pilots.

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

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