American makes its case against union contracts

NEW YORK (AP) — American Airlines argued before a federal bankruptcy judge Monday that its union contracts need to be changed to make the company financially stable.

The airline lost more than $10 billion in the decade leading up to its declaration of bankruptcy in November. During that same period most of its major rivals used the bankruptcy process to cut wages and benefits, which American says has left it saddled with higher labor costs.

American wants to eliminate 13,000 union jobs — about one in every four union workers — freeze or terminate pension plans, curb health benefits, reduce time off, and impose many other cuts.

"A restructured job is better than no job at all," said Jack Gallagher, a lawyer for the airline. Noting that once-great airlines such as PanAm and TWA have disappeared, he said, "We don't want to join them."

The airline also told the court that management costs will be cut by 20 percent through layoffs and wage cuts.

The airline's unions say company leaders are unfairly blaming workers instead of doing something to make American grow and bring in more revenue.

On Friday, the unions expressed their defiance by supporting a potential bid by US Airways to merge with American's parent company, AMR Corp. In effect, they were saying that US Airways' management could run American better than the current leaders.

On Monday, the unions rallied outside the courthouse, blocks from Wall Street, saying that the workers were part of "the 99%." They carried signs that said, "Profits First, Workers Last" and "Merge don't purge."

American is expected to take the entire week to make its case. Those arguments will be followed by a two-week break for the company and unions to try to negotiate an agreement. If none is reached, the unions present their case and the judge is expected to issue a decision by June.

The hearing is about more than just American, the nation's third-biggest airline. If American gets its way, it will cement a decade-long overhaul of the airline industry that has seen major carriers use the bankruptcy process to cut wages and eliminate cumbersome union work rules.

Helped by lower labor costs achieved in bankruptcy, United Continental Holdings Inc. and Delta Air Lines Inc. returned to profitability. Of the major U.S. airlines, only American lost money last year, about $2 billion. And the losses keep piling up — another $1.7 billion in the first three months of 2012, although most of it was for bankruptcy-reorganization costs.

"We're going through a major restructuring of labor relations in the airline industry," says Gary Chaison, a professor of industrial relations at Clark University in Massachusetts. "The entire industry is preparing itself for hard times ahead that might be caused by high fuel prices or by the continuing recession — forces beyond its control."

The unions, which forced American to capitulate on wages in the 1990s, have lost much of their clout. Even if they agree to concessions now, Chaison says, they'll probably be asked to give up more in a few years as the airlines go through more cost-cutting.

The company's demands for lower pay, longer hours and reduced benefits would be devastating, says Laura Glading, president of the Association of Professional Flight Attendants. She says regular workers are still angry over years of stock bonuses paid to management after the unions accepted concessions in 2003.

"We get it that the company is in bad shape," Glading says. "All we're asking is to be treated fairly."

Management is incorrectly blaming labor for AMR's losses, says Scott Shankland, a top officer for the Allied Pilots Association.

"American Airlines has a revenue problem that's much bigger than their cost problem," Shankland says. He says the company needs to grow through a merger with US Airways. That way it can compete with bigger United and Delta for valuable business travelers, who demand huge route networks to get them where they need to go.

AMR CEO Thomas Horton says the company can do just fine on its own, thanks to new revenue from international flying, a planned expansion at five big U.S. hubs, and orders for 460 new planes that will be more fuel-efficient and comfortable.

To make the turnaround work, American says, it needs relief from union work rules that limit its flexibility and drive up costs.

"There would be much more suffering and sacrifice if we don't get this restructuring right," Gallagher told the court Monday.

American wants to outsource more flying to other airlines, something that is currently prohibited by the pilot-union contract. It wants to eliminate a slew of work rules, such as one that lets crews fix seats while a plane is outside but not while it's in the hangar.

Bruce Hicks, a spokesman for American, say the company still would prefer to negotiate concessions with unions rather than hope that the judge will let the company throw out the union contracts.

Hicks says even if American voids the contracts, it would immediately offer to start negotiations with unions on new agreements.

And if the judge rules against American and upholds the union contracts? "We keep talking" with the unions, Hicks says.

The depth of labor's distrust of American's management was underscored when the unions threw their support to a merger with US Airways, which American opposes at least until it gets out of bankruptcy.

"It illustrates the incredibly toxic state of labor relations at AMR, which seem to hit a new nadir with every negotiations," says Robert Mann, an aviation consultant in Port Washington, N.Y., who once held finance jobs at American.

Severin Borenstein, a University of California economist who has written often about the airline business, says airlines once would have been hesitant to take such a strong stand against their own unions. They were afraid of strikes. The financial pressures on the industry from high fuel prices and lingering economic weakness are changing the airlines' approach.

"When you go into bankruptcy," Borenstein says, "your back is to the wall and you can much more credibly say, 'We're going to have to make some changes.'"

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Follow David Koenig at http://www.twitter.com/airlinewriter

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Airlines Writer Scott Mayerowitz in New York contributed to this report.