Bankruptcy at 30,000 Feet: The Battle for the Future of American Airlines

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What would you call the combination of US Airways with American Air? US American Airways? It’s redundant, in the same way that airline service is a contradiction in terms. But a merger between the two is slightly more likely than, say, you finding a frequent flier award seat to Europe this summer. American’s union workers would pretty much prefer to work for any other airline than the one that currently employs them, which is why they have been open to a takeover bid by U.S. Airways. This isn’t what you call a good labor situation.

AMR Corp., the parent of American, was in bankruptcy court in New York City today with the stated intention of lowering costs 20% to get competitive with the rest of the industry. American has proposed to slash 13,000 jobs in addition to wage and benefits adjustments to save $1.25 billion annually. The unions have balked at the new contract proposals, so yesterday American explained to a bankruptcy judge why it should be allowed to abrogate the current contracts. “A restructured job is better than no job,’’ an airline attorney told the court, according to the Associated Press. Outside the courtroom, union workers chanted:  “AA got bailed out, we got sold out.” If the court agrees with American’s plan — and bankruptcy courts tend to favor current management — it would have the leverage it needs to crush the Transport Workers Union that represents most of its ground workers, and bring the pilots and flight attendants unions to heel.

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That’s what you do in bankruptcy — dump pricey contracts and debt obligations, refinance if needed, and then reemerge a stronger, less indebted company. The court has given AA until September to work this out on its own. But the three unions, including Allied Pilots Association and Association of Professional Flight Attendants have some leverage. They’ve signed deal sheets with US Airways that will take effect in the event that US Airways takes over AA. The pilots, for instance, would get an immediate 5.5% raise. There would still be layoffs, but only half the number that American has proposed.

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AMR boss Tom Horton, in a letter to employees, responded by saying, in essence: why would you leave all this? “There is real substance in our plan to build American with our industry-leading aircraft orders for 460 new narrowbody jets, up to 100 787s and 16 777s,” he said. “These are planes which should benefit the careers of American pilots and flight attendants.” There is, obviously, some short term pain.

Most industry observers think it unlikely that American will remain a go-it-alone carrier when it emerges from bankruptcy. Consolidation has been the rule in the industry and everyone knows it. So, obviously, does USAirways, which eyes a combo as a way to put it on a competitive footing with United, which just merged with Continental, and Delta, which took out Northwest.  What the bankruptcy court will decide is, who gets to decide American Airlines’ future— its management, its employees or US Airways?

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