American Airlines files bankruptcy to reduce labor costs

After being unable to reach an agreement with its pilots’ union during contract talks, AMR, the parent company of American Airlines and American Eagle, on November 29 filed for Chapter 11 bankruptcy protection in federal court.

“(AMR’s action) is not a defensive move, but an offensive bankruptcy where they go after their labor groups to reduce costs,” said Avondale Partners airline analyst Bob McAdoo to the New York Times. “They have a great franchise and lots of cash. They have a cost structure that they want to tackle here.”

“The federal bankruptcy courts are being used to bail out a failed management strategy for a company with lots of money in the bank,” said James C. Little, president of the Transport Workers Union, which represents American and American Eagle workers who maintain, repair, and service the airlines’ fleets.

The Allied Pilots Association has been in contract negotiations with AMR since 2008. The talks are being mediated by the National Mediation Board. Back in 2003, the pilots and AMR’s other unions, TWU, the Association of Professional Flight Attedants (which represents flight attendants at American Airlines) and the Association of Flight Attendants-CWA (which represents flight attendants at American Eagle), agreed to big concessions to help the company recover from the steep decline in air travel resulting from the terrorist attacks on New York City and Washington DC. For some pilots, the concessions meant that their pay rates declined by 33 percent.

The pilots were trying to regain some of the ground they lost in 2003, but the company, which was seeking to cut labor costs by $800 million, offered two options that fell far short of what the pilots were seeking.  AMR’s offer also did not address concerns about AMR’s plan to outsource some work at American.

The APA board voted 17 to 1 not to submit the company’s proposal to members for ratification. After rejecting the offer, APA wrote a letter to AMR saying that the union wanted to continue negotiating for a fair settlement, but the company filed for bankruptcy instead.

Despite filing for bankruptcy, AMR is hardly destitute. It has $4.1 billion in cash and cash-like assets on hand. The company has also been generous to its top executives. The Fort Worth Telegram reports that compensation packages for AMR’s top executives are ten times their base pay.

Back in 2009, top executives received bonuses worth $6.5 million even though the company lost $375 million. APA at the time estimated that in the previous four years, executive bonuses totaled $300 million.

Shortly after announcing the bankruptcy filing, former AMR CEO Gerald Arpey announced that he was resigning and left with pension benefits worth $4.7 million.

In a report on AMR’s financial health before the bankruptcy filling, Gimme Credit analyst Vicki Bryan wrote that “the main culprit (for AMR’s financial troubles)  has not been AMR’s labor costs. It was spiking fuel  expense, which is up 187 percent from $2.8 billion per year in 2003 to the  current $7.96 billion.”

American has an aging fleet of airplanes that are not fuel-efficient. The company only recently has taken steps to replace its older stock with more fuel-efficient new airplanes.

In filing for bankruptcy, AMR may be following the lead of its competitors including United Continental, Delta, and US Airways all of which used bankruptcy as a vehicle for shedding their traditional pension plans. If the bankruptcy court agrees, AMR could unload its four traditional pension plans onto the Pension Benefit Guaranty Corporation, a federal agency.

If that happens, PBGC Director Josh Gotbaum estimates that “American Airlines employees could lose a billion dollars in pension benefits promised by their employer. Unfortunately, when the (PBGC) assumed (other) airline (pension) plans, many people’s pension plans were cut, in some cases dramatically,” Gotbaum said.

All four unions representing AMR workers said that they will play an active role in the bankruptcy proceedings to protect members benefits and jobs. TWU President Little said that “our union will fight hard to make sure that front line workers don’t pay an unfair price for management’s failings.”

Vera Shook, AFA-CWA president said, “AFA will continue to defend the jobs, pay and benefits for the over 1,500 flight attendants at American Eagle. . . .  Today’s filing does not change pay, benefits or working conditions for flight attendants as their contract remains intact.”

APFA annonced that it has scheduled base visits to provide members with information about the bankruptcy.

The Wall Street Journal reports that APA is close to hiring Lazard Ltd, a financial advisory firm, to negotiate on its behalf during the bankruptcy proceedings.

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3 thoughts on “American Airlines files bankruptcy to reduce labor costs

  1. aa’s flight attendants are represented by the apfa

  2. Its disheartening to see that such a prosperous organization is taking the toll on its employees while top level executives are getting millions in bonuses. The most annoying factor is that its CEO took retirement just after announcement with a pension fund of whopping 4 million! His case should be investigated.

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