- Associated Press - Thursday, August 16, 2012

DALLAS (AP) — A federal bankruptcy judge has temporarily blocked American Airlines from throwing out its contract with union pilots and imposing measures that would lower its labor 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 labor” and “a significant setback for management.”

Mr. Wilson said American went too far in using the bankruptcy process to eliminate union contracts, “and the judge recognized this in his decision today.”

Mr. Hicks 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 long had preferred to emerge from bankruptcy as a stronger, stand-alone company before considering a merger.

By canceling 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 canceling the contract might be outweighed by playing up the airline’s poor labor relations.

“How comfortable will creditors be for American to come out of bankruptcy without a labor contract, without labor peace?” Ms. Syth said.

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

Story Continues →