AA''s Unions Seen Agreeing to Wage Concessions


Aug 20, 2002
FOCUS American Airlines' unions seen agreeing to wage concessions
---- by Bruce McMahon ----
NEW YORK (AFX) - Wage concessions are the greatest hurdle for AMR Corp's American Airlines in its bid to cut costs and avoid bankruptcy, but the troubled airline's employees will likely make the necessary cuts after seeing what Chapter 11 has done to employee benefits at rival airlines, analysts said, on the eve of a crucial meeting between AMR executives and unions.
American's employees have seen firsthand what Chapter 11 can do to compensation, as per UAL and US Airways, said Merrill Lynch Michael Linenberg.
United Airlines' plan to create a low-cost carrier with separate pay scales and seniority lists brought an angry response from the Air Lines Pilots Association (ALPA), which said it was totally unacceptable.
Meanwhile, US Airways, as part of its own restructuring, is seeking to replace pilots' defined benefit pension plan with a defined contribution plan.
The move, if approved by the Pension Benefit Guaranty Corp (PBGC), which regulates pension plan terminations, would slash retiree benefits significantly.
Earlier this week, American asked its employees to accept wage cuts of 1.8 bln usd in total as part of a wider 4 bln usd cost saving plan to bring the airline back into the black.
It is seeking 660 mln usd worth of savings from pilots, 620 mln usd from mechanics, 350 mln usd from flight attendants, 80 mln from ticket agents and 100 mln from management.
This is asking a lot, said Richard Bittenbender, airline analyst at Moody's Investors Services. On the other hand, the potential alternatives are more devastating.
Moody's Bittenbender said that even if 1.8 bln usd of cost cuts are agreed, the total cost savings will be almost 4 bln usd, only just enough to bring American back into profitability.
It posted a net loss last year of 3.5 bln usd.
The hope is that revenues will recover, said Bittenbender.
Credit Suisse First Boston analyst James Higgins said in a note: Timing and getting its labor groups to agree to lower costs remain AMR's greatest hurdles.
But, while history suggests quick negotiations and favorable airline union responses are unlikely, we have been very pleasantly surprised by the early response of AMR's union leadership and limited rank-and-file feedback we have seen. Simply put, AMR's employees appear to 'get it'.
He added that the labor cost savings would significantly improve AMR's liquidity, as the carrier's cash flow from operations would generate about 275 mln usd compared to its current estimate of a 1.1 bln drain.
Under that scenario, AMR's ability to avoid Chapter 11 would appear almost assured.
Higgins added: While the imponderable outcome of any war with Iraq and the uncertainty that AMR will be able to lower labor costs before it is too late still make the outcome here too close to call, we are incrementally more optimistic from a low level that they might be able to avoid a Chapter 11 filing.
So far, the unions representing these employees have taken a cautious stance, saying they are reviewing the proposals.
We are reserving judgement on the amount of cost savings AMR management has identified until we can learn more about the rationale and methodology behind them, said a spokesman for the Allied Pilots Association (APA), which represents American Airlines' pilots.
We are still gathering information. Any agreement would be made between AMR management and our negotiation committee, but this would have to be ratified by membership.
Meanwhile, the Association of Professional Flight Attendants (APFA) said that unfortunately, the company has put the cart before the horse in publishing the proposed cost cuts without providing the unions with details.
APA, APFA and the TWU (Transport Workers Union) are due to meet AMR management tomorrow, so that the company can lay out the rationale behind its decision.
An APA spokesman said there is unlikely to be any statement immediately after the meeting, although the unions are expected to make their response clear next week.
Despite his optimism, Merrill's Linenberg did say however that there is a possibility of the unions rejecting the proposals.
While a 1.8 bln usd pay cut for American's employees represents about a 25 pct reduction, and is similar in magnitude to UAL's and US Airways' labor cost cuts of about 30 pct, our concern is that American's employees will not cooperate, he said, adding that various employee groups have gone on strike three times in the last nine years.
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