All UAL wants for Christmas is Labor Agreements


Aug 27, 2002
United Restates Commitment to Achieving Consensual Agreements With Unions On Cost Reduction Proposals; Active Discussions with Unions Continue
CHICAGO--(BUSINESS WIRE)--Dec. 17, 2002--
Company Informs Bankruptcy Court That It May File
Motion Under Section 1113;
Filing Required to Meet Financial Covenants
UAL Corp. (NYSE:UAL), the parent company of United Airlines, today restated its commitment to achieving consensual agreements with its labor unions regarding employee participation in the company''s business plan to successfully emerge from Chapter 11 bankruptcy. United said that active discussions with its unions on cost reductions are continuing. The company has presented its plan and cost reduction proposals to the unions and the unions are now considering these proposals.
United also informed the U.S. Bankruptcy Court for the Northern District of Illinois and the company''s unions today that, in the absence of consensual agreements, it intends to file a motion under Section 1113 of Chapter 11 of the U.S. Bankruptcy Code late next week. While United will continue to work collaboratively with its unions, the filing of this motion would be necessary to ensure that United remains in compliance with the financial requirements of the company''s debtor-in-possession (DIP) financing agreements by seeking the Court''s assistance should the company and the unions fail to reach consensual agreements.
United''s DIP financing is structured such that the cost reductions must be in effect by February 15, 2003. In order for the company to be certain that it meets that deadline and avoids being in default of the terms of the financing, United must protect its ability to use the 1113 process by filing a motion with the court on December 26, 2002, in the absence of consensual agreements.
In the meantime, reaching consensual agreements with United''s unions remains a top priority, and United will continue to negotiate in good faith as the company proceeds toward December 26 and beyond.
For UAL to abrogate the agreements with the IAM Mechanics, one of the things that has to be shown is that UAL negotiated in good faith.

Reuters, in a story picked up by Forbes, contained the following quotes attributed to Tilton:

Tilton did not disclose details of the latest
wage cut proposal in a letter to employees
released Tuesday, but said the earlier plan for the
Air Transportation Stabilization Board loan
guarantees would have provided only temporary

"Simply put, the plan submitted to the ATSB was
designed to stabilize the company," Tilton
said. "However, we knew there was more to do going
forward. What we are seeking now is to transform
the company for the long term and to make that
transformation sustainable."

Other Labor Groups on this Board have been quick to criticize Mechanics for looking at this charade and calling it for what it was. Tilton admits above that the first round of cuts was a bandaid and that more were coming. The ATSB saw it, the Mechanics saw it: why couldn't the IAM and the rest of the Unions?

When does 7 million become 22 million?
Bob, just because no court has ever actually acted on a 1113 request before doesn't mean there won't be a first time, and given the stipulations on the DIP financing, it doesn't look good right now for the groups without S1113 letters. The Judge's first responsibility is to make sure that the creditors are paid back as much on the dollar as they can, not the employees. Harsh, but true.
Well, obviously I am not a judge. Nor do I know for certain the outcome.

But I don't see how a judge would deny a motion to throw out labor contracts when he knows full well that it would mean a probably change to CH7.

Do you have any compelling argument as to why he would deny such a motion? Key word: compelling.
On 12/17/2002 5:48:32 PM eolesen wrote:

Bob, just because no court has ever actually acted on a 1113 request before doesn't mean there won't be a first time, and given the stipulations on the DIP financing, it doesn't look good right now for the groups without S1113 letters. The Judge's first responsibility is to make sure that the creditors are paid back as much on the dollar as they can, not the employees. Harsh, but true.

Do you mean in the airline industry? Otherwise, this would definitely NOT be the first time a court approved an application under Section 1113 to reject a collective bargaining agreement. It is likely that one reason United did not file in Delaware is that the 3rd Circuit's views on 1113 are less friendly to employers. In Chicago, it should be somewhat easier.

Under Section 1113, the debtor in possession must show that (1) rejection of the current agreement is necessary to permit reorganization (which is by the way, the primary goal of Chapter 11), (2) its proposal treats all affected parties fairly and equitably, and (3) the union rejected its proposal without good cause. First, however, the DIP has to negotiate in good faith and make extensive disclosures about the company's financial situation...hence the press release quoted above.

That's what the law says...I have no way of predicting what the judge will decide in United's case, but it definitely can happen.
On 12/18/2002 5:25:30 PM AAG2000 wrote:

Do you mean in the airline industry? Otherwise, this would definitely NOT be the first time a court approved an application under Section 1113 to reject a collective bargaining agreement. ----------------

Where is the example?
On 12/17/2002 5:18:57 PM UnitedChicago wrote:

Do you have any compelling argument as to why he would deny such a motion? Key word: compelling.

See the NWA/AMFA/PEB proceedings that took place in Philadelphia. Aircraft Mechanics are not paid above "market rates" for their skills, the industry is still facing a severe shortage of qualified mechanics in the future. Despite the financial difficulties the airlines face their is no reason why mechanics should give their skills and expertise to the airlines, the creditors or the travelling public for a discount. Its their labor, they have the right to demand a fair price for it, if the airlines or the creditors or the travelling public dont want to pay, they have the right to withhold it. Mechanics have been hit with more PEBs than any other work group and those PEBs came to the conclusion that double digit increases were required. How much will the creditors get back if the mechanics strike? It would be in the mechanics best long term interests to see SWA expand rather than take a pay cut to prop up a money losing airline. Normally mechanics can expect to make it back to top pay in 5 years or less if they stay in the industry, however many leave the industry permanently following a layoff, especially younger workers. SWA pays their mechanics more than UAL yet they make money. Obviously the advantage that SWA has is not lower paid mechanics. As SWA grows they will continue to take more work in house. While a pay cut for mechanics may on the surfice appear to benifit the creditors the fact is that forced pay cuts could easily result in a strike or other form of self help that would easily cost more than any savings that would be seen from the paycut. The mechanics, as the sole party to reject the prior referendum on pay cuts has demonstrated that they are unwilling to accept pay cuts despite the dire predictions of what would happen if they didnt. If they would not volunteer to give back why would any one assume that forced pay cuts would be received passively? Therefore a forced paycut would more than likely lead to confrontation with this skilled workforce that could not be easily replaced or controlled. This would lead to a further decrease in value of the assets of UAL.
It's the market that is going to drive your wage. It's going to hit AAA in the next few months as well.
We're all on a three leg stool.
On 12/18/2002 5:50:23 PM Bob Owens wrote:

Where is the example?


Right here: Truck Drivers Local 807 v. Carey Transportation, 816 F.2d 82 (2d Cir. 1987). The Court of Appeals, affirming the Bankruptcy Court and the District Court, allowed Carey to reject two collective bargaining agreements.
The following is layman(not lawyer) opinion of the following:

Information from a GOOGLE search of: Truck Drivers Local 807 v. Carey Transportation, Inc., 816 F.2d 82 (2nd Cir. 1987)

Not even dealing with the absence of a "snap-back" provision and the interpretation of the covenants authorizing creation of the ATSB:

Recitation of Truck Drivers v. Carey strikes both ways. The court is called to consider the likelyhood of a strike, the relative standing of parties performing the same job within the same industry and the role of good faith during negotiations.

Organized Labors' Role Under 1113 Bankruptcy: Critical Issues

A)Union retains the right to strike following rejection of contract:

Briggs Transportation Co. v. I.B.T., 739 F.2d 341 (8th Cir. 1984), cert. denied, 469 U.S. 917 (1984).

B) Contractual Right to Representation and the Duty to Arbitrate survive rejection:

Air Line Pilots Ass'n, Int'l v. Shugrue (In re Ionosphere Clubs, Inc.), 922 F.2d 984 (2d Cir. 1990); In re Continental Airlines 125 F.3d 120, 137-38 (3d Cir. 1997).

C) Ability to challenge "Retention Programs":

In re Geneva Steel Company, 236 B.R. 770 (Bankr. D. Utah 1999).
In re Jefley, Inc. , 219 B.R. 88, 93-94 (Bankr. E.D. Pa. 1998).

D) Essential Elements to Rejection:

In Wheeling-Pittsburgh Steel Corp. v. United Steelworkers of America, 791 F.2d 1074 (3rd Cir. 1986), the United States Court of Appeals in Philadelphia inquired into the necessity and objective of the proposed modifications. The Court held that a Bankruptcy Court should permit only essential, minimum modifications to the collective bargaining agreement and construed the term "necessary" to mean "essential." The Court then determined that the objective of the modifications should be the short-term goal of preventing liquidation of the debtor, rather than the overall, long-term goal of Chapter 11 of restoring financial health to the debtor. Wheeling-Pittsburgh was the seventh largest steel maker in the U.S. in 1985. The union had given economic concessions to the company on three different occasions prior to any bankruptcy filing. When the company asked for a fourth round of concessions, the union refused until Wheeling-Pittsburgh had extracted concessions from its lenders first. The lenders had not made any concessions up to that point. The company negotiated with the lenders and the union but could not convince either party to compromise on the issue of the company pledging its current assets to the banks. Consequently, Wheeling-Pittsburgh filed for relief under Chapter 11. The company made a post-petition proposal to the union to modify the collective bargaining agreement. After negotiations broke down, the Bankruptcy Court granted the application and Wheeling-Pittsburgh implemented unilateral changes. Immediately after, the union went on strike.

The Court of Appeals determined that the argument, that "necessary" had a different meaning than "essential" because the words appeared in two different subsections as hypertechnical. Based upon this interpretation of the statute, the Court of Appeals further determined that Wheeling-Pittsburgh’s proposal to the union had not met the "essential" standard for rejection. The Court specifically noted that the absence of a "snap-back" provision, whereby the union would share in the company’s profits if business rebounded, made the proposal unfair and inequitable. In effect, the Court of Appeals applied a strict standard to determine if a debtor could reject a collective bargaining agreement.

In Truck Drivers Local 807 v. Carey Transportation, Inc., 816 F.2d 82 (2nd Cir. 1987), the Second Circuit Court of Appeals in New York construed section 1113 in a more flexible and less stringent manner than had the Wheeling-Pittsburgh court, above. The Carey court held that "necessary" modifications need not be restricted to those that are absolutely "essential" or minimal, and that "reorganization" refers to the long-term financial viability of the debtor, rather than the short-term goal of preventing the debtor’s liquidation. Carey Transportation was a bus company that had successfully obtained concessions from Local 807, the Teamsters local representing its mechanics and also obtained concessions from its creditors. However, it was not able to negotiate adequate concessions. Carey filed for Chapter 11 protection and made a further proposal to the local to modify its labor agreement. The union refused to accept any more changes and declined to enter into further negotiations. Carey obtained rejection of its contract with Local 807 under section 1113 of the Code.

The Second Circuit Court of Appeals disagreed with the Third Circuit’s holding in Wheeling-Pittsburgh that "necessary" meant "essential" or the "bare minimum." The Court held that the "essential" modification standard would place the debtor in an untenable position because if the debtor only proposed the absolute minimum changes, it would not be considered able to bargain in good faith. The Court also held that the term "essential" in the interim relief section is not synonymous with the term "necessary" in the permanent relief section, arguing that the two different terms used in two different subsections could and do have different meanings.

Furthermore, the Court held that long-term viability of the debtor is inherent throughout the reorganization process. The Court also required the union to come forward with a reason, supported by evidence, for its refusal to accept the debtor’s proposal or else it will be deemed to have refused the proposal without good cause under section 1113(2)© of the Code.

The Second Circuit Court of Appeals in Carey noted that section 1113 codified the balancing of the equities test of Bildisco. The court delineated six factors as necessary to properly balance the equities involved in determining whether a labor agreement should be rejected. These six factors include:

1. The likelihood and consequences of liquidation if rejection is not permitted.

2. The likely reduction in the value of the creditor’s claims if the collective bargaining agreement remains in force.

3. The likelihood and consequences of a strike if the agreement is voided.

4. The possibility and likely effect of any employee claims for breach of the contract if rejection is approved.

a)The cost spreading abilities of the various parties, taking into account the number of employees covered by the labor agreement and how the union-represented employees’ wages and benefits compare to those of others in the industry.

b)The good or bad faith of the parties in dealing with the debtor’s financial dilemma.
On 12/18/2002 10:49:30 PM Boomer wrote:

The following is layman(not lawyer) opinion of the following:

Recitation of Truck Drivers v. Carey strikes both ways. The court is called to consider the likelyhood of a strike, the relative standing of parties performing the same job within the same industry and the role of good faith during negotiations.


Well, yes and no. It CAN strike both ways, depending on the facts of any given case, but in Carey it clearly struck against the union. And in United's case it might, too, although there's no way of knowing what the court will decide.

Note how the court emphasizes the long-term survival of the company through reorganization. Also contrast the 2nd Circuit's more balanced interpretation with that of the 3rd Circuit, which limits any changes to those absolutely necessary for the continued operation of the debtor. As I mentioned, this is a deterrent for any company considering filing in Delaware (Chicago, BTW, is in the 7th Circuit).

Anyway, thanks for posting that link so everyone can read the caselaw. Again, my point was not to comment on what the court WILL do in United's case, but just that a court CAN reject a collective bargaining agreement, as you can see.
Gap in Pay Divides Pilots From Other United Unions

December 19, 2002

Of all United Airlines' employees, the pilots seem to have
lost the most in the airline's bankruptcy filing. Highest
paid among United's nonmanagement employees, the pilots
pushed worker-ownership the hardest and received the
biggest stake in the airline, only to have their equity
wiped out.

But United's 8,800 pilots fought for special compensation
that no other employee group has and that no creditor can
touch as the airline struggles to reorganize.

Starting in April 2000, as the stock of United's parent,
the UAL Corporation, was tumbling, the pilots persuaded
United to make large contributions to a tax-deferred trust
fund for their retirement. The company has contributed
hundreds of millions in the last couple of years to the
fund, which had swelled to $2.2 billion at the end of 2001,
the last public data available. The airline agreed to
contribute the equivalent of 11 percent of each pilot's
pay, a footnote at the time to headlines about the
impressive raises of more than 20 percent depending on a
pilot's service.

These days, the pilots' fund looks particularly valuable,
as United seeks even deeper cuts from employees than the
concessions it had won before filing for bankruptcy
protection last week. Salaries and wages will surely be
sacrificed in the months ahead, but the trust is the
pilots' to keep.

A United spokesman declined to comment on whether the
airline had proposed reducing future contributions to the
pilots' fund as part of cost-cutting concessions described
to its unions on Friday. The unspecified concessions caused
an outcry from United's pilots.

But as more information emerges about the fund, it may
worsen the already deep divisions between the pilots and
the members of other United unions.

"There's a little feeling now that we ought to start
rubbing heads with the pilots," said Joe Schwirian, who has
worked for 17 years as a United mechanic in San Francisco.
But he added that he and other mechanics continue to be
"more ticked off with management" than with the pilots.

Relations between United's unions are important because
each of the three main groups - representing the pilots,
the flight attendants, and the mechanics and other ground
workers - has been given a seat on the airline's 13-member
creditors' committee. The presence of so many labor
representatives has caused concern among some industry
experts, who fear that a strong labor voice will make it
hard for United to cut costs effectively.

But labor's voice may not be consistent. There are
indications of diverging positions among the unions, as
illustrated by the gap between the pilots' and the
mechanics' compensation packages.

Like the pilots, United's 36,000 mechanics, baggage
handlers and customer service employees took pay cuts in
exchange for stock in UAL. The ground workers received a
20.4 percent block, the second largest after the pilots'
holdings. The decision to do so split their union, the
International Association of Machinists and Aerospace

Now the machinists' equity is worthless, just like the
pilots'. But unlike the pilots, the machinists and
aerospace workers received no special tax-deferred payments
in 2000, when the six-year period of pay cuts for stock
ownership ended. The pilots pressed for and ultimately
received the deferred-compensation payments, as well as pay
increases that year. But the machinists did not even
receive a raise.

The machinists finally received raises earlier this year.
United agreed at the time to pay an additional $500
million, to make them whole for the time they worked in
2000 and 2001 without a contract. The first of eight $70
million installments was paid on Monday .

Now that United is in bankruptcy, it is unclear whether it
will pay the remaining installments.

"It's a great injustice," said Charlie Lincoln, a lead
mechanic and shop steward for the machinists in San
Francisco. "There's a lot of anger about it."

All four main labor groups - pilots, flight attendants,
machinists and nonunion ground workers - have
United-sponsored pension plans, together worth about $7.6
billion at the end of 2001, when the last data was issued.
Again, the pilots have the most attractive provisions. Even
though they make up only 12 percent of those entitled to
pensions, they have claims on about half of United's
pension assets.

United also offers its flight attendants, machinists and
nonunion ground workers the chance to save for their
retirement in 401(k) accounts, but those workers contribute
their own money. Even before the bankruptcy filing, United
offered them no company matching contributions.

The pilots' special trust fund, now called the Pilot
Directed Account Plan, existed long before United's current
financial troubles began. Before United created its
employee-ownership program in 1994, the airline was
contributing an amount equal to 9 percent of each pilot's
salary to the trust each year. That worked out to about $85
million a year in the early 1990's.

The pilots are required to leave their holdings in the
trust until they retire, though they may borrow against the
money and may contribute some of their own pay, to reduce
the tax bite. The Frank Russell Trust Company is the

In 1994, when United began its employee-ownership plan, the
pilots agreed to pay for their stock with a pay cuts and
reduced company contributions to the trust, said Steve
Derebey, a United 767 pilot and spokesman for the pilots'
union. For six years, United contributed an amount equal to
1 percent of each pilot's salary to the plan, or about $8
million to $10 million a year.

When that period of concessions ended, on April 12, 2000,
United tried to revert to the old contribution rate, 9
percent of each pilot's salary. Pilots said that initially
they were so eager to restore the deferred compensation
contributions that they would have even agreed to lower
their demands for higher pay.

But then United announced plans to acquire US Airways,
angering the pilots, who feared they would lose seniority
when the two groups of pilots were merged. The pilots,
already somewhat soured on their status as worker-owners,
began to act a lot less like capitalists with equity to
protect and a lot more like labor militants.

The pilots "worked to rule" that summer, refusing overtime
at the busiest time of year and just as the airline was
trying to expand. United's on-time performance plunged to
the worst in the industry; delays and cancellations hit
record levels. By the end of August, United's management
capitulated to the pilots' demands, not only raising their
salaries by 21.5 to 28.5 percent, but also increasing
contributions to the tax-deferred trust to 11 percent of
salaries, retroactive to April 12.

In 2000, United contributed $95.7 million to the pilots'
trust. In 2001, it contributed $178.1 million.

The pilots justify the gains by recalling that they went
for six years with below-average pay, while they were
trading wages for stock.

"We have bills to pay, and our costs are going up just like
everybody else's," Mr. Derebey said. "Basically, we were
just keeping even with the Joneses."

In fact, the United pilots' contract catapulted them past
the Joneses, giving them the richest compensation in the
industry that September, when it was ratified. The pilots'
achievements also raised the expectations of United's
machinists and flight attendants, who were also demanding
raises in 2000.

Mr. Derebey said the pilots were disappointed that employee
ownership had not worked out as hoped.

"We really made an attempt to change the culture in the
organization, to get everybody to sing off the same sheet
of music," he said. But from the beginning, he said, the
plan was weakened by "pockets of resistance." He cited, for
example, United's flight attendants, who did not become
employee-owners because their union was unable to agree
with the airline on a trade-off of concessions for stock.

"That was the first fatal blow," Mr. Derebey said.

Mr. Schwirian, the mechanic, found fault with the pilots.
The machinists' union supported the pilots' campaign in the
summer of 2000 and expected the pilots' union to back them
up as well.

"As soon as they got what they wanted, they dropped it," he
said. "They didn't back us. They said, `Look, you're on
your own.' "