I have now read through the 106 page decision and it is obviously more of a reprieve than anything else. The judge went out of his way to say that the concessions which were common to all unions in pay, pension and benefits were reasonable. He also supported some major hits to the pilot scope clause, which was probably the most important part of the proposal. He also went out of his way to invite AA to refile with less onerous terms on codesharing and furloughs. And what he said about those terms was that AA was entitled to relief, just not all the relief it demanded. What is, of course, being missed is that he was evaluating the term sheet, not the LBFO which was recommended by the pilot leadership. That proposal was much less drastic on both codesharing and furloughs. All the Company has to do is line up its term sheet with its LBFO. The judge gave them the road map.
If you look at the judge’s opinion it is very clear that he would have allowed the maintenance outsourcing proposed in the term sheet which, in fact, was less onerous than what normally happens in bankruptcy. As for the idea that the pilots standing in the industry is somehow superior to other employees, you better talk to one of them. With the new UAL agreement, AA pilots will be at least 20 percent in pay behind all major carriers except USAirways, and those pilots are, of course, still operating under a bankruptcy contract. In any case, the judge took no issue with the pay, benefits, and pension in the proposal even though it left the pilots near the industry bottom. He took issue with two items, and the basis of his concern is that they went beyond the Company’s stated needs.
The Two Issues raised by Judge for refusing the abrogation of the APA Contract
CONCLUSION
The Court concludes that American’s proposed changes to furlough and codesharing have not been justified by either reference to the Business Plan or the practices of American’s competitors. Given the significance of these two provisions collectively to American’s proposal, the Court finds that American has not shown that the proposal is necessary as required by Section 1113. For the reasons set forth above, therefore, American’s Motion to reject the collective bargaining agreements of the APA is denied. This denial is without prejudice to remedying the two defects identified in this Opinion and submitting a new application under Section 1113. Debtors’ counsel shall settle an order on three days’ notice.
Code sharing
The Court concludes that a significant increase in codesharing would greatly benefit American. It is equally clear that the current collective bargaining agreement is far more restrictive on codesharing than recent industry norms for a carrier with a smaller network. Given American’s need to compete with its now-smaller network, American has established a need for significant change to its codesharing abilities. American has not shown by a preponderance of the evidence, however, that essentially unlimited codesharing is necessary to achieve a successful reorganization. American has reasonably explained why it is inappropriate to measure its need for codesharing by comparing itself to current larger network competitors. But American’s unlimited request for codesharing is greater even than the comparative group that American urges is an appropriate benchmark: the group of network airlines, before mergers, that used extensive codesharing in the past to compete with American’s larger network. American’s codesharing request also is in excess of the Company’s stated goals and contemplated arrangements expressed in the Business Plan, which American has presented as defining what is necessary to achieve a successful reorganization.
The current and projected financial condition of the debtor’s business will provide the primary evidence as to whether the trustee's proposed modifications are “necessary ‘ for reorganization, but the facts and circumstances of each case may also influence the outcome. Probative evidence necessarily will involve projections about the future business prospects and financial performance of the debtor's business. Where the trustee’s business plan dictates the size of labor cost reductions required, “its assumptions and methodology are key”” and are frequently challenged.
Collier ¶ 1113.05[3][c]; see Mesaba, 341 B.R. at 731. The Company claims that it must maintain flexibility to respond to new opportunities that might arise over the next six years. But while the Court understands the need for some flexibility in the future, that flexibility cannot be unlimited or it would render the necessity requirement a nullity. It is the Company that presented and relied upon its Business Plan as the cornerstone of necessity, and it must accept both the benefits and drawbacks of that decision.51
See In re Express Freight Lines, Inc., 119 B.R. 1006, 1013––1018 (Bankr. E.D. Wis. 1990) (denying debtors’’ Section 1113 application on necessity grounds because the Court concluded that other companies operated under contract terms similar to those the debtor sought to modify); In re Cook United, Inc., 50 B.R. 561, 563 (Bankr. N.D. Ohio 1985) (denying debtors’’ Section 1113 motion on the basis that the present operating plan still projected positive cash flow without the rejection of the collective bargaining agreement and therefore, modifications were deemed unnecessary); see also Carey Transp., 50 B.R. at 209 (“There can be no pat formula. Any analysis must be undertaken on a case by case basis with due consideration given to the nature of the business and industry patterns.”&rdquo😉, aff’d, Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82 (1987) (emphasis in original).
Furlough
As of February 1, 2012 there were 10,738 pilots on American’s seniority list. (Newgren Decl. ¶ 4). Of those, 7,664 were active pilots that were flying for the Company. (Newgren Decl. ¶ 4). The remainder were on inactive status, including leave or furlough. (Newgren Decl. ¶ 4).
American argues that as part of its reorganization, it will initially need to furlough employees. (Newgren Decl. ¶ 155). The current pilot collective bargaining agreement contains two restrictions relating to furlough that American proposes to eliminate, arguing that they limit flexibility and increase cost. First, the agreement permits a pilot to voluntarily take a furlough designated for a more junior pilot who otherwise would have been furloughed based on seniority. (Newgren Decl. ¶ 156). American notes that if the pilot volunteering to take the furlough was already on leave or preparing to retire, American would not obtain the economic value of the furlough, because it must pay to furlough someone who was already inactive or planned to leave and is still required to furlough the junior pilot. (Newgren Decl. ¶ 156). Second, the agreement effectively prevents American from furloughing pilots above a certain place on the seniority list. (Newgren Decl. ¶ 156). The Company argues that this would prevent it from responding to unforeseen catastrophic events. (Newgren Decl. ¶ 155).
But the Court disagrees with American’s view on the furlough provision. The APA complains that American seeks to eliminate all contractual restrictions against furlough. See APA Proposed Findings ¶ 14. The APA correctly notes that while the Business Plan only contemplates the furlough of 400 pilots, American has proposed to eliminate all the restrictions on its ability to furlough. The APA also accurately observes that the existing furlough protection clause allows the Company to furlough up to 2,000 pilots, five times what the Company’s Business Plan requires. (Roghair Decl. ¶ 85). While American claims to seek more broad furlough authority to address unforeseen emergencies, there appears to be no need to do so as the existing agreement includes a force majeure exception which was used by the Company to furlough 2,900 pilots following September 11th. The evidence proffered by American is unclear even as to the amount of savings gained by American’s proposal on furlough, with the evidence suggesting that the savings may be as little as $300,000 a year. (See APA Ex. 412; Roghair Decl. ¶ 85). Thus, American has failed to justify its request for unrestricted furlough by reference to the savings identified in its Business Plan. Finally, American has not justified its request for proposed changes in furlough by identifying comparable provisions in the airline industry.
Without being able to justify this change by reference to the industry or its Business Plan, the Court concludes that the furlough proposal is inconsistent with the necessity requirement of Section 1113.See In re Fiber Glass Indus., 49 B.R. 202, 206––208 (Bankr. N.D.N.Y. 1985) (denying debtors’’ Section 1113 application on a “necessity” basis because debtors failed to proffer sufficient evidence to support a finding that the proposal was necessary for reorganization); In re Sun Glo Co., Inc..144 B.R. 58, 62 (Bankr. E.D. Ky. 1992) (denying debtors’ motion to reject a collective bargaining agreement under Section 1113 on grounds that debtors failed to “demonstrate[] that [the proposed] measures are “necessary’’ to its reorganization” and have not shown “how these particular changes will increase the likelihood of successful reorganizing.
