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Bankruptcy: American Airlines seeks to reject labor pacts, opening new front

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As specter of rate cuts grows, investors retreat from leveraged loan asset class

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Bankruptcy: American Airlines seeks to reject labor pacts, opening new front

American Airlines yesterday filed motions in its bankruptcy case to reject its collective-bargaining agreements with its three key unions, namely, the Allied Pilots Association (APA), the Association of Professional Flight Attendants (APFA), and the Transport Workers Union of America, AFL-CIO (TWU), saying it “cannot successfully reorganize” with the agreements in place.

The filing was expected, as the company’s attorneys had said at a bankruptcy court hearing last week that it would be filing the motion, known as a Section 1113 motion for the section of the Bankruptcy Code authorizing rejection of labor agreements.

Still, the filing opens up a newly litigious – and risky – front in the company’s Chapter 11 process.

American has made no bones about the fact that its Chapter 11 filing was aimed at, among other things, bringing its disputes with its unions to a head “to achieve a cost and debt structure that is industry competitive.” Subsequently, on Feb. 2, the company announced a plan under which, among other things, it would need to cut some 13,000 jobs and reduce average annual employee related costs by $1.25 billion from 2012 through 2017, in order to survive.

American said in the filing that it “has tried for years to reach agreements [with its unions] that acknowledge the realities facing the company but, with a few exceptions, those efforts to find common ground have been unsuccessful.”

Generally, in order to reject a labor agreement under Section 1113, a company must show that modifications to its labor agreements are necessary for the company to reorganize, that it has proposed such modifications to its unions, that it has been bargaining in good faith and that the union had rejected the proposal without good cause.

If the court approves the rejection, the entire CBA is not immediately discarded, but it is modified to reflect the company’s most recent modification offer. Beyond that, renegotiation of the agreement is subject to applicable labor laws such as the National Labor Relations Act or, in the case of airlines, the Railway Labor Act.

On the other side of the equation, of course, Section 1113 rejection of a collective-bargaining agreement generally frees a union to strike if it so decides, although so far, at least, that option has not yet emerged in this case (as opposed to Hostess, also pending in the New York bankruptcy court, where key unions have said they would strike if their agreements are successfully rejected under Section 1113, likely forcing a liquidation upon the company).

If the unilateral imposition of new labor terms by the company under Section 1113, with the corresponding risk that it could trigger a strike, seems like a result that fails to serve the needs of either the company or its employees, arguably one goal of using Section 1113 to introduce such new tension and uncertainty into the proceeding is create new incentives to propel both sides to a new deal.

Indeed, according to the company’s Section 1113 motion, it is seeking to reject the existing collective-bargaining agreements in order to “foster” a new agreement. “American understands … that to be successful in the long run it needs agreements with its unions,” the company said. “It cannot exit Chapter 11 or compete effectively without them. American’s purpose in filing this motion, then, is to foster agreements; contract rejection cannot be viewed as the ultimate goal because that would be a lasting victory for no one.”

American goes on to say in the filing that hopes that the “court is never required to decide this motion, because it hopes that the motion will facilitate bargained-for solutions for each employee group,” adding that the company plans to continue negotiations with each of its union, “and it is on those negotiations that American’s attention remains principally focused.”

At the same time, the company said, its “survival hinges on its success in promptly resolving this indispensable element of its reorganization.”

As for the timing, American has been clear that it is seeking to complete its bankruptcy as soon as possible. Tom Horton, for example, told the Associated Press in a recent interview in response to a question about how long the bankruptcy would last, “I want to go as quickly as we can. We must do this right. We must do it only once, and we must be sure that the company is profitable, successful and growing coming out the other side. I’ve given our team a target to have that done by the end of the year. I will admit that is an aggressive target by prior standards. There’s no reason why we can’t do it.”

Needless to say, the company’s unions see the situation differently.

For its part, the APA echoed the airline’s desire to reach an agreement, but slammed this latest legal maneuver. In a written release, union president Captain Dave Bates said, “We’re extremely concerned that despite giving lip-service to the importance of reaching a consensual agreement with APA, American Airlines management appears intent on having the bankruptcy court reject our contract.”

Bates warned that success in court might not help American reach its goals. “If the court decides to grant management’s 1113(c) motion, management would then be able to impose new terms of employment on our pilots,” Bates said. “Taking this step – one that could be fairly described as running roughshod over our contract – will not foster long-term success for American Airlines.”

Bates also took issue with whether American has been bargaining in good faith. “In recent bargaining sessions with APA, management has repeatedly stated that a consensual agreement will be ‘impossible’ if we continue making proposals designed to keep our working conditions at or near industry-standard levels,” Bates said in the release. “Just saying no to everything the APA leadership has proposed at the negotiating table does not constitute good-faith bargaining.”

In a statement on its website, the TWU was more circumspect, saying only it would “continue its efforts to negotiate with the company to reach consensual agreements.”

Not that the union is rolling over. “Our attorneys are continuing to prepare our case and will be ready to defend our contracts and challenge the company’s 1113 motion to abrogate our contracts,” the union statement said.

The AFPA, meanwhile, told members in an online “Hotline” message yesterday that it would “fight the [Section 1113] effort in court.” More specifically, the message from union president Laura Glading said, “The company can succeed only if it convinces the judge that the contract changes it seeks are necessary, fair and equitable. In reality, its draconian demands are none of those things.”

A hearing on the Section 1113 motion is set for April 10. – Alan Zimmerman