American Airlines Seeks to Use Bankruptcy Court to Restructure Labor Costs

As was the case for many previous airlines that declared for Chapter 11, American Airlines’ labor costs under union contracts were a prominent reason for seeking bankruptcy protection.  Tom Horton, chief executive of American, stated that American Airlines’ labor costs exceed that of its major competitors by roughly $800 million a year.  These labor costs consist of, among other things, the highest pensions in the industry.  Other airlines were able to reduce such costs by seeking bankruptcy protection in the past in order to restructure their own expenses and increase profitability.

Under Section 365 of the Bankruptcy Code a debtor is able to accept or reject existing contracts.  If they are rejected, the contracts are treated as though breached just before filing.  Therefore, the practical consequence of such a rejection is to relegate the other party to the contract to the position of an unsecured creditor in line with everyone else to receive its pro rata share.  In other words, the counterparty to the contract (in this case the various employee unions) would potentially receive only a small percentage of the original cost of the contract.

Section 1113 of the Code provides special requirements for rejecting collective bargaining agreements (as opposed to any other kind of contract).  American must show that it has negotiated in good faith to attempt to reach satisfactory modifications in the agreements.  Additionally, American must demonstrate that these modifications are necessary to permit the successful reorganization of the debtor.  Negotiations between the various unions and the airline have been ongoing for weeks to no avail.  As such, it is likely that American will ask the judge to permit rejection of the collective bargaining agreements in the coming weeks in accordance with Section 1113.

Alternatively, unions will argue that the airline failed to negotiate in good faith, and were acting under the false pretense of fair negotiations in order to satisfy the obligations required by Section 1114.   A past case involving the bankruptcy of Northwest Airlines ruled that an airline must do more than simply present a “take-it-or-leave-it” proposal.  It is therefore not surprising that this same “take-it-or-leave-it” language was recently used by a spokesman for Allied Pilots Association to describe the negotiation offers of American, a further indication that claiming lack of good faith on the part of the airlines could be a strategy employed by the unions in court to rebuff the attempts to reject their collective bargaining agreements.

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