Airline Says Only Union Members Can Stave Off Bankruptcy

American Airlines says the unions representing pilots and flight attendants have accepted an offer that provides employees additional opportunities to benefit in the event that the company's financial situation substantially improves. The announcement comes as union employees prepare to vote on tentative agreements that, if not ratified, will force AMR Corp. to file for bankruptcy protection.

The agreement adds additional opportunities for American's employees to share in any opportunities made possible through their sacrifices. The tentative agreements already provide a new stock option and profit sharing plan.

The Pitch

The new agreement offers an opportunity to revisit wage rate increases in later years of the contracts and shortens the contract period from six years to five and two-thirds years for the pilots and flight attendants, matching the contract terms for the Transport Workers Union.

"Long-term job security and returning our company to sound financial footing must go hand-in-hand, with employees having opportunities to participate in any success their sacrifices helped make possible," AMR Chairman Don Carty wrote in April 11 letters to the Allied Pilots Association and the Association of Professional Flight Attendants.

Earlier this week, leaders of the Transport Workers Union agreed to the same arrangement.

The amendable date for the APA and APFA contract is now identical to that of the TWU agreements, which shortens the contract term to Dec. 31, 2008. It was American's original intent to have standardized contract durations. The difference in durations occurred during the rush to reach tentative agreements before the March 31 bankruptcy deadline.

"We hope that by listening, shortening the contract duration, and making available the Variable Wage Adjustment Program to your membership, we clearly demonstrate that although we are all in a very difficult predicament today, we are committed to restructuring this company consensually and sharing in our joint success," Carty wrote.

Agreement In Principle

On March 31, American and its three major unions reached consensual agreements to restructure labor costs as part of a wide-ranging effort to cut costs and make the airline more competitive.

The airline is asking for a total of $1.8 billion in employee costs savings -- with the sacrifice shared among the pilots represented by the APA; flight attendants represented by the APFA; mechanics, fleet service workers and other employees represented by the Transport Workers Union; and all representatives, agents, planners, support staff and management.

Unless all three unions vote to ratify the consensual deals by April 15, the company has said it will have no option but to file for Chapter 11 bankruptcy protection.

The profit sharing plan in the tentative agreement provides that 15 percent of pre-tax earnings greater than $500 million will be earmarked for distribution to American Airlines employees who do not participate in the incentive compensation plan. Base pay will be used to determine how these funds will be distributed.

Stock Options Part Of The Deal

Stock options representing nearly 25 percent - or between 37 and 38 million - of the company's outstanding shares will be granted to American Airlines employees. Options will be granted to each workgroup based on the level of cost restructuring accomplished and the percentage each group represents of overall labor costs. This stock option program will become effective once the agreements are ratified and the options will be issued soon thereafter. These options will vest over three years and will have an exercise price equal to the fair market value of AMR stock on the date of grant.

The Variable Wage Adjustment Program approved today provides union employees an opportunity to add to the 1.5 percent pay increase already allowed within the new contract by providing for additional wage increases of up to 4.5 percent for a 12-month period. The program would be triggered only if AMR's credit rating returns to the level held immediately prior to Sept. 11, 2001. At the time, the Standard & Poor's rating was BBB- and Moodys rating was BAA3. Any adjustment could take effect Jan. 2006 and could recur in each subsequent year of the agreement upon requalification.

Reality Check

In his letter, Carty said that he did not want to "create false hopes" with this agreement that the unions can return to the bargaining table or change the terms of the tentative agreements signed last month.

"I want to again make clear that these adjustments do not create an opportunity to further modify or renegotiate the tentative agreements," Carty wrote. "It bears repeating that our financial condition makes it impossible to revisit the terms of the agreements because we must deliver $1.8 billion in savings, and we must do it quickly if we are to stave off bankruptcy."

FMI: www.amrcorp.com