American Airlines and its Bankruptcy Proposal ... Unions Kill Another Company and Thousands of Jobs

American Airlines (AMR) recently filed for bankruptcy. Now management has disclosed its proposed plan to "fix" the company.

As part of its "get well" plan, AMR intends to reduce employment by 15%, or 13,000 employees. It also plans to terminate its pension plans and convert them to 401k plans. It further expects to modernize its fleet, outsource work and improve internal productivity in an attempt to restore the company to a competitive and profitable condition.

Why bankruptcy? Why didn't the company, with the agreement of its unions, take these very necessary steps years ago? Why didn't the unions play a constructive role and prevent the situation from getting out of hand? Why was it necessary to involve the courts? Why does the government continue to side with the unions? And what about the taxpayers?

Basically, the answers to all of the above questions involve the power, intransigence and brinksmanship employed by the unions for many, many years, both at AMR and elsewhere in the airline industry as well.

AMR incorrectly believed it could work effectively with the unions to regain competitiveness and profitability. It tried much harder and longer to work things out with the unions than its competitors did. And now it's going to continue to pay the price for having done so.

Simply stated, the unions wouldn't agree to make the changes required to save the company and the employees' jobs. They preferred to see the company go downhill until it entered bankruptcy. Now the unions will sit and harshly criticize the company and bankruptcy court as they are forced to do the necessary and unpleasant work all by themselves.

That union posturing will allow the unions to oppose company proposals and the court's approval thereof, and thereby the unions will maintain their pro-employee facade. At the end of the bankruptcy proceeding, they will be able to say to their membership and the public, and after the company's go forward plan has been approved, "Don't blame us. We fought them all the way."

And in fact, they will have done just that.

One more thing. Lest we forget, all this game playing by the unions will also cost U.S. taxpayers lots of money. Later we'll get to the taxpayer and the role of the PBGC (pension benefit guaranty corporation), a federal pension insurer.

But now let's look more closely at this AMR story.

AMR Seeks to Cut 15% of Jobs has several relevant pieces from which we'll quote:

GENERAL OVERVIEW

1 ... "American Airlines parent AMR Corp. Wednesday said it will seek to cut 13,000 jobs and terminate pensions in pursuit of $2 billion in annual cost savings, tipping its hand for the first time in what could be a long and painful bankruptcy proceeding.

The company said it wants to reduce labor costs by $1.25 billion a year, or 20%. That includes cutting its work force of 88,000 by nearly 15%, imposing new productivity measures and outsourcing some work. The company also aims to terminate its four underfunded pension plans, a move that would represent the largest pension default in U.S. history.

"The world has changed around us and this is our moment to adapt or lose the opportunity forever," AMR Chief Executive Tom Horton said in a letter to employees.

Mr. Horton, who with senior executives Wednesday laid out the plans to leaders of American Airlines' three big labor unions, also said "we will end this journey with many fewer people. But we will also preserve tens of thousands of jobs that would have been lost if we had not embarked on this path.""

ROLE OF BANKRUPTCY COURT, THE UNIONS AND GOVERNMENT (PBGC)

2 ... "AMR's plan faces a number of hurdles, including convincing U.S. Bankruptcy Court Judge Sean Lane that the carrier won't be able to successfully reorganize without these savings. The desired labor cuts will first be subject to negotiations between the company and its unions. If the unions balk, AMR could petition the judge to let it modify the contracts and impose the changes it seeks.

"The piece I'm personally shocked by is the depth of the concessions they're asking for," said Transport Workers Union International President James C. Little. "We're going to fight this."

To win approval for the desired pension terminations, AMR will need to make a similar case to the judge over what is expected to be fervent opposition from the Pension Benefit Guaranty Corp. The PBGC, a federal pension insurer, would have to take over the plans, adding to its already record deficit.

AMR, the nation's No. 3 airline by traffic, has struggled financially since 2001, losing $12.5 billion from that year through the first nine months of 2011. The Fort Worth, Texas, company filed for bankruptcy-court protection Nov. 29. As part of its turnaround plan, Mr. Horton said AMR seeks $750 million a year in other savings from restructuring debt and aircraft leases, grounding older planes and redoing supplier contracts."

COMPETITION USED BANKRUPTCY PROCESS TO STRENGTHEN THEMSELVES AND WEAKEN AMR

3 ... "More than eight years ago, AMR staved off a Chapter 11 filing when employees voluntarily agreed to $1.8 billion in annual concessions. But many of its rivals used the bankruptcy-court process to extract much larger cuts, and some of them also shed their pension obligations. Then they consolidated, creating larger airlines with better route networks and strong relationships with foreign partners. American, mired in its own problems, sat out that dance.

The four largest carriers that restructured under court protection in recent years chopped labor costs by an average of 42% and cut their full-time-equivalent employees by 45%, according to Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology. To match those savings, American needs to cut another $1.5 billion in labor costs and nearly 14,000 jobs on top of the changes made in 2003, he said.

Mr. Horton's overall labor-savings goal of $1.25 billion a year is not far off that mark, especially because rivals' labor costs are rising as unions negotiate new contracts. The reduction of 13,000 or more of AMR's workers also would comport with steps rivals took."

TAXPAYERS WILL END UP ON THE PENSION HOOK

4 ... "The PBGC already has warned that it will fight AMR on the pension terminations. "Before American takes such a drastic action," agency Director Josh Gotbaum said Wednesday, "it needs to show there is no better alternative."The PBGC, already laboring under a record $26 billion deficit, estimates that the plans have assets of $8.3 billion to cover $18.5 billion in benefits. The agency is limited on what it can pay to retirees, thus the highest-paid AMR workers, particularly the pilots, would receive much less than they would have if the plans weren't jettisoned.

The plans would be replaced by 401(k) plans with a company match for employees who contribute. Workers would have to contribute toward their medical plans and the company would discontinue retiree medical coverage, Mr. Brundage said. . . .

AMR has no set timeline in which it hopes to reach consensual agreements with its unions on the new terms it seeks. But Mr. Horton said it is in the best interests of the company and employees "to get on with this" and achieve agreement as soon as possible."

WITHOUT A REASON, THE UNION HAS RUINED EVERYTHING FOR AMR AND ITS EMPLOYEES

5 ... "Mr. Hoban, the spokesman for the Allied Pilots Association union, said the company wants authority to require its pilots to fly 100 hours a month, or 15 hours more than their current labor contract allows.

The company also is seeking to outsource flying of any planes with fewer than 89 seats, instead of the current limit of 50 seats. Only about 400 pilot positions will be eliminated out of 10,000.

The company's proposal "is even more extreme and despicable than we had anticipated," Laura Glading, president of the Association of Professional Flight Attendants union said Wednesday.

AMR's six-year contract offer to flight attendants would increase salaries by 1.5% a year but also require flight attendants to work up to 100 hours per month—up from a maximum of 83—and reduce vacation and sick-day accrual rates."

PUTTING IT ALL TOGETHER

Laura Glading, the flight attendant union's president, is absolutely correct about the presence of "extreme and despicable" behavior. However, she's completely wrong about who engaged in it.

The unions have managed to bankrupt the unionized portion of the airline industry, as they did the steel industry, auto industry and rubber industries previously.

Thus, the bankruptcy court is the only avenue left to AMR management as it tries to survive in business and save tens of thousands of jobs in the process.

The unions, as is their habit, have continued to play a short sighted, very stupid and reckless power game throughout the years. In the process, AMR has lost billions of dollars for its shareholders. Now they're bankrupt.

Other unionized airlines have long been unprofitable as well. Except for a few non-union carriers, the airline industry has consistently been and remains a loser for shareholders. Taxpayers, too.

Now the taxpayers will get to pay another huge sum by subsidizing the government pension agency, the PBGC. That's because the PBGC doesn't have enough money to pay the AMR pensions owed. Enter the taxpayers, perennial bag holders for the unions and government officials.

Yes, the union lady president is right. It's despicable behavior for sure.

The unions have won again. In the end, they'll lose again. And lots of regular people as well.

And for no good reason.

Thanks. Bob.