Even Though the Bankruptcy Court Refused to Alter American’s Pilot Contracts, the Airline Really Won

After close of business the judge in the American Airlines bankruptcy case denied the airline’s request to terminate their pilot contracts (in what’s known as a section 1113 ruling).

Most of the headlines I’ve seen leave it at that, “American denied request to reject pilot contract” or the like.

And while that’s technically true, their motion was denied, it was denied without prejudice — with the judge agreeing with the airline on almost everything — but felt the airline had gone too far in their requests in two areas. So he wouldn’t give them everything they were looking for.

I’m not an attorney, let alone one versed in labor and bankruptcy law. But I read through the 111 page document (.pdf) this evening. And it was almost a universal, across-the-board win for American. It just didn’t give them everything they asked for, and invited them to amend and re-submit.

The judge cites American’s high labor costs as a key reason for their poor financial performance. He refers to labor as a significant reason that American’s costs aren’t competitive, and that labor costs are the airline’s “largest controllable cost.”

American’s labor CASM is approximately 24% higher than the average of the other network carriers and 79% higher than the average of the LCCs with which American competes

The judge cites American’s lower labor productivity as well, and that American’s pilots’ union has conceded that the airline pays pilots more than competitor airlines do, and even that this is unsustainable.

Further, the Court noted that American’s competitors outpaced the carrier’s labor cost savings through bankruptcy.

So the bankruptcy judge was sympathetic to the need to lower costs. And the Court rejected union arguments that a possible US Airways merger — which would involve higher pay for pilots than proposed by American — proved that lower labor costs weren’t really ‘necessary’ for the airline to continue as a going concern.

I hadn’t realized that the American pilots’ contract contained provisions that were more favorable to the airline as long as they owned their regional affiliate. In asking to eliminate the distinction between owned and non-owned regional carriers, they’re looking for the flexibility to sell off American Eagle.

Meanwhile, American’s case for larger regional jets includes the importance of a first class section in those planes in order to attract high value customers. Glad to see the importance of first class!

American asked for unlimited codesharing. It’s one possible alternative to a merger scenario. But since they were asking for more than any of their competitors had in their own pilot agreements, the judge wouldn’t grant it. The judge agrees that more codesharing is necessary, that American’s current contracts are more restrictive than their competitors’ contracts. The airline had just asked for too much (and, indeed, more than they indicated they needed in their business plan).

American also asked for an unlimited ability to furlough pilots, while in their business plan they only anticipated 400 furloughs — when current contracts allow for up to 2000.

It was interesting to read that American’s pilots work fewer hours than their peers at other airlines, and take more sick leave. And that American wants to move a pilot rest seat from first class to business class on international flights. (Though with fewer planes which will have first class in the future, as first will remain only on 777-300 aircraft, I’m not sure how significant this will be.)

The court even concluded “It is clear that rejection of the agreement is necessary for American to successfully reorganize.”

But he wasn’t going to give them unlimited codesharing and unlimited furlough rights. So the airline will have to resubmit a section 1113 motion to get the rest of what they wanted.

Update: There’s more good commentary over at Wandering Aramean along similar lines, though pulling out some of the more salacious quotes from the ruling.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. This is a good summary. After resubmission, AA will be able to emerge healthier, and I think that is ultimately going to be a good thing for frequent fliers.

  2. My read of the codeshare bit is that the competitor contracts are reasonably limited because they are sufficiently large now to not require as many codeshares, at least domestically. So “matching” competitors wouldn’t be sufficient.

    I also found it interesting that the ability to codeshare with HA on inter-island flights depends on keeping at least 10 mainland flights. I have heard a variety of excuses for why AA supposedly continues to run those flights at a loss. This one seems to make the most sense, though it is hard to figure just why it is so important to have those flights as codeshares if there isn’t really the traffic anyways.

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