American Airlines needs to be freed of its union obligations

Erik Telford President, Franklin Center
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The government-managed auto bankruptcies broke dangerous new ground when they overrode hundreds of years of precedent to make unions whole at the expense of senior secured creditors. Emboldened by that political exercise, unions are now attempting to interfere with the bankruptcy of American Airlines, a company that desperately needs an honest restructuring that frees it from unsustainable union obligations.

Vulnerable to energy price shocks, disruptive new competitors, shrinking budgets for business travel, and 9/11, the airline industry has been racked with several waves of bankruptcies. But throughout it all, the industry could always be described as perseverant.

A number of the country’s most recognized airlines have emerged from restructuring stronger and better equipped to meet new demands. In November 2011, American Airlines — once the leading domestic airline carrier that had never merged or entered bankruptcy — filed for Chapter 11. Costly labor contracts, which consume 28 percent of the company’s revenues, were one of the primary factors driving its losses.

Sadly for American Airlines, its union labor force — the ones largely responsible for landing it in the state it’s in now — are threatening the company’s ability to proceed through the reorganization process. Earlier this year, its three biggest labor unions entered into negotiations with US Airways, a move to wet the ground for a possible merger with American Airlines at a time when the company is in a weak position. The timing is particularly inopportune since any move to acquire American Airlines before it’s able to address its internal problems through restructuring would likely only further poison the industry.

Because American Airlines’ union contracts are outdated and excessively lavish, the restructuring process will require them to renegotiate labor agreements. US Airways has offered to match the unions’ current contracts and even increase them by five percent. But the lush offer should raise flags given US Airways’ labor disputes with employees it acquired in a 2005 merger with America West; seven years later, labor groups from that deal remain divided on seniority and company lines.

In fact, the US Airways merger with America West is a telling forecast of how US Airways’ dealings with American Airlines might proceed. When acquiring America West, US Airways claimed the deal would produce $600 million in revenues and savings and include equal improved compensation packages for its workforces. But workforce standoffs and negotiation complications have left workers divided, and according to the U.S. Airlines Pilots Association president, “There have been very few tangible benefits for US Airways pilots as a result of the 2005 merger.”

Nor have customers benefitted from the previous US Airways merger. Following the 2005 merger, US Airways finished last among the largest carriers in the number of customer complaints and reports of mishandled bags. And last year, almost a third of US Airways’ flights arrived late, according to the Department of Transportation’s standards.

For the unions, the US Airways offer may not be as good as it looks. Continuing to demand uncompetitive pay and benefit packages will perpetuate the problems that landed American in bankruptcy in the first place. And their haste to engage with US Airways could ensure that the problems currently plaguing American Airlines will spread to a large segment of the industry.

Nobody likes bankruptcy, but when a company finds itself there, the best solution is a clean bankruptcy that sheds liabilities and allows the reorganized company to emerge on sound footing. For American, that must include cutting labor costs. Only then would it make sense for American to consider merger options.

Erik Telford is vice president at the Franklin Center for Government & Public Integrity, a non-profit organization dedicated to providing non-profit reporters and citizen information activists at the state and local levels with the training, expertise, and technical support necessary to pursue journalistic endeavors.