US Airways, Pilots Agree on Cuts

US Airways (UAIRQ Quote) and its pilots union reached a tentative agreement on wage cuts, a critical step in the bankrupt carrier's restructuring plan.

With the possibility of court-ordered wage cuts just two weeks away, the Air Line Pilots Association, representing 3,200 US Airways pilots, and management reached a tentative agreement late Thursday night. Earlier this week, US Airways told a bankruptcy court that it could be forced to liquidate by mid-February if employees do not cut their pay by 23%.

"This is a major step forward for our company, its employees, customers and all other stakeholders," said Bruce Lakefield, US Airways president and CEO. "Ratification by ALPA's members is essential to our transformation and would demonstrate their continuing commitment to making our airline stronger and more competitive."

Details of the tentative agreement were not announced. This afternoon, the union's master executive council, which runs the union, will be briefed on the plan and decide to hold it up to a general vote. The vote could be contentious -- three weeks ago, four members of the MEC decided to block a general vote on concessions, an act which ultimately led the carrier to file for bankruptcy protection.

This time, however, the stakes are even higher. Because of its weak balance sheet and deep losses, US Airways entered bankruptcy without debtor-in-possession lending, forcing the carrier to use cash to fund operations. But with oil above $50 a barrel and demand weakening, the airline is burning through its lifeblood and warning of a Chapter 7 filing if it can't generate $200 million in cash over the next five months.

While pilots have come around, two other major work groups are not even at the negotiating table, which means the airline will almost certainly need the court to impose lower labor costs on some groups. The Association of Flight Attendants, which represents 5,500 employees, and the International Association of Machinists, which represents 4,800 employees, have rejected management's last proposal on wage concessions.

The court will hold a hearing on Oct. 7 on management's motion to dismiss its labor contracts, under Section 1113(e) of the bankruptcy code. At the hearing, labor and management will present their cases to the judge. Specifically, management must prove that it will be dealt "irreparable harm" if the court does not impose new labor contracts.

The decision will be monumental for the industry. If the court agrees with US Airways, and dismisses employee contracts, it will essentially establish new pay scales for the entire industry and break from the government's tradition of honoring legal agreements. But if the court disagrees with the carrier, it will likely spell the end of US Airways and its nearly 30,000 employees.

Shares closed at 81 cents Thursday.