US Airways' Merger Hopes Shape Contract Talks

TEMPE, Ariz. (TheStreet) -- Finally, in the fourth year of contract talks between US Airways(LCC) and its flight attendants, the two sides have started to talk about the most critical issue: compensation.

Mike Flores, president of the US Airways chapter of the Association of Flight Attendants, said he is displeased with the company's first pay proposal, delivered Tuesday, which offers the majority of members little more pay improvement than increases negotiated during the carrier's 2005 bankruptcy. The company has, however, offered an increase in paid vacation time as well as a salary increase.

The compensation negotiations are complicated both by management's belief that a merger with a Big Three airline is likely in the next several years, and by the separate contracts still in place for the two flight attendant groups following the 2005 merger between US Airways and America West.

Throughout 2010, US Airways executives have said that during the next several years, the carrier could well enter merger talks with American(AMR), Delta(DAL) or United(UAL).

"Looking out over four or five years and recognizing that a merger is a possibility, we want to make sure we have the company in an advantageous position," said Steve Johnson, US Airways' executive vice president, in an interview. "There are very significant benefits for shareholders and employees in a merger, so we don't want to make mergers complicated or unattractive."

Johnson noted that while US Airways would be perfectly content to continue to operate as a stand-alone carrier, it also wants to be prepared should a merger present itself. It therefore is seeking to reduce merger protections currently included in flight attendant and pilot contracts. Those restrictions, which offer wage snap-backs to high, pre-bankruptcy levels, "would add significant costs to a merger [and therefore] would prevent or inhibit discussions," Johnson said. "We're interested in doing everything we can to be in a position to negotiate a merger should the opportunity arise."

A corollary to the expectation of a merger is that without one, US Airways operates at a 10% unit revenue disadvantage to the Big Three because it lacks a powerful hub like Atlanta, Chicago or Newark, CEO Doug Parker has said. Until a merger occurs, the carrier must maintain a labor cost advantage around 10% so that it can compete, Johnson reiterated.