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Union: American Airlines Overstates Labor Cost Gap

Stocks in this article: AMRDALLUV

DALLAS TheStreet) -- A key component of the AMR> (AMR) recovery scenario is that contract improvements at competitors will lead to convergence with American Airlines' labor costs, which the carrier says are the highest in the airline industry.

American's flight attendants aren't buying it. As far as flight attendant costs are concerned, convergence in labor costs is already here, they say, a result of a series of contract improvements made by American's competitors.

"The cost disparity had turned to zero because of the contract increases," said Dan Akins, a consultant who serves as economic advisor for the Association of Professional Flight Attendants, in an interview. APFA represents about 18,000 American flight attendants. By mid-2011, "the flight attendant contract costs of other carriers were equivalent to those at American," Akins said.

"The conundrum for me is that American's cost disparity relative to their competitors has been shrinking, yet their performance in terms of profit margins has fallen further and further behind their competitors," he said.

Nevertheless Akins said he does not see an imminent bankruptcy, despite recent investor concerns that resulted in an overly enthusiastic sell-off last week.

On Oct. 3, American shares opened at $2.82 and sank as low as $1.75. Shortly before noon on Tuesday, the shares had nearly recovered the entire amount of that decline, as they traded at $2.73, up 8%.

It is accepted as common wisdom in the airline industry that American, the only legacy carrier never to seek bankruptcy protection, has a labor cost disadvantage relative to its peers. American has put the amount of the discrepancy at about $800 million annually. That number is not accepted by APFA, which says it is frustrated, not only by continual repetition of the number but also by the suggestion that American employees made no concessions. "In March of 2003, employees gave back $1.8 billion annually, and those savings are continuing," Akins said.

According to American, the $800 million includes roughly $200 million each for three items: wages, work rules, benefits (primarily health care for both current employees and retirees), as well as another $200 million annually that other carriers save by not contributing to pension plans. American says the numbers are based on an analysis that takes into account an average of contracts at each American competitor, rather than any specific contract. Akins said the computation has not been proven to the flight attendants.

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