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





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"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.

Flores said US Airways flight attendants do the same work as flight attendants at the Big Three and should receive the same pay. "We paid for the merger we have," he said, referring to contract concessions that enabled the carrier to emerge from bankruptcy. "Why should we pay for another one now?"

The company's first contract proposal offers already-promised increases: 1% in January 2011 and 3%, slated for January 2012, although Johnson said the company would move up the 3% increase by a full year.

The approximately 4,000 flight attendants from pre-merger US Airways, known as "the east," have different perspectives than the approximately 2,000 flight attendants from the former America West. Flores said west flight attendant raises would range between 13% at the top of the scale and 43% at the middle. "All the airline wants to do is to give the west pay parity," he said. "Not a single east flight attendant would vote for this."

But Johnson said moving up the scheduled increase would boost the payout to east flight attendants by "a significant seven figure amount" in the first year. He also said that increasing east vacation time to the level in the America West contract would cost the airline more than $10 million annually and would give 8 to 14 more paid vacation days annually to east flight attendants with eight or more years of experience. "It is effectively a big pay increase for east flight attendants," he said.

Flores said the proposal is unacceptable and the US Airways chapter will formally request to re-open its contract negotiations on Jan. 2, a move permitted under the current contract, which becomes amendable on Jan. 2, 2012, but has an early-open provision. Unlike the current negotiations, which are aimed at securing a joint contract, formal Section Six negotiations would be conducted under the Railway Labor Act process that enables mediation and potentially a job action if the talks fail.

Typically, the process takes years, but Flores said less time would be required because agreements exist on 25 of 33 contract sections.

Flight attendant negotiations have consumed about two weeks a month for the past 40 months. Johnson said the carrier wants a conclusion soon, after which it would step up talks with pilots. "We think an agreement with the flight attendants will be the inspiration to getting an agreement with the pilots," he said.

-- Written by Ted Reed in Charlotte, N.C.

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Ted Reed