US Airways Labor Pacts Could Hinder AMR Merger Effort

CHARLOTTE, N.C. ( TheStreet) -- Labor contracts at US Airways ( LCC) could pose a problem as the airline pursues an effort to merge with bankrupt AMR ( AAMRQ.PK).

Contracts with pilots and flight attendants, signed during the carrier's 2002 bankruptcy, both contain "snapback" provisions that would bring wages back to pre-bankruptcy levels in the event of a change of control. Unions sought the provisions so that employees would benefit if their bankruptcy concessions led to a successful outcome. In the case of pilots, wages would increase by about 50% if the provision was implemented.

Two recent events are bringing renewed attention to the contracts. First, US Airways is ratcheting up efforts to convince creditors of bankrupt American of a merger's benefits, according to people close to the creditors committee. "There's a lot of energy coming out of Phoenix," said one.

Additionally, flight attendants last month overwhelmingly rejected a tentative contract agreement that included elimination of the snapback provision.

The tentative agreement retains a provision that in the event of a merger laid-off flight attendants would be entitled to 60% of their salary for five years, likely ensuring that none would be laid off.

The "end point of negotiations" came when management backed off efforts to eliminate the 60% guarantee, which it "desperately wanted to get rid of," said former union president Mike Flores, in a February interview with TheStreet.

Even though snapback agreements are often unenforced, they give unions leverage. Some flight attendants have said that elimination of the snapback provision was a factor in their decisions to vote against the contract.

It is unclear whether a transaction involving AMR would involve a change of control. For instance, US Airways could acquire the carrier in bankruptcy court. On the other hand, in the 2005 merger between US Airways and America West, bankrupt US Airways Group technically acquired America West, although America West's management team took over and its Phoenix headquarters was retained.

In the case of US Airways pilots, a snapback provision was considered to be a barrier to a 2010 effort to merge with United ( UAL). In a presentation to pilots that year at the carrier's Charlotte training center, CEO Doug Parker discussed the provision.

"We've had talks with airlines in the past," Parker said then. "This (provision) always comes up. (It) is a large issue in consolidation talks. There will not be a merger if that's where the pay rates go. Anybody we would merge with can't let the pay rates go to those levels.

"You can't have both," Parker added. "You can't have a merger with that provision. (It) will either result in a merger never being done or it will be a merger that doesn't trigger that provision."

Although former leaders of the U.S. Pilots Airline Association were often perceived as obstreperous, in the spring of 2010 they acted to work with the carrier to enable a merger with United, and Parker subsequently praised those efforts.

Parker has said that US Airways has a 10% revenue disadvantage to the Big Three airlines, which have hubs in cities with higher levels of local traffic, and that lower employee costs make up for the revenue disadvantage. A merger would enable better contracts at US Airways, he has said.

"The change of control provision provides US Airways pilots with a tremendous amount of leverage should a transaction occur," said USAPA spokesman James Ray. "In order for US Airways pilots to support a merger, it has to recognize the sacrifices that this pilot group made in two bankruptcies, which put us in the position we are today, where we can possibly make a deal that benefits employees and investors at both airlines."

-- Written by Ted Reed in Charlotte

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