* Union questions fairness of AMR business plan
* Plan seeks $990 mln in annual concessions from unions
* Unions have said merger with US Airways could save jobs
By Nick Brown
NEW YORK, April 24 (Reuters) - The prospects of a merger for bankrupt AMR Corp took center stage again on Tuesday in the second day of a court battle over the fate of the company's labor contracts.
The airline's chief restructuring officer, Bev Goulet, defended AMR's business plan during testimony in U.S. Bankruptcy Court in Manhattan, drawing questions from the unions that would be asked to make annual concessions of $990 million.
The unions and the company are at loggerheads over ongoing contract negotiations, and are now in court fighting over AMR's request to scrap its collective bargaining agreements altogether and impose interim terms unilaterally.
For the request to be successful, AMR must convince Judge Lane that its unions have unreasonably shunned prior requests to negotiate, and that the company considered alternatives to avoid scrapping contracts.
The unions have said AMR has not considered the alternative of a merger. Robert Clayman, an attorney for AMR's flight attendants' union, argued on Tuesday it was "critical" to know whether the cost-saving plan "is just a means of extracting as much money from labor as possible." Clayman said AMR could implement stingy labor terms only to render them moot by merging with another airline.
Judge Sean Lane shut down that line of questioning, citing confidentiality concerns about merger talks.
The merger issue has been front-and-center since AMR's three main unions on Friday said they had struck a deal with US Airways Group Inc to support a potential merger between US Airways and AMR. They said a deal could save more than 6,000 jobs.
US Airways Chief Executive Doug Parker said the union agreement does not mean a merger is in the works, while AMR CEO Tom Horton said whispers of a merger would not veer AMR off its course to pursue a standalone restructuring.
The hearing, in U.S. Bankruptcy Court in Manhattan, is expected to last at least a week. On Monday, two witnesses testified that AMR's labor costs were the highest in the airline industry. Other key witnesses, including Rothschild Group's David Resnick, AMR's financial advisor, are expected to take the stand on Wednesday.
AMR filed for bankruptcy in November, citing untenable labor costs.
THE FIVE PILLARS
AMR's business plan calls for the company to sharpen its focus on international markets and on what it has referred to as its "Five Pillar" domestic markets -- Dallas/Fort Worth, New York, Los Angeles, Miami and Chicago.
The plan could generate $1 billion in new revenues, Goulet testified, but would still fall "well short" of bringing the company to profitability without additional concessions of about $1.25 billion a year from its union and non-union workforce.
AMR, the world's largest airline in 2000, has slipped to fourth as labor costs have risen and lower-cost carriers have taken away market share.
During his cross-examination of Goulet, Clayman kept his focus on a merger, asking Goulet if she felt that consolidation by other airlines, like Delta Air Lines and United Airlines, helped them to leapfrog AMR.
Goulet acknowledged that growth was an important factor in an airline's viability, but did not bite when Clayman asked whether it was necessary for AMR to pursue similar growth.
"Growth is part of our business plan, but I don't know if I'd call it a significant amount of growth," Goulet said.
Goulet admitted she had had conversations with CEO Tom Horton in which Horton had expressed a belief that AMR might one day "have a role in" consolidation in some form.
Clayman's examination at times took on a critical tone, including his barb that AMR's growth projections had not factored in the expectation of similar growth by other airlines.
"You would not expect Delta and US Airways on any particular day to just stop competing, would you?" Clayman said.
Later in her testimony, Goulet said AMR's business plan does account for competitive response.
LONG WAY TO GO
Judge Lane will not issue a ruling right away. After the hearing ends, the company and its unions will have another two weeks to negotiate. If new terms are still not reached, the unions will have a chance to present their case in court in May. A ruling from Lane would then be expected in June.
On Monday, sources told Reuters that the Transport Workers Union, which represents seven work groups at American Airlines, will vote starting next week on an updated contract offer from the airline, with results expected before unions testify at the hearing..
Regardless of how Lane rules on AMR's motion to scrap contracts, the airline must continue negotiating for a consensual long-term contract with its labor force. A ruling granting AMR's request to break its contracts would allow AMR to impose its own temporary unilateral labor terms while those negotiations go on.
The bankruptcy is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.