UPDATE 4-U.S. judge denies American Air request to scrap pilot contracts

Wed Aug 15, 2012 11:48pm EDT

* American says will alter, resubmit motion

* Judge cites unfettered ability to furlough pilots, codeshare

* Flight attendants still to vote on last offer (Adds comments from AMR creditors' committee lawyer and analyst)

By Nick Brown and Karen Jacobs

NEW YORK, Aug 15 (Reuters) - A U.S. judge on Wednesday denied a request by American Airlines parent AMR Corp to abandon collective bargaining agreements with its pilots' union, an unexpected decision and setback for bankrupt AMR in its quest to save more than $1 billion a year in labor costs.

In a lengthy written ruling in U.S. bankruptcy court in Manhattan, Judge Sean Lane, who is overseeing AMR's Chapter 11 bankruptcy restructuring, turned down American's motion in part because it would give the carrier unrestricted ability to temporarily lay off pilots and engage in code-sharing.

Lane said AMR failed to show that such "unfettered discretion" was necessary for its own operations or that it was common in competitors.

AMR said in a statement it would alter its motion and resubmit the request to terminate its agreements with the Allied Pilots Association by Friday.

However, Kevin Starke, a bankruptcy analyst at CRT Capital Group, said he is not convinced AMR would be able to resubmit its motion as swiftly as it would like.

"I've watched this movie before," Starke said. "The problem with failing on a motion of this magnitude is that it allows objections to creep in on the second go-round, and so you don't often get back to the ruling stage as fast as you would hope."

Meanwhile, the pilots union saw the ruling as a victory.

"Clearly management went well beyond what is the industry standard for bankruptcy contracts, and the judge recognized this in his decision today," union President Keith Wilson, named to head the Allied Pilots Association last week after his predecessor resigned, said in a statement.

AMR's creditors' committee, which supported the airline's bid to abrogate its contracts, downplayed the severity of the ruling in a statement on Wednesday, saying AMR will not be hard-pressed to make the adjustments Judge Lane is seeking.

In fact, the company already made those changes in its last contract offer -- which the pilots rejected, Jack Butler, the committee's attorney, said in the statement.

"We expect that AMR's revised positions will be sustained by the bankruptcy court," Butler said.

He added that the creditors' committee's labor subcommittee is slated to meet on Thursday to further discuss the effects of the ruling.

Had Lane granted the motion, AMR would have had been able to implement more dramatic cuts that would have governed in the interim, including hundreds of pilot layoffs, and the elimination of equity stake, 401(k) retirement fund contributions and raises. Instead, the union's current collective bargaining deal will remain in place for now.

Lane acknowledged that serious concessions are needed from AMR's unions, and rejected the unions' arguments that AMR had an obligation to consider a merger with US Airways while still in bankruptcy.

AMR management said it was concerned the ruling would confuse flight attendants at the company, who are scheduled to wrap up voting on a last and best offer from American management on Sunday.

"We just want to make sure the flight attendants don't misinterpret Judge Lane's ruling on the pilot agreement in relation to how they choose to vote this week," Denise Lynn, American senior vice president for people, told reporters.

AMR has already reached consensual labor terms with its ground workers' union, while its flight attendants' union has until Sunday to vote on AMR's latest offer.

The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463. (Additional reporting by Sakthi Prasad; Editing by Bernard Orr and Eric Meijer)

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