(Reuters) - AMR Corp, the parent of bankrupt American Airlines, wants to slash 13,000 jobs and terminate employee pension plans as part of a cost-cutting strategy the carrier says is necessary to compete with rivals.
The cuts detailed by executives on Wednesday would be part of overall efforts to reduce operating expenses by more than $2 billion annually. Layoffs and other employee-related cuts would comprise more than half of the total savings.
“As you know, our major competitors have used the restructuring process to overhaul their companies and become more competitive in every aspect of their business,” AMR Chief Executive Tom Horton said in a letter to employees.
“All work groups will have total costs reduced by 20 percent, including management,” Horton said. “While the savings from each work group will be achieved somewhat differently, each will experience the same percentage reduction.”
AMR says it suffers from higher labor costs than its peers and filed for Chapter 11 protection from creditors in November in New York.
Analysts and industry insiders believe the company’s chief priority is to align labor costs, primarily from its heavily unionized work force, with rivals who cut thousands of jobs and pensions in bankruptcy several years ago.
“This is the same plan AMR was and has been pursuing long before the bankruptcy - with mostly the same senior management team - so it looks to us like the company still believes its main obstacle to success will be removed mostly by stunning cuts to labor,” said Vicki Bryan senior high yield analyst at Gimme Credit, an independent research service on corporate bonds.
American said it lost $10 billion over the past decade and financed the red ink with debt. The period was marked mainly by industry downturns triggered by the 2001 hijack attacks, recession, and skyrocketing fuel prices.
Mergers and restructuring by United Airlines UAL.N, Delta Air Lines (DAL.N), and US Airways LCC.N between 2002 and 2010 have enabled them to now turn profits with oil prices near $100 per barrel. American, by contrast, lost $900 million in December, its first month in bankruptcy.
“The fact is, we’re losing money every day,” said Jeff Brundage, the airline’s vice president of personnel.
American is restructuring debt and leases and planning to ground older planes as part of the cost-cutting strategy. But executives say that the labor component of that plan is the toughest to pull off. The company will try to negotiate cost changes with pilots, flight attendants and ground workers.
Horton said in a letter to employees that the carrier was aiming for $2 billion in total annual cost reductions, including $1.25 billion in employee-related expenses. American also plans to restructure debt and leases as well as ground older planes.
American also wants to generate $1 billion per year in new revenue through changes in its route network, fleet utilization and product improvements.
American has 73,802 full and part-time employees and its regional carrier American Eagle has 14,237 full- and part-time employees.
The company will try to negotiate cost changes with its unions for pilots, flight attendants and ground workers, who reacted sharply to the proposal.
“The company’s proposal is even more extreme and despicable than we had anticipated,” said Laura Glading, president of the flight attendants union at American.
“Management has given us absolutely no credit for the concessions we made and continue to make and now they want another bailout,” she said. “Frankly, they’re not entitled to it.”
James Little, president of the Transport Workers Union, said on a conference call with reporters that the company has asked too much from labor.
“I think the whole thing is about trying to move work overseas or perhaps subcontracting the work out to third parties overseas,” said James Little, president of the Transport Workers Union, on a conference call with reporters. “I think it’s wrong for America. I certainly think it’s wrong for American.”
TWU represents many of the groundworkers that will bear the brunt of job cuts.
The company released a breakdown of the expected cuts, which will hit ground workers hard.
American said it expects to trim about 4,600 mechanics and related jobs, about 4,200 fleet service workers, about 2,300 flight attendants, about 1,400 management and support staff and about 400 pilots.
American also said it would seek bankruptcy court approval to terminate traditional pension plans covering 130,000 workers and retirees. Those plans would be replaced with 401(k) plans with a company match, the airline said.
American has a $10 billion shortfall in its employee pension accounts, according to U.S. pension insurers with the Pension Benefit Guaranty Corp.
The PBGC said it would seek to prevent pension plan terminations at American, steps that rivals United Airlines and US Airways took during their court restructurings.
Horton also said the airline intends to emerge as an independent company, according to one of the sources who attended the meeting with the unions. AMR is a potential merger target for rivals. US Airways has said it is assessing a bid and Delta also is considering one, sources have told Reuters.
William Swelbar, a research engineer with MIT’s International Center for Air Transportation, said the job cuts are part of what American needs to do to reorganize effectively.
“The other part that American needs to address is its ability to generate revenue. There is no question that the company is at a distinct labor cost disadvantage relative to the industry,” Swelbar said.
In addition to the labor cost reductions, AMR also plans to invest about $2 billion per year in aircraft with the goal of making American’s fleet the youngest in North American by 2017.
Horton said the carrier intends to increase departures across its five key markets - Dallas/Fort Worth, Chicago, Miami, Los Angeles and New York - by 20 percent over five years.
AMR’s cost proposals require approval from the New York bankruptcy court.
Reporting By Kyle Peterson; additional reporting by John Crawley and Karen Jacobs; Editing by Mark Porter, Maureen Bavdek, Dave Zimmerman, Richard Chang and Gunna Dickson