AMR's Serious Labor Troubles

AMR Corp. (NYSE:AMR) and unions representing pilots, flight attendants and maintenance workers at its American Airlines subsidiary are locked in labor negotiations that are growing increasingly contentious.  Shareholders should be extremely worried.

As the Wall Street Journal notes, the company avoided bankruptcy in 2003 by getting $1.8 billion in payroll cuts, which is smaller than the concessions won by rivals including US Airways Group Inc. (NYSE:LCC), Delta Air lines  Inc. (NYSE: DAL) and UAL Corp.’s (NYSE:UAUA) United Airlines who filed for Chapter 11 protection.

The chickens are now coming home to roost for the  Fort Worth, Texas-based airline.

“American’s labor cost, at 3.69 cents per available seat mile as of last September, was the highest in a list of 13 biggest airlines compiled by the federal Bureau of Transportation Statistics,” the paper said. “Also, employee benefits, which were cut sharply at other airlines, have remained largely intact at American. Nevertheless, American’s pilots are demanding a 50% pay increase.”

The Allied Pilots Association has rented billboards denouncing the $300 million in bonuses paid to the company’s top 1,000 executives over the past three years and pointing out a government safety investigation.  The pilot’s union spokesman even called the 2003 concessions a “loan” which should be paid back.

Obviously, he does not read the papers or the company’s balance sheet.  Analysts expect AMR to report about a $400 million loss tomorrow. Revenue is expected to be about $4.72 billion. The airline said last month expected to end the quarter with a cash and short-term investment balance of approximately $3.1 billion, down from $3.6 billion at the end of December.  Last month,  Fitch Ratings slashed the company’s debt ratings further into junk status.

Other unions are waging similar battles with the company.  AMR’s management is taking a tough line saying “If we don’t exist, they don’t exist.” Good point.

If the rhetoric does not cool down soon, things will get ugly fast.

Jonathan Berr