Directors Update 10-24-2003
Posted on Friday 24 October @ 08:02:05
TO: All AA members Local 501-590.
RECAP: AA reorganization Time Line.
Dear Sisters and Brothers:
I know we have all been through some extremely difficult times since 911 in our Airline Industry, and we do not know what the future will bring. I do however; believe we made the right decision on the restructuring at American. As you know things were changing fast during the spring, AA avoidance of bankruptcy, IRAQ war, SARS and the ailing economy. My biggest regret is that not all of you were kept as current on the status of American as the situation unfolded therefore, I thought a recap of events that led up to the reorganization agreement would give you a better insight of what your leadership was faced with.
1. In the fall of 2002, we began to receive regular briefings from Company officials warning that American's finances were deteriorating and that the Company was sustaining daily losses averaging five to seven million dollars. The Presidents of the Allied Pilots Association (APA) and Association of Professional Flight Attendants (APFA) received similar warnings. Then, on December 6, 2002, I received a letter from AMR CEO Don Carty requesting that the TWU (along with the APFA) defer a pending increase due on March 1, 2003. We did not agree to do so, but stated we would need to do an analysis of AA finances, and if conditions warranted we would ask our members to consider a pay deferral. We hired economic consultants to review the Company's books to determine whether the request was justified. Our consultants were the "ECLAT" Group (DCA) led by former Air Line Pilots Association President-CEO Randy Babbitt. ECLAT informed us that it would take about 30 days to complete an analysis. However, while attending Senator John McCain subcommittee hearing on binding arbitration in Washington DC we contacted ECLAT for a status report. That evening ECLAT gave us preliminary findings that indicated forgoing pay was not the issue of concern and based on their analysis AA could be in bankruptcy by late May. Our first reaction was of disbelief however Mr. Babbitt assured us they would review the analysis again.
2. About a week later the APA contacted us to review their financial finding, and according to their analysis AA would be in bankruptcy by late spring. APA, APFA, and TWU contacted CEO Don Carty and requested a meeting with senior management. During the meeting we asked if AA would be in bankruptcy by late spring. He stated that the company is experiencing deep financial losses, and bankruptcy may be imminent. We notified Mr. Carty we would no longer consider the pat deferral, and would focus our resources on the bankruptcy process.
3. While ECLAT was still conducting its analysis of AA's books, CEO Carty requested that the TWU participate in a process of "active engagement" to "save and restructure American Airlines." Exhibit 2. Carty's letter identified the following problems:
· Our bankrupt mainline competitors are using the bankruptcy process to create huge cost advantages through creditor-imposed labor and other cost cuts.
· The competitive threat from low-cost carriers in over 75 percent of our markets, coupled with the growing practice of internet fare shopping, has impacted our pricing structure;
· Government-imposed security and insurance costs are crippling; and
· Fuel prices continue to rise and the threat of war looms.
The letter went on to warn that "... the restructuring of our labor agreements is inevitable and fundamental to our survival, and must be part of any long term solution." The Presidents of the pilots and flight attendants unions received identical letters.
4. ECLAT completed its review in late January 2003. ECLAT President Randy Babbitt and the economist Thomas Stalnaker confirmed that the Company was indeed sustaining operating losses of five million dollars a day and, combined with debt payments, the losses approached ten million dollars a day in the third quarter of 2002. ECLAT stated that these sorts of losses were not sustainable and, at that rate of "cash burn," the Company would have to file for bankruptcy as early as May 2003. ECLAT noted that American was unlikely to allow its unrestricted cash position to fall below $1.2 billion because it would be unable to finance a reorganization in bankruptcy. ECLAT's conclusion was not unique; the consultants for the other unions, as well as several published analyses from various investment firms, came to essentially the same conclusion. .
5. On February 4, 2003, CEO Carty sent another letter to all unions on AA property warning that "We continue to lose millions of dollars every day forcing us to borrow vast sums of money just to make payroll and stay in business. Now our number one priority must be to deliver the additional two billion we estimate we need to survive." Given that priority, the Company demanded aggregate labor cost savings of $1.8 billion per year. AA allocated the sacrifices expected of each work group as follows:
Based on this review, the TWU Represented employee’s portion is $620 million. We want to work with you to determine together how best to achieve these savings, and expect it would be through a combination of changes in wages, benefits, and work rules.
The other work groups' portions are as follows (in millions):
Pilots $660
Flight Attendants $340
Agents and representatives $80
Management and support staff $100
Be assured that management will continue to do its part. Today's $100 million allocated to management and support staff is in addition to the over $200 million in savings already achieved through a 22 percent reduction in these provisions and foregoing across-the-board management pay increases (2001-2002) for a second straight year.
Upon examination, it turned out that the allocation of concessions to each union was based on the percentage of payroll paid to each membership in 2002.
6. In late February and early March, International Representatives Gary Yingst, Robert Gless, John Conley and I worked with ECLAT as well as our staff economist, John Donnelly, to examine the Company's request and to cost out the various provisions of our contract in order to facilitate dealing with AA’s proposals for relief. Late in February, we also brought investment bankers from the Milestone Group (who was also working on the World Com reorganization) into the process in order to get data on AA's standing in the financial markets and to help us structure a stock option plan if that became an alternative our Bargaining Committees wished to pursue. We also met with consultants for the pilots and flight attendants. All consultants were unanimous in advising that AA could not sustain the losses it was absorbing and that unless its labor contracts were modified and the Company provided cost savings of the magnitude demanded, the Company would not survive.
7. We did not conduct any negotiations with the Company until all TWU Local Presidents at American were brought into Dallas. Then, on March 12, 2003, at the request of the Company, a meeting was convened with CEO Carty and his top labor relations and operational managers. At that meeting, Carty stated that the Company's finances were still deteriorating and that it could not survive unless its labor costs were restructured in the amounts requested in his February 4, 2003 letter, and that, without consensual modifications to its agreements to provide this relief, the Company would have no choice but to declare bankruptcy. Carty stated that the Company had major cash payments due on April 15, 2003, and April 16, 2003 which it did not wish to make if it was compelled to seek Chapter 11 protection. Accordingly, Carty stated that he needed tentative agreements modifying AA’s labor contracts by the end of March, and ratified modifications supplying the necessary relief by April 15, 2003. And Carty stated, in the most express terms, that unless all three unions could alter their normal timetables for ratification to provide for the chance of producing modified agreements by that date, he intended to file for Chapter 11 protection before the end of March.
8. The following day, the AA Local Presidents Council voted unanimously to request that the International Administrative Committee allow them to revise their normal procedures for ratification in order to adopt an automatic balloting procedure for the ratification of any modifications of our collective bargaining agreements that would allow the ratification process to be conducted between April 1 and April 14, 2003. The APA and APFA made such revisions in their procedures and adopted automatic electronic balloting procedures and the same timetable as the TWU. All Unions designated the American Arbitration Association as the agency to conduct and count ballots.
9. The following week, I convened Bargaining Committees for all work groups including mechanic and related. I suggested that we divide responsibility for producing the required $620 million in annual relief among TWU work groups using the same methodology that AA used to allocate concessions among its various unions. I then suggested that the representatives of each work group devise their own proposals for reaching the targets demanded by the Company. Within a few days, the Mechanic and Related Committee formulated a proposal in which it sought to meet the Company's financial demands of its craft solely through layoff of 2,700 employees. The Company, however, definitively rejected this proposal; because its accountants advised that it did not produce anywhere close to the necessary labor cost relief. Moreover, because the proposed layoff would leave AA without enough workers to perform necessary maintenance, the Company maintained that the above approach would require it to outsource a substantial amount of work. AA, therefore, responded with a proposal which allowed the mechanics to make some of the required savings by closing two heavy maintenance bases and outsourcing the work overseas, closing a number of small line stations, and ridding itself of all automotive and facilities mechanics. The Mechanic and Related Committee rejected this proposal and passed a resolution stating its intent not to reach its cost savings targets through further outsourcing or overseas maintenance. Only the two representatives from Local 561 and the President of Local 562 dissented.
10. By Saturday, March 29, 2003, none of the Unions had yet reached agreement with American. American Airlines President and Chief Operating Officer Gerard Arpey, along with Chief Financial Officer Jeff Campbell, asked to speak to a joint session of all TWU Bargaining Committees. At that meeting, he thanked us for our efforts, but also emphasized that "American Airlines is out of gas" and stated that it could not survive with its labor agreements in their present form, and that the agreements would either be modified consensually or in bankruptcy. Arpey further stressed that, if the Company was forced to take the latter course, it would need at least half a billion a year more in concessions in order to finance a bankruptcy and secure debtor in possession financing. Arpey stated that the deadline for reaching consensual agreements was 11:00 a.m. Central Standard Time, so as to allow the Company's lawyers in New York enough time to file a Chapter 11 petition in the Southern District of New York. The Chairman of the National Mediation Board was in Dallas at the time, and also spoke to our Bargaining Committees. He, too, emphasized the risks associated with a bankruptcy. After the meeting, our advisors from ECLAT and Milestone were informed by CFO Campbell that AA's operating cash was deteriorating rapidly because vendors, particularly suppliers of fuel, were no longer allowing 30 days to pay, but demanding payment within 15 days.
11. Shortly after these presentations, the Company provided all unions with the proposals it intended to make pursuant to 11 U.S.C. § 1113 should it file for bankruptcy without consensual concessions. AA’s plan was to shrink operations by at least 25 percent in bankruptcy, its § 1113 proposal to TWU represented mechanics eliminated all protections against layoff, all restrictions on outsourcing, and called for elimination of over 10,000 mechanic and related workers, a concession which would have wiped out all automotive and facilities mechanics, and the bulk of our members in heavy maintenance bases. Similar reductions would occur within our other title groups. The proposal also called for over a threefold increase in the cost of health care coverage for active employees, more than a fourfold increase for retirees, and conversion of the defined benefit pension program to a cash balance plan. Even with all the above concessions, the Company would still be demanding a 13 percent reduction in pay and premiums with no stock, profit sharing, or wage snap backs for the remaining employees. As an example the aggregate yearly sacrifice in the Company's post bankruptcy proposal for mechanic and related was $385 million as compared to the $315 million the Company was demanding in pre-bankruptcy bargaining. Comparable proposals were presented to the representatives of the various work groups in joint bargaining.
12. At approximately 11:00 a.m. on March 31, 2003, the Mechanic and Related Committee approved the Company's final proposal for consensual contractual relief by a margin of 14 to 8. The proposal contained deep concessions, including a 17.5 percent cut in base wages (i.e., wages not including license or skill premiums), elimination of five holidays, one week of vacation, a portion of sick time, as well as a number of work rule concessions. At the same time, the proposal preserved all aspects of the defined benefit pension plan, the retiree medical program, allowed for no changes in medical coverage or cost beyond that already provided for in the contract, and retained all restrictions on outsourcing. A maximum of 1,481 mechanics were to be laid off based on efficiencies realized from the work rule changes adopted, but after conclusion of that layoff a job protection provision covering all mechanic and related hired before September 28, 1998 was to be instituted. In addition, the consensual proposal provided for wage snap backs of 1.5 percent per year, beginning April 2004, stock options at prices established the day after ratification, and profit sharing. Finally, the consensual proposal limited the Company's ability to secure more concessions if, notwithstanding the agreements, it filed for Chapter 11 bankruptcy. The Joint Committee reached agreement at approximately the same time and also provided the Company with the cost savings it had demanded, but also negotiated job protections and opportunity for stock and profit sharing comparable to the mechanics.
13. Beginning March 31, 2003, the TWU took the following steps regarding ratification: On that day, the Union posted, on its Air Transport Division website, term sheets which outlined the various concessions which the Bargaining Committees had tentatively agreed to, along with the value given each concession. The next day, the Union provided the American Arbitration Association the TWU/American Airlines membership list so that the AAA could conduct the ratification vote, prepare, and assign the pin number election ballots for the members. I confirmed that AAA had accomplished this and assigned pins on a random basis. On April 4, the TWU sent to its American Airlines members an overview of the March 31 modifications and an explanation of why the consensual modifications were preferable to the modifications that were likely through the bankruptcy procedures, as well as an explanation on how the AAA’s electronic balloting procedures work. On April 10, the first day it was available due to various drafting disputes, the TWU posted on its ATD website the full final text of the March 31 modifications.
14. In tandem with the foregoing, on April 4, the AAA mailed out to the TWU’s members the ratification election ballot, together with balloting instructions. The balloting period, which was originally set as April 9 to April 14, was reset to run from the evening of April 10 to the morning of April 15 to take account of the protracted period for drafting the final contractual language, as well as a clerical error, which we became aware of shortly after ballots had been sent out. This error was the omission of 467 mechanic crew chiefs from the eligibility list sent to AAA, a mistake that was made because this group of members is kept on a separate seniority roster. We were alerted to this problem through complaints made to the Union, as well as to AAA. We remedied the mistake by transmitting the names of the 467 crew chiefs inadvertently omitted from the eligibility list to AAA on April 10, and confirmed receipt by AAA the morning of April 11. AAA arranged to allow this group of members to request pin numbers via E-Mail through the weekend up until Tuesday morning, and we posted instructions for doing so on the ATD website. Members of my staff were made available during this time frame to assist members in securing pin numbers. After conclusion of the election, AAA informed me that 200 out of the 467 eligible mechanic crew chiefs had voted.
15. At 9:00 a.m. Central Standard time on April 15, 2003, voting ended. In the mechanic and related vote, out of 15,825 eligible voters, 13, 339 participated. 7,021 mechanic and related members voted yes and 6,318 voted no. In the Joint Negotiation vote, out of 19,160 eligible members, 6,222 voted in favor and 5,272 opposed. Subsequent to the election, AAA informed me that the election process had worked properly, that AAA had received only 699 requests for, or complaints about, pin numbers from all TWU members involved in both ratifications (including the crew chiefs referred to above) and that AAA was generally able to rectify the problems as they arose. The pilot’s ratification process ended at the same time as ours, and they also ratified the proposed concessions. The APFA extended its ratification process another day, but, in the end, also ratified.
16. On April 17, 2003, the Wall Street Journal published an article stating that American had made a filing with the Securities and Exchange Commission to the effect that it intended to provide special "retention bonuses" to various officials, and that it had partially funded the Special Executive Retirement Plan (SERP). As AA CEO Carty later admitted, none of the unions were informed of either action and, in my view, both actions were completely inconsistent with assurances we had received throughout the negotiation process that there would be full disclosure of all aspects of the Company's finances and that management would fully share in the sacrifices necessary to save the Company. The same day, I advised the TWU members that, without reform on executive compensation, I could not go forward with the signing of the modified collective bargaining agreements.
17. On Friday, April 18, 2003, the President of the APFA announced his intent to conduct a ratification revote. I considered the matter over the weekend and, after consulting with TWU President Sonny Hall, ATD staff, and various TWU Local Union officers and members, on Monday, April 21, I announced that, because of the Company's misrepresentations and omissions during the bargaining process concerning executive compensation, TWU would likewise conduct a revote. Within a day, I received communications from the AA Vice President for Labor Relations stating that it was the Company’s position that, as of April 15, the modified collective bargaining agreements were binding contracts. He further warned that the AA Board of Directors would be meeting on April 24, 2002 in Chicago and that the officers of the Company intended to request approval for a bankruptcy filing in the event that TWU, APFA, or the APA sought to unsettle matters by conducting a ratification revote.
18. On April 22, I was contacted by Congressman Martin Frost, who expressed deep concern over the impact of an American bankruptcy on his district and on the Dallas economy in general. He asked if I would be amenable to meeting with him, as well as other members of the Dallas/Fort Worth congressional delegation, along with the Company, to see if he could prevent the restructuring agreements from unraveling, thereby creating a bankruptcy. Similar requests were made of the APFA and APA.
19. On April 24, 2003, Congressman Frost, along with Congressmen Pete Sessions and Michael Burgess, did convene a meeting at the Dallas/Fort Worth Airport of the TWU, APFA, APA and the Company. All three Unions denounced the Company’s actions on executive pay and explained how that action had put a cloud over the negotiation and ratification of the March 31 modifications. The Company’s chief spokesperson was CEO Carty. He stated that the AA Board of Directors had authorized the Company to file for bankruptcy in the event any of the Unions sought to revote their ratification of the March 31 modifications. During the course of the discussions, though, Carty noted that the Company had taken steps to undo the problems created by the hidden compensation arrangements. This included not only elimination of the retention bonuses, but also a commitment to never fund the SERP at a level higher than the pension plans for the hourly work force. Carty further responded to concerns, voiced throughout the ratification process, that the concession agreements were too long, by offering a reduction in the term of the agreement by nine months, as well as provisions for an opportunity to fully reopen the contract after only three years. (The full reopener was offered in lieu of a very limited opportunity to engage in binding arbitration over wages after three years in the original agreement -- an arbitration in which we could not be granted increases which would place us above industry average). In response to concerns initially voiced by the APFA, Carty also offered a process affording the unions an opportunity to “swap†one concession in the agreement for a concession which the union determined was less harmful, provided it was of equal value. It was made clear in this discussion that any swap proposal and any modification that came out of an early opener were subject to ratification. Finally, in response to concerns that, if the Company's performance improved, management, but not labor, would receive bonuses, Carty agreed to a process providing the unions’ members whatever performance incentive bonuses the Board of Directors’ Compensation Committee provides to Company managers, in addition to the new modified stock options and profit sharing already in the agreements. Carty stressed to all three Unions that he had to have an answer, before close of business that day, from all three Unions, as to whether the union would (a) accept the additional modifications he had proposed on a final and binding basis and (B) would honor the entire modified collective bargaining agreement a binding contract. He reemphasized that, if any Union sent the March 31 modifications out for revote, the Company would file for bankruptcy. At the conclusion of our discussion, Mr. Carty also advised me that he would not stay if his presence would be an impediment to avoiding bankruptcy, and that there would be a decision of the Board of Directors on that issue the following day.
20. After the meeting with the Congressmen and the Company, I held a conference call with President Hall, ATD-staff, our bankruptcy attorneys, Investment bankers (milestone) and our economic team from ECLAT to discuss our options. It was made clear that based on the current state of American especially, as a result of the Carty fiasco AA may end up in Chapter 7 (liquidation). I held a second telephone conference with the Presidents of the TWU Locals at American. I note that, at the time of this call, it was still not clear whether the flight attendants intended to honor their agreement.(as the executive Board was in session on deliberation) Therefore, there was still substantial risk that there would be a bankruptcy, and that we could enter into such procedures without protection. I advised the Council that after discussion with our experts and the APA leadership. I intended to accept the modifications to the collective bargaining agreements that the American CEO had proposed on a final and binding basis and that I did not intend to conduct ratification revote on the March 31 modifications. After considerable discussion, the Presidents were asked if there was a better alternative course of action. No one suggested, much less made a motion directing, that I take a different course.
As to the April 24 modifications, it was my view that the modifications were not of the type that required a ratification vote, and given their favorable nature, did not warrant ratification. As to the March 31 modifications, it was my view that, since American had rescinded the secret bonus arrangement and had neutralized the most objectionable aspects of the hidden pension arrangements, the fairness considerations that had pushed toward a revote no longer obtained, and that the overwhelming likelihood that going forward on a ratification revote would cause American to file bankruptcy not only pushed against such a decision, but made it clear that the decision would be destructive of the welfare of the membership.
I know that the restructuring agreement has had a great deal of impact on our membership at
American. However, I truly believe that any other decision would have been devastating to our members and our families.
In Solidarity and sincerely and fraternally,
James C. Little
Director Air Transport Division
Intl. Administrative Vice President
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