ANALYSIS: American pilots decision largely favours airline

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American Airlines is the likely benefactor of a bankruptcy court's 15 August decision to deny American's request to reject its pilots contract.

Judge Sean Lane of the US Bankruptcy Court for the Southern District of New York agreed with the Fort Worth, Texas-based Oneworld carrier's section 1113 request to reject the labour agreement on all but two points - furloughs and codeshares. He gave American three days to submit a revised request, which the airline says it will file by 17 August.

"[The decision] is a rather limited objection by the court," says Robert Mann, an airline industry analyst at RW Mann & Company. "Remedying those objections won't change the economics of the restructured company."

American sought 20% cost reductions from all of its labour groups with the request, according to court documents. This equals about $370 million in annual savings from its pilots.

"Judge Lane could indeed allow AMR [American's parent company] to put in place cost saving measures that exceed its competition on several counts," says Michael Derchin, an analyst at CRT Capital, in a report today.

The judge largely discounted arguments from the Allied Pilots Association (APA), which represents the airline's more than 10,000 pilots. These included an argument that the court should focus on a possible merger instead of a standalone business plan, and a suggestion to limit American's ability to expand its scope to fly regional jets.

"It is appropriate - and indeed necessary - for American to formulate a stand-alone business plan at this point in time," said Lane in the decision. "Such a business plan serves as a basis for comparing all of the business options available to a debtor to maximise the value of the estate for all stakeholders."

He quashed the union's argument that the court should instead focus on a potential merger with US Airways or another carrier. "Put simply, there is no merger for the court to consider," said Lane.

On regional jets, Lane said that American needs an increased number of the aircraft with 88 seats or less in order to compete with other domestic mainline carriers and to generate additional revenue.

American outlined plans for up to 255 (or 50% of the total narrowbody fleet, whichever is greater) of jets with 51 to 88 seats and for up to 110% of the narrowbody fleet of jets with 50 seats or less in its business plan, according to the decision. This is up from a limit of 47 jets with 70 seats, and 110% of the narrowbody fleet for jets with 50 seats or less today.

"He [Lane] came out strongly supporting the company on one of its most important goals, namely, changes to the scope clause that will allow American to fly larger jets at the regional level," says Derchin.

"We think it should be clear to the pilots that they are likely to lose on this issue," he adds.

Neither the court nor American has released the business plan cited by Lane in his decision. The airline has until 28 December to file a final reorganisation plan.

Lane found that American's arguments to remove furlough restrictions and for unlimited domestic codeshares were not sufficient. The airline is able to furlough up to 2,000 pilots under its current agreement but only outlined a case for 400 furloughs in its business plan, Lane said.

The codeshare request was beyond the established industry norm and American did not establish why it needs the blanket authority, writes Lane.

"I don't imagine that it's going to make a whole lot of difference," says Bob McAdoo, an airline analyst at Imperial Capital, on the decision's impact on American's request to reject the contracts.

Separately, a vote by American's Association of Professional Flight Attendants (APFA)-represented flight attendants on the carrier's last, best and final offer is scheduled to conclude on 19 August.

"[The] ruling postpones the inevitable abrogation of the pilots' contract," says APFA in a letter to its members on 15 August. "Given the fact that most of our arguments have already been dismissed in this ruling, and that our LBFO addresses our arguments that are left outstanding, we do not expect the Court's 1113 ruling to go in our favour."