American Airlines, subsidiary of AMR Corporation (AAMRQ) plans toask the U.S. Bankruptcy Court in New York to reject the current collective bargaining agreement to pursue the new labor contract. Under Section 1113 of the federal bankruptcy code, the carrier is allowed to seek rejection of existing collective bargaining agreements after fulfilling certain criteria.
Last Thursday, union workers were informed about the carrier’s decision citing labor cost issues as the primary reason for proposing rejection of the existing agreement.
In February, the company proposed a business plan involving $2 billion in cost savings and $1 billion in revenue. The new plan also involves reduction of approximately 13,000 employees from its existing pool of 80,100 workers. This would include removing of approximately 400 pilots, 2,300 flight attendants, 4,600 mechanics, 1,400 management staff, and 4,200 other members of fleet services and other Transport Workers Union employees.
As of December 31, 2011, labor cost represented approximately 28% of AMR Corporation’s operating expense that is highest among its peers. In order to achieve reduction in labor related expenses the company believes changes in the existing contract are mandatory to maintain profitability in a highly competitive aviation industry. As a result, changes like job cuts along with outsourcing of certain maintenance related jobs, discontinuation of pension plans and certain medical facilities are some of the key areas that significantly alleviate cost pressure for the carrier.
American Airlines is a highly unionized company like its peers SouthwestAirlines (LUV) and United Continental Airlines (UAL). Thus, union disputes, employee strikes or slowdowns, and other labor related disruptions are likely to increase labor costs or labor disputes, which in turn, would hurt the profitability of the company.
Currently, we have a short term (1–3 months) Zacks #4 Rank (Sell) on AMR Corporation.
AMR CORP (AAMRQ): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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