TWU Int’l President James C. Little spoke on Thursday, March 14, at the Field Hearing of the ABI Commission to Study the Reform of Chapter 11 addressing the airline companies’ use of bankruptcy laws to undermine their contractual obligations to the workers and urgency for reform.
President Little testified, alongside other labor unions, that labor should be permitted to participate in the formulation of a debtor’s business plan, reorganization plan or any alternative transaction. His testimony, along with others, will be used by the Commission as they study and propose reforms to Chapter 11 and related provisions.
You can read his full testimony below:
Good afternoon, I would like to Thank the chairman and members of the commission for the invitation to speak today on the subject of Bankruptcy Reform. My name is James Campbell Little, and I am the International President of the Transport Workers Union of America AFL-CIO.
In 1971, I was hired by American Airlines at New York’s LaGuardia airport in Fleet Service. Between 1974 and 1977 I transitioned to other departments including accounting-claims, quality control, freight control-SOC, and operations agent, flight dispatch and Systems Operations Coordinator.
Our Union represents nearly 200,000 workers, predominantly in the transportation industries, including nearly 23,000 members at American and American Eagle. We administer 11 collective bargaining agreements under the AMR umbrella: seven at American and four at American Eagle. Our members at these two airlines perform hundreds of key functions in dozens of job classifications, including mechanics, baggage and cargo handlers, stock clerks, aircraft dispatchers, simulator technicians, and pilot instructors.
These men and women are and will continue to be on the front lines for these two airlines every day. We have gone on record many times over the last 8 years that TWU was instrumental in saving American Airlines from Bankruptcy in 2003. We made extremely difficult yet necessary choices, slashing our contracts by nearly 35%, and as a result, lowering the company’s labor expense by $620 million per year. We made this concerted effort to avoid a court supervised restructuring and in the short run we were successful.
Unfortunately, everything from terrorism to $147 per barrel oil prices to the “Great Recession” worked against the airline, and here we sit. The TWU remains proud of the fact that we were pivotal players in staving off the grim reaper and protecting pensions, retiree medical, and thousands of jobs for the past 9 years. We also, of course, preserved stockholder and bond holder value, and provided 9 years of business as usual for those who now list themselves among American’s largest creditors.
However, while union members have common interests with other creditors as claimants, our interests are very different in other ways. AMR is only one investment in a broad portfolio for the non-labor interests. For our members, it is their one and only investment- they are all-in. They saw hard earned, contractually guaranteed pay and benefits cut. These are the very lifelines that they count on for fundamental, everyday needs. The vast majority of the TWU members have dedicated 20 years or more to these airlines. These are career airline workers, not young folks just starting out that can simply move on to the next job – and many lost their jobs during this process. They put their faith and trust in American and American Eagle, believing the promises of fair jobs and modest but guaranteed retirement and retiree medical benefits. We hope that you will be able to weigh the true human toll that this process takes on the people that make these two airlines tick. These people are not just the roll-up of a cost item in a financial model.
Our members are not rich people by a long shot. They are working class and middle class folks. You will see data that show they work considerably harder than they did nine years ago – AMR has shed thousands of TWU jobs since 2003 pushing productivity to the brink.
In recent years, the TWU has been mindful of the financial situation at American and American Eagle and has made decisions based on the knowledge that a healthy company would be the best solution for our members and their families in the long run. We worked to make the Tulsa maintenance base a much more cost effective operation with virtually no capital outlay, and won an “Air Transport World Award” as a result. Our people have worked constantly and cooperatively with management in most of our stations to reduce costs in recent years, taking the high road despite having pushed the reset button on their family incomes. We were innovative in securing several agreements and tentative agreements in contract negotiations with the company that addressed every one of the company’s cost issues. We publicly supported the Company’s efforts to gain anti-trust immunity for its Joint Business Arrangement with British Airways, the realization of which has become and will be a key strategic asset going forward. After all of these and other efforts, we ran out of runway. Despite this, we will continue to be focused on making the right business decisions that support our members’ interests. We will not let our members and their families unduly bear an unfair burden as our members lose their livelihoods, their homes and lifelines.
In the American Airlines cases, once the chapter 11 process begun, our members were faced with a Hobson choice. Take costs you believe unfair and not supported by the law but requested by the debtors’ management or lose your job. And once those jobs are gone, they are gone.
So if you happen to need the health care, if you happen to have, or have a family member who has, a pre-existing illness or if you moved for a good job and now have roots in a location where they are no other job options, your only option may be to try and mitigate what is obviously a horribly bad situation. But the fact that all seven of the bargaining units we represent at American and all five at American Eagle ratified modified, collective bargaining agreements is not an endorsement of a process that works, but rather the opposite – self-preservation in an unfair environment.
Worse here is the fact that history proved our fears justified. The business plan against which the debtors requested and obtain below-market concessions under section 1113 was not, as we argued, the business plan supporting the currently proposed merger.
So the treatment and recoveries afforded the bondholders and trade creditors will be measured against real market metrics in the context of the negotiation of the merger, which is the real plan of reorganization.
TWU was forced into a section 1113 process that sought concessions without regard for synergies or merger values. Nobody with the economic stake in American Airlines was asked to support the debtors’ then current plan – that is nobody but labor.
By pursuing a business plan that no one even pretended to tell the bankruptcy court was the “real” business plan and to say that labor must accept cuts so that the benefits of a merger or the real business plan can be better realized by other constituents is unprecedented and frankly a horrible use of the section 1113 process or the bankruptcy courts.
The debtors used a pretend standalone business plan solely for the purpose of obtaining labor cost reductions pursuant to section 1113 and then negotiated the real merger plan for a better benefit for the other constituents in the case.
In a prepackaged or pre-arranged bankruptcy case, the capital structure and real business plan are fixed when the debtor enters bankruptcy. And, if the debtor needs to use chapter 11 to fix operations or modify its current collective bargaining agreements to market terms, all parties understand the business plan and further understand what concessions are being made by other stakeholders.
Even in a more traditional chapter 11 case that does not involve a pre-negotiated plan upon filing, the real capital structure and real business plan negotiations involve all of the debtors’ constituencies, including labor. Labor does not go first against a straw model as they were asked to do in American Airlines.
Further, even where labor concessions come first, they are driven by financing terms or an impending liquidation, whether there is new money in the form of debtor in possession financing based on projections and a business plan that has been market tested and scrutinized by lenders, often by investor-creditors already in the capital structure willing to commit more funds. Not so in the American Airlines case.
In the American Airlines case there was no debtor-in-possession financing with a covenant default, no pending liquidation, or other emergency triggering an immediate need for section 1113 relief. There was no market tested projections or business model against which all constituents were being asked to make sacrifices.
If debtors are allowed to use a business plan that is not the “real” plan or exit strategy just for section 1113 negotiating purposes, then section 1113 is meaningless.
You are back to Lorenzo’s Continental Airlines and the labor issues that triggered section 1113 in the first place. Only it is even worse because section 1113 now is used as a sword rather than the shield that it was intended to be. The imposition of section 1113 relief may not even entitle a union to a rejection damage claim for concessions made or even to negotiate a settlement that includes an unsecured claim coupled with potential bankruptcy limitations on the right to strike.
Labor should be permitted to participate in the formulation of a debtor’s business plan, reorganization plan or any alternative transaction. If debtors have a fiduciary obligation to every stakeholder in the chapter 11 case, labor, as one of those stakeholders must have a seat at the “real” table. For labor, this is not one of many investments or many vendor contracts but the represented employees’ sole source of livelihood.
Further, as demonstrated in the American Airlines cases, following a section 1113 process where unions modified their existing collective bargaining agreements through a ratification vote or even where section 1113 relief was imposed by the bankruptcy court, it should be inappropriate to form an equity committee or to provide for any recovery to old equity, unless and until the full value given up under affected collective bargaining agreements is returned to the represented employees that made the sacrifice. Giving old equity value after a section 1113 process is not a change necessary to restructure a company, but merely reallocating value away from the unionized workforce.
Further, any concessions should be restored if unsecured creditors ultimately get paid in full or receive value equal to 100% of their claims as that would mean that other unsecured creditors made no sacrifice and received the benefit of the collective bargaining agreement modifications.
The only fair way to avoid having labor go first and further than any other creditor group would be to prevent the entry of a final section 1113 order other than on confirmation of the plan of reorganization so that the bankruptcy court is not forced to accept a sham business plan as the basis for a section 1113 ruling as happened in the American Airlines cases.
Thank you for your time and the opportunity to speak to this committee.