American's labor relations on the rocks over executive bonuses

Last Update: Apr 7, 2007 6:55 AM

Dave Koenig, AP

FORT WORTH, Texas (AP) – Union leaders have many ways to vent their displeasure at corporate executives. They can file grievances, write letters or organize picketing.

Tommie Hutto-Blake showed a movie.

The president of the flight attendants' union at American Airlines wanted to tell Chief Executive Gerard Arpey that labor relations are rocky because American will give millions in bonuses to executives but not to rank-and-file workers.

Hutto-Blake says the bonuses – which will total an estimated $175 million for 1,000 managers – don't match Arpey's motto to labor: "Pull together, win together."

So at a meeting of about 20 labor leaders and top executives, including Arpey, Hutto-Blake showed "Collision Course," a 1980s documentary about the union-management strife that helped sink Eastern Airlines.

"Their slogan was 'Working together,"' Hutto-Blake said of Eastern. "Somebody else tried to do this before. It was so eerie. It's a difficult film because we all know the ending."

Hutto-Blake and other union leaders say that slogans aside, labor-management relations at the nation's largest airline are the worst since 2003, when Arpey replaced an unpopular CEO and saved the company from bankruptcy. And they point to those bonuses.

Arpey, who declined a bonus last year, will get about $7.6 million in stock at the current price for shares of American's parent, AMR Corp. The next two highest-ranking officers would get $8 million between them, according to union calculations.

The payments have been around for several years and used to be in cash, but in much smaller amounts. The payout this month would, at AMR's current share price, equal three-fourths of the company's $231 million profit for all of 2006.

As in past years, rank-and-file employees won't get them.

The payouts are pegged only to AMR's stock price from 2004 through 2006. In that time, the shares rose from $12.95 to $30.23, as AMR rebounded from near-bankruptcy to earn its first profit in six years.

American officials say executives are paid in the middle of the pack for comparable jobs inside and out of the airline business. They say Arpey's salary ($526,620 in 2005, the last figure available) is half the median of CEOs at companies of similar size.

And they defend the stock payouts, saying they account for up to one-fourth of managers' compensation and aren't guaranteed. If AMR stock falls, they don't get the "performance shares" – the term the company prefers to "bonuses."

But union officials say it was their members who made the payouts possible. In 2003, with AMR on the brink of bankruptcy, they took pay cuts of 15 to 23 percent, helping AMR cut its labor costs by $1.8 billion per year and recover from a recession, terror attacks and increased competition in the airline industry.

They bristle that while rivals Continental Airlines Inc. and Delta Air Lines Inc. shared profits for 2006, AMR did not.

"There is no notion of shared rewards," said Ralph Hunter, president of the pilots union. He said employee sacrifices made it possible for AMR to earn a profit in 2006 after five straight money-losing years, while management took smaller pay cuts.

Company officials respond that AMR is on track to pay profit-sharing for 2007. And they say employees are already benefiting richly from the run-up in AMR's stock because they got options for 38 million shares back in 2003.

Those options carried a strike price of $5 a share, and half had been exercised by the end of 2006, officials said. On paper, they estimate that the options are worth $1 billion today.

In addition, AMR has kept its defined-benefit pension plan – unlike several carriers who filed for bankruptcy.

"Our employees by and large are still better off than if they had Continental's contract plus Continental's profit-sharing," said Mark Burdette, AMR's vice president of employee relations.

Union complaints over management bonuses are erupting just as the unions are beginning to bargain for new contracts to replace the concessionary deals they approved in 2003.

The pilots' union recently started negotiations on a new contract to take effect in May 2008. The Transport Workers Union, which represents mechanics and other ground workers, will begin bargaining this fall, to be followed early next year by the flight attendants.

Hutto-Blake said flight attendants want "considerable" restoration of wages and benefits to pre-2003 levels.

AMR tried to charge retirees more for using out-of-network doctors and to change drug coverage, but it backed down in February after the flight attendants protested, according to union and company officials.

Hutto-Blake figures the company will take another run at retiree health benefits during contract talks.

Hunter said the pilots haven't exchanged specific proposals with the company yet, but they want "a pretty significant recapturing of our purchasing power."

The negotiations will be watched closely on Wall Street as a test of American's ability to control costs. Philip Baggaley, an analyst with Standard & Poor's. said American has some leverage going into negotiations because other carriers have lowered their labor costs through the bankruptcy process.

"AMR currently has somewhat higher labor costs than the other legacy carriers, not to mention the low-cost carriers," Baggaley said. "Anything that further widens that gap would be a concern."

American endured a flight attendant strike in 1993, a pilot sickout in 1999 and an open revolt – over executive perks – in 2003. Just a few months ago, conflict between management and pilots helped scuttle American's bid for a new U.S.-China route.

But there have also been several labor-management success stories on Arpey's watch.

First, AMR avoided bankruptcy, which would likely have wiped out employees' pensions. The company and the unions lobbied successfully in Washington for pension relief. The Transport Workers Union cooperated with the company to cut costs and attract outside work that might have saved a Tulsa, Okla., facility from shutting down.

Hunter said, however, that the bonuses have ended a period of relative labor harmony and "led to a shift back to a more traditional relationship – an adversarial bargaining relationship."

The pilots might even try to mimic the stock-based bonuses for management. Burdette said the union has asked about it in early negotiations sessions.

Burdette conceded that the stock payouts have affected morale at the 70,000-employee airline, "but they continue to come to work, do their jobs and do them well. They've been around a long time, and they know their future is tied to the success of American."