April 18, 2014                
 
 
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Your APA leadership has received many questions recently regarding the tentative agreement.

We encourage you to read the following questions and answers, which have also been posted to the “Rumor Response” section of alliedpilots.org. We will continue to add questions and answers as necessary.
A: AMR’s second-quarter and profit (the first quarterly profit in five years) represent a year-over-year improvement, much in the category of a “most improved player” award. However, relative to the competition, AMR lags by a very significant margin. Excluding reorganization and special items, AMR posted a net profit of $95 million. Compared to the profit numbers we’re going to see other carriers post this quarter, that’s a pretty poor performance. The results stand in contrast to a record quarterly net profit of $321 million just announced by US Airways (on a revenue basis, US Airways is about half the size of AA). So, while all the AMR year-over-year numbers you may be hearing about sound positive, AMR still trails its competitors in absolute terms by a substantial margin, with DAL and UAL reporting second-quarter average margins about four times that of AMR.

Second Quarter Pre-Tax Margins

ALK: 14.7%
SWA: 9.6%
USAir: 8.6%
JBLU: 6.7%
DAL: 6.1%
UAL: 5.5%
AMR: 1.5%
A: No, APA informed Ballot Point that we did not want to know any voting results until after the voting deadline of noon Central Daylight Time on Wednesday, Aug. 8. At that time Ballot Point will certify the final results and we will release those results to the membership. Although Ballot Point does have the ability to keep organizations informed of the voting results on a real-time basis before the final result is determined, the APA leadership opted not to receive any real-time results.
Q: How does supporting the tentative agreement not end up supporting Tom Horton and the "stand-alone plan"? It seems like reverse logic to me.
A: In short, a ratified tentative agreement removes the focus of the AMR bankruptcy from labor and shifts it to the merits (or lack thereof) of AMR's "stand-alone" plan relative to other potential alternatives. APA and its advisers are on record as believing that a business plan based on a combination with US Airways will likely provide greater value for AMR's creditors than AMR's current "stand-alone" business plan. By taking AMR's labor issues off the table, APA and its advisers believe that the Unsecured Creditors' Committee and the financial creditors will eventually become similarly convinced of this. Moreover, the TA provides APA with a critical piece of influence in the decision process -- a 13.5 percent vote in the general unsecured claims pool. This, by itself, represents almost 40 percent of a "blocking vote" on any plan of reorganization that AMR (or anyone else) may propose. In the event that a plan of reorganization is proposed that APA believes does not give full and fair consideration to a combination with US Airways, APA will be able to vote "no." If AMR's other unions and enough the other creditors feel similarly, the plan of reorganization will not pass. Conversely, APA's advisers believe that, if APA's members refuse to ratify the TA, the following events could rapidly occur: (1) the bankruptcy court could lose patience with APA, abrogate its contract and impose the contract terms from the April term sheet, (2) financial creditors (and possibly the Creditors' Committee itself) would argue that APA is entitled to no voting claim at all and (3) AMR, the Creditors' Committee and others would cite the Second Circuit's Northwest Airlines decision as taking away APA's right to strike. All of these events would dramatically reduce APA's negotiating leverage with AMR and its ability to influence the ultimate outcome of the bankruptcy. Thus, ironically, the refusal of APA members to ratify the TA may ultimately bring about the very scenario that we are most hoping to avoid: an industry lagging set of pay and working conditions followed by an indeterminate, lengthy round of negotiations (negotiations that are unlikely to lead to a better TA) -- all in an environment where a "stand-alone" reorganization actually becomes more likely.
A: For several reasons. First, the bankruptcy court signaled on several occasions during the Section 1113 litigation that its strong preference was for AMR and APA to reach a consensual deal. The Unsecured Creditors' Committee also publicly stated that it preferred to see a consensual deal, so AMR was under some pressure from both of those groups to make one last "best, final offer" to APA before the bankruptcy court ruled on the 1113 motion.

Even with that outside pressure, however, we do not believe that the TA could have been negotiated without the 13.5 percent equity stake that AMR ultimately agreed to give APA in the reorganized AMR. For AMR, this 13.5 percent stake was a very small price to pay (the equity stake costs AMR nothing; instead it comes "out of the pocket" of other general unsecured creditors) to reach a labor deal with APA.

For APA, on the other hand, the 13.5 percent represented real and substantial economic value for APA's members while also giving APA the ability to directly and meaningfully influence the final outcome of the AMR bankruptcy. This is why the 13.5 percent stake and the TA are inextricably linked to each other.
A: The primary difference is that under the TA, management may outsource flying on aircraft operated with a maximum of 79 seats, to include the CRJ 900, E170/175, MRJ70-90 or comparable aircraft. The number of these 79-seat aircraft that management could outsource would be up to 75 percent of the AA narrowbody fleet. Management could not outsource flying on the E190, and if acquired, that aircraft would be flown by pilots on the AA seniority list.
If the contract were to be abrogated, management could, and has said that it will, instead implement the 1113 term sheet. The new cap for outsourcing under the term sheet would allow outsourcing on flying with up to 88 seats in the aircraft, which would include the aforementioned jets and also the larger E190. Rather than being in proportion to the narrowbody fleet, the number of RJs that AA could outsource would be based on 70 percent of the entire mainline fleet.
A: The 13.5 percent equity stake in a reorganized AMR (as well as the plan of reorganization voting rights associated with it) is currently documented in the bankruptcy settlement letter, Attachment F, which is part of what is referred to as the global agreement.

This tentative agreement was not negotiated with the Unsecured Creditors' Committee; it is a settlement between AMR and APA. There are no other parties to the agreement.

If the tentative agreement is ratified by APA's members, it will be presented to the bankruptcy court for final approval as a settlement between AMR and APA. During this process, the Unsecured Creditors' Committee (as well as any other party with interest in the AMR bankruptcy) will have the right to object to the settlement. Based on our conversations with the UCC's advisers and our meetings with members of the UCC, we do not expect that the UCC will object to the settlement. Even if the UCC or some other party objected to the settlement, we believe the bankruptcy court -- which has been urging APA and AMR to reach a consensual settlement for months -- will overrule those objections and approve both the tentative agreement and APA's 13.5 percent equity stake. Both the tentative agreement and the equity settlement are inextricably linked and one cannot be separated from the other during the approval process by the court. When approved by the court, the tentative agreement will become binding on both AMR and APA, and will also become binding on the UCC and all other creditors.
A: If we ratify the tentative agreement, the Company will provide a replacement benefit through the SuperSaver 401(k) plan with a 14 percent company contribution on all pensionable earnings, in recognition of the freeze of our defined benefit plan. If we fail to ratify the tentative agreement, however, our best guess is that management will provide terms consistent with the April 19, 2012, term sheet -- the last offer made by management prior to the 1113 trial. With respect to the SuperSaver 401(k) plan, the April 19 term sheet offered a replacement benefit through a 13.5 percent company contribution on all pensionable earnings to our 401(k)s. However, management marked that item with an asterisk, meaning that its proposal on that term was contingent on our acceptance of the April 19 term sheet, which we rejected. It is not entirely clear how management would approach our 401(k) contributions if we fail to ratify the TA and if the court grants it the right to abrogate our agreement. Our best estimate, based on what management negotiators communicated at the table and on how management priced out the benefits, is that American would maintain the current 11 percent contribution. If American took the most aggressive position possible, they might try to end all contributions to our follow-on 401(k)s. We don't think they will take that position and, if they do, we will challenge it strenuously in court.

Q: Isn't this just a 2003 "bum's rush" all over again? Why aren't we following our normal requirements for a ratification vote? I want my contractual language written in stone before I vote on it!
A: The key difference with this tentative agreement is that a federal bankruptcy judge is determining our timetable in the current ratification process. Our members will be voting on the tentative agreement against the backdrop of a strict legal proceeding with a hard contract abrogation deadline in place. Federal judges have very wide latitude over this process and their ruling has precedence over our internal governance policies. With only two weeks of court-supervised mediated negotiations that resulted in a "last, best, final offer," there still remains much detail work to be done. Rather than rush this process in order to meet the two-week policy manual deadline for a TA summary mailer and risk making an error, your Negotiating Committee will continue to refine as much contractual language as possible in the days ahead. As draft contractual language becomes "agreed upon" language with management, the Negotiating Committee will release it in completed sections.
Regarding the issue of the availability of final contractual language, there is not a single example in APA's history of having 100 percent complete and final contractual language in place for either a Board of Directors vote on an agreement in principle, or a membership vote on a tentative agreement. What is vital to understand is that as the deadline for the abrogation decision approaches, AA may not necessarily have the same internal urgency/requirement/motivation to complete CBA language ― and that is the crux of the problem.
A: Though exit financing is usually the norm in Chapter 11 bankruptcy cases, AMR's situation is rather unique, in that its cash position is uncharacteristically strong for a corporation in bankruptcy. On the day AMR filed for Chapter 11 bankruptcy, its financial status was reported to the SEC via a form "8-K." On page 13 of this form, CEO Tom Horton stated, "The Company has approximately $4.1 billion in unrestricted cash and short-term investments. This cash, as well as the cash generated from operations, is anticipated to be more than sufficient to assure that its vendors, suppliers and other business partners will be paid timely and in full for goods and services provided during the Chapter 11 process in accordance with customary terms. Because of the Company's current cash position, the need for debtor-in-possession financing is neither considered necessary nor anticipated." While the management may elect to seek financial backing at some point in the future, the most recent cash position of the company was reported at $5.7 billion on July 18, 2012, thus eliminating the requirement for any near-term exit financing.
A: There is no statutory requirement in the restructuring process to have signed labor contracts in place prior to exiting bankruptcy. On the APA July 11 teleconference, Andrew Yearley of Lazard Ltd, said, "There is a reasonable scenario, that they can exit from bankruptcy, frankly with contracts that have been abrogated and continue in negotiations without having a consensual agreed labor contract." That being said, our advisers have also stated that not having labor contracts in place may restrict the corporation's ability to attract new investors.
A: The language contained in Supplement T of our current contract was included in our 2003 concessionary agreement and was designed to prevent AA management from getting "two bites at the apple." Simply put, if following our 2003 brush with bankruptcy AMR were to immediately file for bankruptcy and seek additional concessions, this language would have prevented them from seeking relief through the 1113 process. Your APA leadership was well aware of the Supplement T language and devoted a considerable amount of discussion regarding its merits prior to AMR"s bankruptcy filing. Our attorneys subsequently advised that this supplement had long since outlived its legal enforcement utility. Nine years have passed since the original language was included in the 2003 agreement. If litigated, the corporation would most likely put forth the decade-long deterioration in its balance sheet that resulted in annual losses that averaged more than a billion dollars per year, thus satisfying the financial deterioration language contained within Supplement T. This protective language, while common in many bankruptcy contracts, unfortunately has proven to be toothless in the court's eyes.

Supplement T letter:
"The Company agrees that if a petition for bankruptcy is filed with respect to either American Airlines or AMR Corporation, that neither the Company nor any affiliate will file or support any motion pursuant to 11 U.S.C. Sections 1113 seeking rejection or modifications of, or relief or interim relief from, the New Collective Bargaining Agreement unless the Company’s financial condition materially deteriorates, subsequent to the date of this agreement, which is deemed to be March 31, 2003 from the financial condition projected in the Company’s business plan provided to the APA and to the other unions on February 19, 2003, during the negotiations of over AMRs restructuring, whether because of general economic conditions or otherwise."
A: The request to have exclusivity extended was actually a joint request that was made by both AMR and the Unsecured Creditors' Committee. The request was the product of extensive negotiation between AMR and the UCC.

The UCC -- like APA and the other unions -- strongly believes that AMR management must be required to conduct a full, fair and comprehensive evaluation of all strategic alternatives to a "stand-alone" reorganization before AMR files a plan of reorganization with the court.

In order to ensure that AMR does so, the UCC conditioned its support for extension of exclusivity on AMR agreeing to a rigorous timetable for exploring potential merger transactions with US Airways, among others. The UCC has been closely following AMR management's compliance with this timetable and, so far, AMR has been cooperative.

APA and its advisers believe that the proposed strategic alternative timetable is a reasonable one, are encouraged that the UCC insisted upon it and are pleased that the UCC’s advisers are diligently monitoring AMR’s compliance with it.

Moreover, because it was conditioned on a comprehensive strategic alternatives exploration process, US Airways and its advisers supported the extension of exclusivity. This was because, as Doug Parker stated in a speech on July 18, US Airways believes "that any objective analysis will conclude that the best plan for the creditors, employees and customers of American is a merger with US Airways during the bankruptcy process."

 

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