updated 10/8/2007 8:44:29 AM ET 2007-10-08T12:44:29

American Airlines, profitable again after racking up $8 billion in losses since 2001, faces a three-front battle to limit labor costs that are among the highest in the industry.

The three unions representing American's employees want to makeup for double-digit wage and benefit cuts back in 2003, when the company was on the brink of bankruptcy. They argue that their sacrifices saved the nation's largest airline and they deserve to be rewarded now with big pay raises.

Not so fast, airline executives say.

This week, American and the ground workers union broke off talks on a limited contract extension and pay increase. They'll resume negotiations in November.

Last week, American offered pilots pay increases — if they fly more hours. The proposal would not raise basic wage rates.

Leaders of the pilots' union declined to be interviewed about the proposal. But a union spokesman said pilots have "high aspirations" for the current round of bargaining, which is expected to run until at least next spring.

And late this year or early next year, American will begin talks with the flight attendants' union.

"It looks like it's going to be truly old-style confrontational bargaining," said Tommie Hutto-Blake, president of the flight attendants' union.

It would be hard to overstate the importance of the negotiations to the company's bottom line. After five years of losses, American posted a $231 million profit in 2006.

Although high fuel prices get more headlines, labor is still the largest single expense for American's parent, AMR Corp. Wages and benefits accounted for 31 percent of all spending in the first six months of this year.

According to MIT researchers, American's labor costs last year were the highest in the industry — 14 percent more than runner-up Northwest Airlines Corp., and 26 percent more than the average of the five largest low-cost carriers, including Southwest AirlinesCo. and JetBlue Airways Corp.

"We need to be creative because American is not in a position of strength on the cost side," said Jeffrey Brundage, AMR's senior vice president of personnel. He said the company's goal "is lowering our unit labor costs and hopefully doing it in a way they can accept and that doesn't involve pay cuts."

The outcome of negotiations could affect AMR's ability to paydown billions in debt. Philip Baggaley, an airline analyst for Standard & Poor's, said American will be more cautious about ordering new airplanes if it can't get satisfactory labor deals. "They'll tend to fly the older planes longer."

Of its three labor groups, American has enjoyed the friendliest relations with the Transport Workers Union, which represents more than 25,000 baggage handlers, mechanics and other ground workers.The union and company worked together to boost productivity at maintenance hangars.

Two weeks ago, the company offered the union unspecified pay raises in exchange for extending their contract into 2010. A deal would have freed American to focus on contentious negotiations with the other two unions.

But the talks broke off Wednesday. When negotiations resume in November, they will be more difficult, covering an entirely new contract instead of just a handful of issues.

Next up on American's to-do list: Negotiations with pilots. In June, the Allied Pilots Association proposed pay raises of 30.5 percent and a 15 percent signing bonus. But that came from the union's previous president, and his successor wants even bigger raises.

The new president, Lloyd Hill, declined an interview request. Union spokesman Gregg Overman said the union will present Hill's proposal later this month.

"We will be setting high aspirations, and we'll focus on restoring the profession," Overman said.

Any discussion of labor relations at American is colored by the stock bonuses that the company gave the past two years to several hundred executives and managers. The shares were worth about $250 million when issued.

The company considers the stock part of compensation for managers, and notes that there were no payouts between 2001 and 2005. Many rank-and-file workers still laboring under double-digit pay cuts from 2003 are outraged by the bonuses, and the unions feel pressure to deliver pay raises in new contracts.

"Management has seen fit to reward itself handsomely the last couple years," Overman said. "In many respects, we're only taking their lead."

AMR executives say the company can't afford to meet the pilots' initial demand. They say American is being undercut by carriers that used the bankruptcy process to cut their labor costs. In interviews last week, executives said pay could still be addressed later in negotiations, but they were careful to set low expectations for the pilots, who earn $136,000 a year on average, according to the company.

"These are high-paying jobs," said Brundage, the AMR personnel executive. "These jobs are not as good as they were in 2000, but they are terrific jobs ... they work less hours than any other major carriers, and they make more.''

Jamie Baker, an airline analyst with JP Morgan, said there is a 20 percent chance that American's pilots would get wage cuts, not raises. Baker's reasoning: If negotiations bog down and a mediator is called in, he would compare American's wages with lower pay at other airlines.

Pilots, however, have clout, as Northwest was reminded this summer. After sickouts led to hundreds of canceled flights, management agreed to expand overtime pay for pilots.

"It clearly shows pilots have the power to administer sharp economic pain. If (American's pilots) want a pay raise, they'll get one,'' said Vaughn Cordle, who runs Airline Forecasts LLC, are search firm that values airlines for hedge funds.

A 10 percent increase in American's total labor costs would wipe out the entire profit that AMR is expected to earn this year. Cordle said that would depress the stock price and force the company to sell off parts of the business, such as American Eagle or its AAdvantage frequent-flier program.

Airline labor contract negotiations are covered by a federal law that gives the president and Congress power to block strikes. Contracts don't expire; they become amendable.

Some legal experts say the law gives management the upper hand. Certainly strikes such as the 1993 walkout by flight attendants at American are rare.

"These negotiations are marathons, not sprints,'' said Jerrold Glass, a former US Airways executive and now a consultant to airlines — but not American.

"You can have a bad week, and people say things they regret,'' Glass said, "but in the airline industry virtually every negotiation ends peacefully.''

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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