Court Denies Pinnacle Airlines’ Motion to Reject Collective Bargaining Agreement: Outlines Potential Resolution

by Cadwalader, Wickersham & Taft LLP
Contact

[authors: Jeffrey H. Taub]

Following the pattern recently established by other S.D.N.Y. bankruptcy judges in Hostess and American Airlines, Judge Robert Gerber denied Pinnacle Airlines’ motion to reject its collective bargaining agreement with the Air Line Pilots Association on narrow factual grounds. Although Judge Gerber found that Pinnacle had demonstrated that the “great bulk” of its final offer to the pilots was necessary to Pinnacle’s reorganization, the court held that:

  • Pinnacle had not demonstrated that it was necessary to reduce its labor costs below the labor costs of its competitors,
  • Given the substantial concessions requested from the pilots, the profit sharing proposals offered to the pilots were not fair and equitable, and
  • Pinnacle’s failure to make any changes to the total labor cost savings requested from the pilots constituted good cause on the part of the pilots to reject Pinnacle’s proposal.

The court noted that Pinnacle “may best be served” by presenting a proposal to the pilots addressing the issues identified by the court and that if the parties could not reach a consensual agreement, a subsequent motion to reject the CBA correcting these issues would “almost certainly” be granted. Thus, like Judge Drain in Hostess and Judge Lane in AMR, Judge Gerber appears to have set a roadmap for Pinnacle to modify the CBA. In re Pinnacle Airlines Corp., No. 12-11343 (Bankr. S.D.N.Y. Nov 16, 2012) [Docket No. 801].

Background

Pinnacle is a regional carrier that operates smaller aircraft than those used by larger mainline carriers. Larger mainline carriers partner with regional carriers to serve routes that require the use of these smaller aircraft. Currently, Delta Airlines is Pinnacle’s sole mainline carrier partner. On April 1, 2012, Pinnacle filed for chapter 11 bankruptcy protection. On May 8, 2012, Pinnacle presented its unions with a proposal calling for approximately $43 million in total savings from modifications to the wage, benefits and work rule provisions in its CBAs. The amount of labor cost savings in Pinnacle’s proposal was based on its existing contracts with Delta. In June, Delta informed Pinnacle that the rates charged by Pinnacle to Delta exceeded the average rates charged by other regional carriers that partnered with Delta. As a result, Pinnacle determined that it was unlikely to be awarded new flights with Delta unless it could reduce its cost structure to be in line with its competitors.

Pinnacle determined that it would need additional labor cost savings to remain competitive. Pinnacle presented an updated proposal to its unions seeking approximately $76.5 million in labor cost savings – including approximately $59.6 million in savings from the pilots. The new proposal also offered the pilots a profit sharing plan that allowed the pilots to participate in the upside of a successful reorganization.

Pinnacle and the pilots engaged in multiple negotiating sessions, and the parties met with a mediator in an attempt to modify the CBA terms consensually. During the negotiations, Pinnacle indicated that it was willing to explore options regarding attaining the $59.6 million labor cost savings it was seeking from the pilots but was unwilling to reduce the total amount of savings. The parties were unable to reach an agreement and Pinnacle sought court approval to reject the CBA pursuant to section 1113 of the Bankruptcy Code.

As previously discussed here, In order for a debtor to obtain bankruptcy court approval to modify/reject a CBA, (i) the debtor must make a proposal to the union, (ii) that contains only those modifications that are “necessary to permit the reorganization of the debtor,” (iii) the modifications must be “fair and equitable” to the union and (iv) the union must refuse to accept the proposed modifications without “good cause.” Pinnacle argued that its final proposal to the pilots was necessary to its reorganization because it would be unable to compete for new regional flying with Delta if it did not obtain the labor cost savings it had requested.

The pilots argued that the labor cost savings were not necessary to Pinnacle’s reorganization because Delta – Pinnacle’s sole mainline partner – was already locked in to contracts with Pinnacle. Additionally, the savings requested by Pinnacle would result in Pinnacle having lower labor costs than its competitors and that the proposal was essentially a “race to the bottom” rather than a true measure of the labor cost savings that Pinnacle required in order to remain competitive. The pilots also argued that the proposal was not fair and equitable because it required the pilots to make larger concessions than other unions and non-union employees.

The Decision

The court held that “in nearly every respect” Pinnacle had demonstrated that its proposal was necessary to permit its reorganization. First, the court found that Pinnacle’s pilot labor costs were dramatically above those of its competitors, based in part on the testimony of Pinnacle’s experts. The court rejected the pilots’ argument that the current contract with Delta deemed the labor cost savings unnecessary, characterizing such an approach as a “band-aid” solution to a longer term problem.

However, the court agreed with the pilots that the total cost savings requested by Pinnacle was essentially a race to the bottom and that Pinnacle had not demonstrated that it required lower labor costs than its competitors in order to reorganize. Noting the previous rulings in Hostess and American Airlines denying motions to modify CBAs where the majority of a proposal was found necessary and specific aspects of the proposal were not necessary, the court held that Pinnacle had “overreached” in its proposal and was not entitled to the full $59.6 million of labor cost savings from the pilots. Nevertheless, the court indicated that savings “very near to the Pinnacle figure” of $59.6 million were necessary and that the pilots’ offer of $33 million in cost savings were “not at all close” to the requisite amount of savings that were necessary to reorganize.

Next, the court held that – with one exception – Pinnacle’s proposal was fair and equitable to the pilots. The court agreed with the pilots that the proposal sought greater concessions from the pilots than other employees. Nevertheless, the court found the proposal was fair and equitable because other union employees and management were receiving at or below market compensation prior to entering negotiations with Pinnacle, while the pilots compensation was above the market average. As a result, it was fair and equitable to ask the pilots for larger concessions. However, the court held that given the “great pain” that the pilots would suffer, Pinnacle was “obligated to ameliorate[] the pain” by offering the pilots appropriate profit sharing and avoiding creating windfalls to other constituencies. As a result the court held that the “very modest” profit sharing offered by Pinnacle was neither fair nor equitable to the pilots.

Finally, the court held that the pilots also had good cause to reject Pinnacle’s proposal because of Pinnacle’s unwillingness to lower the aggregate demand of proposed labor cost savings. Based on an analysis of prior case law – including Judge Lane’s AMR decision – the court held that in the absence of specific facts to the contrary, a debtor “generally cannot be said to comply with its obligation to confer in good faith . . . when it steadfastly maintains that its initial proposal is nonnegotiable”

Judge Gerber’s ruling on this point varies from Judge Lane’s ruling in AMR where American Airlines refused to reduce its total “ask” during negotiations – but Judge Lane still found, on the facts before him, that American had negotiated in good faith.

Conclusion

Although the court denied Pinnacle’s motion, this decision provides Pinnacle and the pilots with a clear roadmap for further negotiations and outlines the contours of a potential deal. As stated by the court, both sides are now aware of the court’s views on the matter and the deficiencies in Pinnacle’s proposal “are relatively easy to fix.” Viewed in conjunction with the Hostess and AMR decisions, bankruptcy judges in the S.D.N.Y. are closely scrutinizing debtors’ proposals to their unions to ensure that every aspect of the proposal is necessary. When those proposals fall short of meeting the section 1113 requirements, the courts have teed up steps needed by the Debtors to terminate those agreements consistent with section 1113 of the Bankruptcy Code. These cases have created guidelines that not only the current parties can use to negotiate resolution of section 1113 issues – but also can serve to frame negotiations in future cases

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP
Contact
more
less

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!