[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].
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 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.
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