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After closing arguments, bankruptcy judge advises American to make a deal

As American Airlines took its final stand Friday in U.S. bankruptcy court, the judge finished the lengthy hearing on a surprising note by telling the courtroom that the airline and its unions needed to work toward a deal.

In American Airlines’ closing arguments after three weeks of testimony, the company said its labor contracts had to be terminated for it to survive and dismissed its unions’ calls for a merger with U.S. Airways Inc. as “smoke and mirrors.”

But U.S. Bankruptcy Court Judge Sean Lane said that though he was prepared to rule by the June 22 deadline, he would prefer not to.

“The only thing I have in front of me,” he said of the so-called Section 1113 hearing, “is whether to reject a collective bargaining agreement. You’re all still stuck with each other. You still have to negotiate new agreements.”

Even if Lane abrogated agreements with the pilots, flight attendants and transport workers, American would, nonetheless, still have to come up with consensual agreements with its unions.

“I urge and I cannot urge this any more strongly, that the parties resolve this where they need to resolve this – the negotiating table,” said Lane. “Regardless of what I do, you’re going to have to do it anyway.”

Mediation is scheduled to start next week with the labor groups before another judge of the bankruptcy court, and Lane would like a resolution that does not require him to make a decision. “I’ll do it even if I’m reluctant to do it,” he said.

The trial has exposed the deep-seated distrust between labor and management.

The Fort Worth, Texas-based carrier filed for bankruptcy in November and is now trying to get the court to reduce its labor costs as it moves to reorganize as a standalone company. American’s pilots, flight attendants and transport workers counter that a prospective merger with U.S. Airways, with which they have reached in initial labor agreements, is the viable solution.

American has been walking a fine line on the merger issue, saying that it is irrelevant to the labor contract hearing, but at the same time saying that the carrier will consider consolidation as part of its business strategy.

Friday, however, the focus was on the short term – the June 22 deadline as the carrier hemorrhages money.

“We don’t know if consolidation is in the future,” said American attorney Jack Gallagher. “What we do need is to get out of bankruptcy. We need a competitive labor structure.”

Saying that there was no concrete business plan that involved a merger, he told Lane that the “term sheets” the unions had agreed to with U.S. Airways did not amount to a deal. “We think that’s more smoke and mirrors. It’s a distraction. It’s a red herring. It’s not really something before you.”

American got a strong boost from the Unsecured Creditors Committee, which represents the company’s nine largest creditors, when its attorney, Jack Butler, said, “There’s only one business plan before you.” A deal with U.S. Airways is “completely speculative,” he said.

The unions countered that it is also an issue of timing, since American may wait until it has a more favorable cost structure and then seek U.S. Airways as a partner. Ed James, attorney for the Allied Pilots Association, which represents American’s pilots, said terminating the contracts was permanent and could not be undone. Sharon Levine, a lawyer for the Transport Workers Union, said that the unions should not be used “as bait” for a future merger.

American – which Gallagher said has lost $10 billion over the past 10 years and in the first quarter of this year lost $80 million a month – is seeking $1 billion a year in labor savings from its unions.

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