ALPA Endorses Bicameral Bankruptcy Reform Legislation

Bill Highlights Flaws in Current Policy that Encourage Abuse

By John Perkinson, Senior Staff Writer

A major component of ALPA’s comprehensive campaign to shelter U.S. airline employees from the corrosive effects of the COVID-19 pandemic is the passage of the Protecting Employees and Retirees in Business Bankruptcies Act of 2020. The legislation aims to restore fairness to the bankruptcy code by prioritizing collective bargaining and shared sacrifice over one-sided and exploitive corporate behavior.

Among its various safeguards, the bill would ensure that pilots and other airline employees do not again bear an excessive and unreasonable share of a carriers’ bankruptcy cost-cutting measures through dictated concessions. Instead, airlines could only obtain necessary, mutually acceptable contractual relief through negotiations at the collective bargaining table. Recalling the monstrous burden on airline employees from past airline reorganizations, ALPA and other aviation unions are aggressively lobbying Congress for this new legislation, pointing out that the current bankruptcy process has acute deficiencies that must be addressed.

In a recent statement, Capt. Joe DePete, ALPA’s president, said, “Airline workers know far too well the devastating effects corporate bankruptcies have on the lives of hardworking Americans. Following 9/11, pilots made enormous financial sacrifices to help save our airlines, only to have tens of billions of dollars taken from us in pension and health-care cuts, as well as other negative forced changes, lasting years longer than the crisis.”

DePete continued, “Pilots remain committed to working with management to weather this current public-health and economic crisis. However, history shows that airline executives exploited the bankruptcy process to get the most for themselves while leaving frontline workers with the bill—and we will not allow that to happen again.”

The new legislation, presented to both the House and Senate on June 25, is a comprehensive effort to reform Chapter 11 of the U.S. bankruptcy code, which affords a company in dire financial straits certain protections to reorganize its business affairs, debts, and assets. The legislation was introduced by Sen. Dick Durbin (D-IL) and Rep. Jerrold Nadler (D-NY), the House Judiciary Committee chair, who remarked, “The bill would curb those abusive practices and make sure working people get the fair deal that the bankruptcy laws were always supposed to provide.”

The new legislation proposes to restrict excessive executive compensation programs, improve the chances for claim recoveries for employees and retirees, and provide certain protections for labor agreements. The act would limit the conditions under which most collective bargaining agreements can be negated or altered in Chapter 11 bankruptcy, narrow the circumstances in which retiree benefits can be reduced or eliminated, mandate that court approval of bankruptcy sales must be based on the maintenance of existing jobs and retiree health benefits, and specify that a Chapter 11 bankruptcy must strive to preserve jobs to the fullest extent possible.

Of particular importance to pilots and other airline employees, the legislative proposal seeks to prevent the rejection or alteration of airline labor contracts in bankruptcy, mandating that changes to such agreements could only be made under the normal Railway Labor Act (the law that regulates airline labor contracts) bargaining process. These protections have been in place for rail employees for more than 80 years, and the bill seeks to correct this disparity.

Crux of the matter

The focus of the reform effort and primary reason for the new legislation is the misapplication and abuse of Section 1113 of the bankruptcy code, “Rejection of Collective Bargaining Agreements.” This provision classifies the circumstances and procedures under which labor contracts can be changed within the Chapter 11 bankruptcy process. Congress enacted Section 1113 in 1984 in reaction to the Supreme Court ruling NLRB v. Bildisco & Bildisco.

Four years before the court’s decision, the distributor of building supplies, failing to pay some of its union health and pension benefits as well as wage increases as outlined in its collective bargaining agreement, filed for Chapter 11. In a 5–4 decision, the Supreme Court concluded that the company had the unilateral right to reject its labor contract and impose new terms immediately subject to after-the-fact, limited court review.

The 1113 process was added to the bankruptcy code by Congress that same year to ensure there would be clear justification for nullifying a labor agreement as well as proof that the employer had previously engaged in good-faith bargaining efforts with the union to obtain necessary concessions. If an agreement couldn’t be reached, the court would have to determine whether the concessions proposed by the employer were necessary for its continued operation, and only then would contract terms be modified.

However, the broad language of Section 1113 proved inadequate and rife for misapplication by bankruptcy courts focused solely on the interests of the bankrupt employer. Contrary to its original employee-protective purposes, Section 1113 has been exploited time and again, allowing companies to gut labor contracts and impose working conditions with virtual impunity.

Numerous airlines subsequently filed for Chapter 11 bankruptcy in the decade following the Sept. 11, 2001, terrorist attacks, including the following carriers with ALPA-represented pilots: US Airways (2002, 2004), United Airlines (2002), Hawaiian Airlines (2003), Aloha Airlines (2004, 2008), ATA (2004, 2008), Atlas Air/Polar Air Cargo (2004), Delta Air Lines/Comair (2005), Independence Air (2005, 2006), Mesaba Aviation (2005), Northwest Airlines (2005), Gemini Air Cargo (2008), Sun Country Airlines (2008), and Mesa Air Group (2010). In each of these cases, the carriers used the bankruptcy process to dictate terms to their organized labor groups.

In fact, airlines were able to use the 1113 process after 9/11 to elicit $84 billion in wage and benefit reductions, do away with nearly every defined-benefit pension plan, and in some instances dictate 50 percent pay cuts and seven-year contracts to cement long-term employee losses. These brutal measures would never have been achieved at the bargaining table and were grossly disproportionate in substance and duration.

Robbing Peter to pay Paul

To make matters worse, the same airline executives who orchestrated these enormous reductions rewarded themselves nicely. During an April 17, 2007, congressional hearing titled “Executive Compensation in Chapter 11 Bankruptcy Cases: How Much Is Too Much,” Rep. Linda Sanchez (D-CA), who then chaired the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary House of Representatives, summarized this concern in her opening remarks.

“This problem is clearly illustrated by the numerous Chapter 11 cases in which chief executive officers receive outrageously large compensation and bonus packages while they simultaneously slashed wages, benefits, and even jobs of the workers who are the backbone of those businesses.” She continued, “‘All too often,’ as one bankruptcy judge recently observed, executive retention plans ‘have been widely used to lavishly reward…the very executives whose bad decisions or lack of foresight were responsible for the debtor’s financial plight.’”

Sanchez cited the then UAL Corporation CEO as a prime example. She observed that Glenn Tilton received compensation worth $39.7 million in 2006, several years after the carrier filed for Chapter 11 despite the fact that the company terminated the pensions of 120,000 employees, transferring $5 billion in pension obligations to the federally chartered Pension Benefit Guaranty Corporation—“the largest pension default in the history of the United States,” she remarked.

United remained in bankruptcy for three years. Meanwhile, United pilots were locked into a seven-year concessionary agreement and some lost their jobs.

Essence of exploitation

In some instances, the bankruptcy process has been abused by profitable airlines. At a May 25, 2010, hearing before the same House subcommittee to support the Protecting Employees and Retirees in Business Bankruptcies Act of 2010 (a previous version of the current bill), Capt. John Prater, then ALPA president, testified, “In the case of the bankruptcy of Hawaiian Airlines, pilots faced a Section 1113 motion by a profitable company after having made prepetition concessions demanded to avoid a Chapter 11 filing. All this after management approved a self-tender of the airline’s stock at a substantial premium to market value following September 11 and before the bankruptcy filing.”

Prater gave other examples of the problems associated with the Chapter 11 process. He noted how a bankruptcy bargaining dispute between Delta management and its pilots led the two to settle outside the bankruptcy court process, offering evidence that “bankruptcy courts with judges focused solely on the debtor’s concerns are not the best place to resolve differences between labor and management.” Prater went on to say that the bargaining table is the most suitable location.

“In the case of Mesaba Aviation [a predecessor of Endeavor Air], the bankruptcy court approved as ‘necessary’ a wage cut of almost 20 percent that would have lasted for six years, within a structure that did not envision any reversal or mitigation of the cuts during that lengthy period.” He continued, “After the district court agreed with ALPA that such overreaching amounted to bad-faith conduct and an abuse of the bargaining process, ALPA still had to accept a concessionary agreement even though the company reorganized under a plan that provided 100 percent recovery for all creditors, including interest.”

Prater stressed that the current 1113 process repeatedly failed to live up to Congress’s vision of protecting workers from employers who see the Chapter 11 process as the perfect opportunity to sidestep collective bargaining and thumb their noses at obligations to employees.

DePete shared his urgent concerns on the matter in a recent all-member message. “In the United States, many ALPA members who flew following 9/11 endured life-changing financial hardship as a result of a flawed bankruptcy process that permitted companies to alter workers’ collective bargaining agreements, allowing airlines to decimate their pilots’ salaries, health-care benefits, and pension plans.” He added, “ALPA pilots still suffer today from this injustice—and our union is aggressively working to prevent a similar miscarriage of the intent of Congress in response to COVID-19.”

Broad approach

The Association’s recently launched Call to Action promoting the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (www.alpa.org/action) is part of a broad approach ALPA has taken in its response to the COVID-19 outbreak. The union has harnessed the power of its committee structure and professional staff to employ a series of tactics designed to influence policymakers to support employee protections and facilitate strategic planning, particularly among pilot groups within airline brands. The Association is providing a host of resources and services to address member needs, including preemptive checklists, supplemental benefits, educational opportunities, job listings, and counseling. Most of all, ALPA is encouraging members and their families to prepare themselves for the industry changes that are undoubtedly coming.

The Association’s assertive lobbying campaigns recently led to the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the United States and the Canada Emergency Wage Subsidy. These federal actions offered North American airlines financial assistance to help cover short-term employee compensation while buying workers some much-needed time to plan for their immediate professional futures.

In addition to calling for bankruptcy reform, ALPA also launched a Call to Action to extend the worker payroll and benefits support from the CARES Act beyond September 30 to ensure airline industry stability (www.alpa.org/payroll). The Association is urging lawmakers to authorize hazard pay for essential workers and health-care coverage, including COBRA subsidies, for those who are displaced. The union is also advocating for extended sick leave, unemployment benefits, and special furlough considerations related to the pandemic.

ALPA will continue to press Congress to take necessary action to address the Association’s concerns, especially as some pilots have already been issued Worker Adjustment and Retraining Notification letters advising them of planned displacements this fall due to the effects of the COVID-19 pandemic.

This article was originally published in the August 2020 issue of Air Line Pilot.