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Bankruptcy judge shakes up power dynamics in Pinnacle pilot talks

Memphis-based Pinnacle operates regional jets for Delta Air Lines
Pinnacle
Memphis-based Pinnacle operates regional jets for Delta Air Lines, and it filed for Chapter 11 on April 1 because it was losing money and facing a liquidity crisis.

Pinnacle Airlines' union pilots, including hundreds based in Minnesota, have gained leverage at the bargaining table from an unlikely source -- a U.S. bankruptcy judge in New York.

Bankruptcy court has become the venue of choice for airlines to slash their labor costs. It's been used by Delta, United and the former Northwest to extract pay cuts and work rule changes.

But U.S. Bankruptcy Judge Robert E. Gerber proved recently that there aren't any rubber stamps in his courtroom when it comes to shredding a labor contract.

Gerber refused to allow Pinnacle to impose new work terms on its 2,400 pilots because he concluded that "Pinnacle overreached." It's an important union victory at a time when American workers often are forced to accept a company's last offer.

Memphis-based Pinnacle operates regional jets for Delta Air Lines, and it filed for Chapter 11 on April 1 because it was losing money and facing a liquidity crisis.

In a 66-page court ruling, Gerber acknowledged that Pinnacle's pilot costs must be dramatically reduced because they are "substantially over market" when compared with other regional carriers that fly for Delta.

However, he cited "three deficiencies" that he said gave the unionized pilots "good cause" to turn down Pinnacle demands for almost $60 million in annual pilot labor concessions.

Gerber rejected Pinnacle's motion to toss out the current pilot contract and allow the carrier to force its preferred concessions on the pilots. Citing the bankruptcy code and earlier airline bankruptcy cases, he explained that Pinnacle failed to meet the legal standards needed to permit a bankruptcy judge to grant permission to impose work terms.

No leapfrog to the bottom

He determined that Pinnacle successfully made the case that some concessions are necessary to compete with other regional carriers, but wrote that Pinnacle "has not shown a need to leapfrog below them " so that Pinnacle's pilots would become the lowest paid among Delta Connection regional carriers. He said that Pinnacle fell short when it failed to move off of its cost-cutting target during the negotiations and also didn't offer the pilots an acceptable profit-sharing plan to partly ameliorate them for their financial sacrifices.

Gerber's action will shake up the dynamics at the bargaining table between Pinnacle management and the Pinnacle branch of the Air Line Pilots Association (ALPA). Many Twin Cities travelers who fly on Delta Connection regional planes are transported by Pinnacle pilots.

The two sides began concessionary negotiations a year ago, long before Pinnacle filed for bankruptcy. Pinnacle originally wanted $33 million in annual pilot labor savings. But it boosted that figure to $59.6 million when it became clear that it would need to compete with multiple carriers to secure Delta flying with larger regional jets.

In his Nov. 16 ruling, Gerber was particularly upset with the fact that Pinnacle management would not move off of the $59.6 million cost-cutting target during negotiations. He labeled it "stonewalling" and also criticized Pinnacle for quoting his colleague, Judge Sean Lane, out of context to explain why Pinnacle could not deviate from its labor cost-cutting goal.

In the written decision, Gerber went so far as to quote the court hearing dialogue in which he asked Pinnacle's counsel to what extent it showed any movement in negotiations on its concessionary target. Pinnacle's counsel said: "Well...the answer is that we stuck to the amount of labor savings that our analysis showed we need...to become cost competitive." To which Gerber replied, "Is that a euphemism for saying zero?"

Pinnacle has been asking its pilots to take pay cuts ranging from 7 to 28 percent.

Road map for a deal

Pinnacle CEO John Spanjers said in a written statement that Gerber's ruling "gave the parties a clear road map to arrive at cost savings necessary for Pinnacle to emerge from bankruptcy as a viable, competitive company." Spanjers added: "Pinnacle continues to face severe financial challenges requiring urgent cost savings, but we now believe there is a path to achieving a competitive cost structure necessary to survive in our challenging industry."

Tom Wychor, chairman of the Pinnacle ALPA branch, stressed that a pilot-negotiated and pilot-ratified contract is the only viable outcome for Pinnacle. In a statement, he said the two sides need to reach agreement on a deal that "preserves jobs worth having while creating an environment in which the company can thrive."

Both Spanjers and Wychor live in the Twin Cities area.

Pinnacle Airlines filed for bankruptcy less than two years after it announced it was acquiring Eagan-based Mesaba Airlines. Both Pinnacle and Mesaba have had pilot bases in the Twin Cities, and the combined pilot workforce has many pilots with considerable seniority.

The cost of those experienced pilots is one of the issues in the ongoing negotiations.

While the Pinnacle pilots are bargaining with Pinnacle management, Delta Air Lines holds the ultimate power over Pinnacle's fate. Delta is Pinnacle's sole customer, Delta controls which airplanes and how many airplanes Pinnacle flies, and Delta is providing debtor-in-possession financing to keep Pinnacle afloat in Chapter 11.

Gerber made reference to a meeting between Delta representatives and Pinnacle leaders that occurred on June 15 in Minneapolis. In that session, Delta notified the regional carrier that its rates for flying 50-seat and 76-seat aircraft exceeded the "average rates" charged by other carriers operating regional flights for Delta.

Based on Delta's dominant role, the pilots union asked Gerber to require three-way discussions amongst Pinnacle, the pilots union and Delta. "This would probably be very useful, but the Court cannot require it" based on the bankruptcy code and related case law, Gerber wrote.

Delta hiring pipeline

However, now that the pilots have been granted more negotiating power by Gerber, it's probable that the pilots will place renewed emphasis on a proposal to get Pinnacle pilots into a Delta hiring pipeline.

Previously, the union suggested that Pinnacle management address the average pilot seniority issue by working with Delta on "career progression options" so Pinnacle pilots would move to Delta along a career path.

Many airline industry insiders are worried about a pilot shortage and substantial numbers of retirements are on the horizon at Delta and other big carriers. In a Sept. 21 flight operations update to Delta pilots, Delta's Jim Graham said he's starting to see "the first wave" of age 65 mandatory retirements.

"In 2013, 60 pilots will reach the mandatory retirement age; within the next 10 years, 3,299 pilots will reach age 65," Graham said. "Just to remain status quo in our staffing -- and not factoring in new aircraft requirements -- we're faced with hiring a minimum of 3,500 new pilots over the next 10 years."

Pinnacle's bankruptcy case will reach the eight-month mark on Dec. 1, and Gerber's precise ruling on the pilot labor talks provides some hope that a negotiated deal could be reached within the next few weeks.

Gerber and Delta will be keeping close tabs on the ability of the two sides to finally negotiate a tentative agreement.

The stakes are high because Pinnacle's survival is not ensured. As Gerber noted: "Delta has stated that it is not interested in talking to Pinnacle about help with Pinnacle's short-term liquidity problems if Pinnacle doesn't first get its labor costs house in order. The Court takes Delta at its word."

 Fedor can be reached at lfedor@minnpost.com.

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