NEW YORK, Wed Aug 15, 2012 11:48 pm EDT (Reuters) — A U.S. judge has denied a request by American Airlines parent AMR Corp to abandon collective bargaining agreements with its pilots’ union. The unexpected decision was a setback for bankrupt AMR in its quest to save more than $1 billion a year in labor costs from redesigned retirement savings plans and retiree benefits.

In a lengthy written ruling in U.S. bankruptcy court in Manhattan, Judge Sean Lane, who is overseeing AMR’s Chapter 11 bankruptcy restructuring, turned down American’s motion in part because it would give the carrier unrestricted ability to temporarily lay off pilots and engage in code-sharing. Lane said AMR failed to show that such “unfettered discretion” was necessary for its own operations or that it was common in competitors.

Had Lane granted the motion, AMR would have had been able to implement more dramatic cuts that would have governed in the interim, including hundreds of pilot layoffs, and the elimination of equity stake, 401(k) retirement fund contributions and raises. Instead, the union’s current collective bargaining deal will remain in place for now.

Lane acknowledged that serious concessions are needed from AMR’s unions and rejected the unions’ arguments that AMR had an obligation to consider a merger with US Airways while still in bankruptcy.

The airline proposed freezing its defined benefit plan and terminating its money purchase defined contribution plan for pilots after already freezing three pensions for other union workers. As concessions, it would contribute 14% of pay into a 401(k) plan and give pilots a 13.5% equity stake in the company that’s expected to give the group more influence over a key corporate committee.

AMR also has sought to put the brakes on employer-paid health care and life insurance benefits for about 40,000 current retirees. The proposal is similar to one involving future retirees who would be given access to medical coverage as long as they pick up the tab.

AMR said in a statement it would alter its motion and resubmit the request to terminate its agreements with the Allied Pilots Association. However, Kevin Starke, a bankruptcy analyst at CRT Capital Group, said he is not convinced AMR would be able to resubmit its motion as swiftly as it would like.

“I’ve watched this movie before,” he said. “The problem with failing on a motion of this magnitude is that it allows objections to creep in on the second go-round, and so you don’t often get back to the ruling stage as fast as you would hope.”

Meanwhile, the pilots union saw the ruling as a victory.

“Clearly management went well beyond what is the industry standard for bankruptcy contracts, and the judge recognized this in his decision today,” union President Keith Wilson, named to head the Allied Pilots Association last week after his predecessor resigned, said in a statement.

AMR’s creditors’ committee, which supported the airline’s bid to abrogate its contracts, downplayed the severity of the ruling in a statement, saying AMR will not be hard-pressed to make the adjustments Judge Lane is seeking.

In fact, the company already made those changes in its last contract offer -- which the pilots rejected, Jack Butler, the committee’s attorney, said in the statement.“We expect that AMR’s revised positions will be sustained by the bankruptcy court,” he said, adding that the creditors’ committee’s labor subcommittee was slated to meet to further discuss the effects of the ruling.

AMR management said it was concerned the ruling would confuse flight attendants at the company, who were scheduled to wrap up voting on a last and best offer from American management on Sunday.

“We just want to make sure the flight attendants don't misinterpret Judge Lane’s ruling on the pilot agreement in relation to how they choose to vote this week,” Denise Lynn, American senior vice president for people, told reporters.

AMR has already reached consensual labor terms with its ground workers’ union, while its flight attendants’ union had until Sunday to vote on AMR’s latest offer.

(Additional reporting by Sakthi Prasad; Editing by Bernard Orr and Eric Meijer)

© 2011 Thomson Reuters. Click for Restrictions.

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