American Airlines and US Airways will merge and create the world's biggest airline. The boards of both companies approved the merger late Wednesday, according to three people close to the situation.
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NEW YORK (CNNMoney) -- Executives at American Airlines' parent warned its unions Wednesday that deep cuts are coming to the staff of 88,000 at the nation's No. 3 airline.
AMR Corp. CEO Thomas Horton, said in a letter to American employees, "We will end this journey with many fewer people. But we will also preserve tens of thousands of jobs that would have been lost if we had not embarked on this path."
The company's job-cut target was not disclosed, but Horton said the company needs to save more than $1.25 billion annually in labor costs, and reduce costs in each work group, including management, by 20%. To try to cushion the blow of those cuts, it is offering employees a profit sharing plan.
Other savings will come from restructuring debt and leases, grounding older planes, and improving supplier contracts. Horton said the company wants to cut $2 billion a year in total cost cuts.
AMR is also is looking for $1 billion a year in improved revenue from better use of its aircraft and improved product offerings.
There have been suggestions since the bankruptcy filing that American should close hubs, break-up the carrier or merge with another airline.
"I do not believe any of these outcomes are in the best interests of American, our people, or our stakeholders," Horton wrote. "But as I have said since the start of this process, there will be many parties with input into the outcome of our restructuring."
The company is meeting with the three major unions that represent the workers at American, the Allied Pilots Association, the Association of Professional Flight Attendants and the Transport Workers union, which represents ground workers including mechanics. Between them the three unions represent about 54,000 employees at American and its feeder airline, American Eagle, which also is owned by AMR.
Beyond job cuts, the unions are still waiting to hear if there will be any changes in work rules, like requiring longer hours for flight crews. The TWU is also worried American will close facilities such as ones that perform the major overhaul of aircrafts that all airlines need to do on a regular basis. The TWU expects American will outsource that heavy maintenance work to low-cost, unsecured facilities overseas. Most major airlines such as Delta Air Lines, United-Continental and Southwest Airlines already outsource hat work.
AMR Corp. said at the time of its Nov. 29 bankruptcy filing that it needed to achieve a more competitive labor structure. Over the past 10 years most other major U.S. airlines have gone through bankruptcy to cut labor costs.
Asked about company plans earlier this week, spokesman Tim Smith said, "We need a competitive cost structure. It doesn't necessarily mean we get to that the way others have done."
Companies can use the bankruptcy process in order to throw out union contracts, a fact that gives management significant leverage during negotiations on new, lower-cost labor agreements.
The unions also expect that AMR will move to shift its underfunded pension plans to the federal agency that oversees those plans, the Pension Benefit Guaranty Corp.
Since American Airlines' bankruptcy the PBGC said it would seek to keep the airline from dumping its pensions on the agency, which is already facing a deficit of its own. The agency's estimate is that American's pensions are underfunded by $10 billion.
If the company is successful in shifting its pensions to the agency many workers would have their pension benefits slashed.
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