In The Matter Of

The Arbitration Between:

 

Air Line Pilots Association, International

And

Air Wisconsin Airlines Corporation

 

Direct Appointment by the Parties

Case No. ARW-05-02 (MEC Group Grievance Concerning Restructuring Agreement)

Date of Opinion: February 20, 2007

 

Preliminary Statement

 

An arbitration hearing involving the above-captioned matter was held in Appleton, Wisconsin on June 28, 2006 before a System Board of Adjustment comprising Christine Deister, Company-designee, Mitchell Madison, Association-designee, and the undersigned, impartial chairman. Representing the Company was Thomas J. Kassin, Esq., and representing the Association was Elizabeth Ginsburg, Esq.. A transcript of the hearing was made as well as a transcript of a subsequent examination of Peter Blain on October 4, 2006. Briefs were submitted by the parties on December 13, 2006, and objections concerning the briefs were resolved on January 8, 2007. An executive session of the System Board was held on February 9, 2007.

 

Issues

 

The parties did not agree upon the issues to be submitted for decision. In essence, this case presents the question of whether the Company breached the “fully effective” language contained in Letter of Agreement #8 (also known as the Restructuring Agreement) dated June 16, 2003.

 

Background

 

In April 2003, United Airlines, which was in bankruptcy under Ch. 11, came to Air Wisconsin (hereinafter AWAC or the Company) – a regional carrier for United – and said that it was asking 7 regional carriers to submit bids for United’s regional business, and that the carriers had two weeks within which to submit their bids. The Company protested that two weeks was an unreasonably short period of time, but United was unmoved.

The Company in the person of Geoff Crowley, CEO & President, met with the Association’s Master Executive Council (hereinafter MEC) members on April 16, 2003, explained the situation, asked the MEC if the pilot group would be willing to consider a restructuring of pilot costs with all cost savings flowing to United Airlines, and stated that the parties had about a week to do the restructuring. In an April 16th memo, presented to the MEC, the Company stated that: “All cost and margin reductions will accrue to United.”

The MEC deliberated and decided that it was in the best interest of the pilot group to negotiate a restructured contract with the Company. Negotiations began on April 18th and had a targeted end date of April 25th. If these negotiations proved successful, AWAC would then have to renegotiate the agreement between itself and United governing regional flying (hereinafter called the United Express or Express Agreement).

The collective bargaining agreement which AWAC and the Association were seeking to restructure had an amendable date in 2005 (hereinafter the 2001-05 collective bargaining agreement); this contract had put the pilot group in a very favorable position in comparison to other regional pilot groups with respect to pay and working conditions.

During the course of the restructuring negotiations the Association stated to the Company a number of times that it was not interested in negotiating concessions for a short term, exit agreemen¹ from the relationship with United; it stated that it was only interested in an agreement which would secure the future. The Company represented during negotiations that all savings derived from pilot concessions would be passed on to United and would not go to the Company.² Also, during these negotiations, Mr. Crowley in a memorandum to the pilots acknowledged that the parties were being asked to negotiate in an “entirely unreasonable time frame”.

AWAC and the Association also discussed during negotiations the concept that the agreement restructuring pilot costs (hereinafter the restructuring agreement or Letter of Agreement #8) was not to be implemented until the Company’s Express Agreement with United Airlines was “fully effective”. John Mondus, Association negotiating member, testified that the parties were using “fully effective” in the lay sense of the term meaning that United would not be able to walk away from the amended Express Agreement once it was signed. There was no discussion during negotiations between AWAC and the Association about United’s assumption of the pre-petition Express Agreement. Bill Jordan, Executive Vice-President and General Counsel for the Company, testified that he did not interpret “fully effective” to mean that United Airlines had to assume the Express Agreement.

It should be noted here that under bankruptcy law a pre-petition agreement, if breached, constitutes only an unsecured claim on the debtor’s assets whereas a post-petition agreement, if it is an agreement made in the ordinary course of business, or a pre-petition agreement which is assumed by the debtor constitutes, if breached, a higher order claim on the debtor’s assets – it constitutes a claim on the administrative expenses of the debtor.³Consequently, a pre-petition agreement, if assumed by the debtor, attains the status of a post-petition agreement; however, such an agreement, if not assumed, remains a pre-petition agreement.

On April 26, 2003 the parties reached agreement on a restructuring package which would cut wages, per diem, vacation pay, duty rigs, 401C contributions, and rest and duty limitations. The parties also agreed upon the following clause:

“WHEREAS, it is understood and agreed that these amendments shall only become effective if a new or amended United Express agreement between AWAC and UAL becomes fully effective, including, but not limited to, Bankruptcy Court approval.”

 

The pilots ratified the restructuring agreement (also known as Letter of Agreement #8) shortly after April 26, 2003.

In the ensuing months following ratification the Company negotiated with United over the Express Agreement. The Association was not party to these negotiations and had to rely upon the Company’s representations as to the course of these negotiations. During those negotiations the Company proposed to United that United assume the Express Agreement; the Company made such proposal because it thought assumption would give it greater protection in the event of a breach by United while United remained in bankruptcy. United’s response was that its Creditors Committee would not accept assumption unless the Company obtained new capital equipment. Consequently, the Company worked up an alternative proposal suggesting that United pay the Company based on the Company’s lowered costs (base payment) plus an additional payment in the amount of 10% of the base payment which roughly equated to the amount of the cost savings the Company would be passing on to United; the proposal further was that the Company would carry the additional 10% payment on its books as a deferred liability to be paid to United, in part, when United assumed the amended Express Agreement and, in part, when United emerged from bankruptcy. United accepted this alternative proposal, and eventually agreement was reached between the Company and United on all aspects of the Express Agreement.

The critical clause in the Express Agreement, insofar as this case is concerned, was characterized as follows in the Motion seeking approval of the amended Express Agreement from the Bankruptcy Court:

“… it is the intention of the parties that the amended agreement will remain a pre-petition agreement and entering into the amended agreement does not constitute an assumption of the agreement by the debtors. The debtors have and are reserving their right to amend or reject the amended agreement at a later time. In the case of such later amendment or rejection, any damages arising therefrom would give rise to only general unsecured claims.” (p. 4, Par. 9 of Co. Exh. #10)

The Association was not advised of the existence of a clause to this effect in the Express Agreement nor of the unique payment arrangement between United and the Company. The Association had asked to see the amended Express Agreement, but the Company resisted such request on grounds that the Agreement was confidential.

During the course of the negotiations over the Express Agreement, the Company kept the Association informed of certain developments. A memorandum dated July 2, 2003 provided in pertinent part:

“Our Memorandum of Understanding with United provides for an amended United Express Agreement that will run through 2014….

“The agreement is conditioned on negotiating the final agreements and an approval by the Bankruptcy Court. It is also conditioned on our ability to deliver the labor cost savings that were included in our bid.”

In that same memorandum, the Company further stated: “Until our agreement with United is finalized, we continue to run the risk that our flying will be turned over to another carrier.”

A motion was then presented to the Bankruptcy Court attaching the amended Express Agreement, requesting that the Agreement be kept under seal, and seeking approval of the Agreement; the Bankruptcy Court approved such motion on September 19, 2003.⁴ At the hearing on this motion were ALPA lawyers representing the United MEC not the Air Wisconsin MEC. The members of the Air Wisconsin MEC were not briefed on the court session by representatives from the United MEC. Contained within one of the 26 paragraphs justifying the motion was a statement: “Although the Debtors are seeking the Court’s authority to enter into the Amended Agreement, it is the intention of the parties that the Amended Agreement will remain a pre-petition agreement, and entry into the Amended Agreement does not constitute assumption of the Agreement by the Debtors. The Debtors have and are reserving their rights to amend or reject the Amended Agreement at a later time. In the case of such later amendment or rejection, any damages arising therefrom will give rise to only general unsecured claims.” (p. 4, par. 9 of Co. Exh. #10). There was no evidence that the Association at Air Wisconsin ever saw this motion.

By letter dated September 30, 2003 addressed to the Association’s MEC and negotiating committee, the Company enclosed the order⁵ of the Bankruptcy Judge approving the Express Agreement and identified the effective dates of the Express Agreement as October 1, 2003 to December 31, 2014. The letter also stated: “Although the agreement contains several conditions to effectiveness, all of the conditions have been met or waived, and the amended United Express Agreement will be fully effective on October 1, 2003.”⁶

Since the Association believed on the basis of the Company’s representations that the Preamble in its restructuring agreement had been met, the Association sat down with the Company and agreed upon staggered dates for implementing the restructuring agreement commencing October 1, 2003.

Thereafter, a little more than a year later, in November 2004, the Association was advised by the Company that the United Express flying was again being put out for bid. A Company memorandum, dated November 10, 2004, stated the following:

“As they <United> have reviewed their costs, AWAC has been identified as the Express carrier with the highest cost structure. In addition, we are the only Express carrier with an agreement that was approved by the Bankruptcy Court but never affirmed⁷ by United. Essentially, this means United has the ability to terminate our contract.”⁸

In a newsletter entitled “The Weekly Wrap”, published by the Company on November 11, 2004, the Company said with regard to the Express Agreement with United that: “However, they <United> also have the right, while in bankruptcy, to reject the agreement.”

A subsequent Company memorandum, dated November 24, 2004, provided as follows:

“We tried every which way to get them <United> to assume the agreement…. We agreed to begin operating under the new agreement beginning October 1, 2003, but until they assumed the agreement, they would overpay us by an amount roughly equivalent to the difference between the rates in the old contract and the new one. When they assumed the agreement, we would turn over the overpayment to them. This compromise gave them the comfort that we were in fact delivering savings to them effective October 1 and gave us some comfort that they would have a great disincentive to threaten rejection in the future because doing so would result in forfeiture of the overpayment…. It <the money> is on our books as an account payable, in other words as money we owe United and that they can collect at any time by assuming our contract.”

Thereafter, the Company struck a deal with US Airways to do US Airways’ regional flying. The Company then negotiated a settlement and transition agreement with United and did give United a share of the money the Company had been holding for United as a deferred liability. The Company, however, retained some 90 million dollars of which the Association has claimed part – the part representing the concessions the pilots gave to retain the United flying. The Company has resisted the Association’s claim for such money.

A grievance was filed concerning this matter in May 2005 when the Company ceased flying for United, and inasmuch as such grievance has remained unresolved, the Association has elected to bring the matter on to arbitration before this System Board for resolution.

 

Position of the Parties

 

Position of the Association

 

The Association contends that the pre-condition for amending the parties’ 2001-05 collective bargaining agreement, as set forth in the parties’ Letter of Agreement #8 (hereinafter LOA #8), was never met, and that, therefore, the 2001-05 collective bargaining agreement should be re-instated as the operative agreement between the parties and that the pilots should also be re-imbursed a portion of the $93 million, attributable to pilot concessions, that the Company kept for itself as opposed to delivering to United under the United Express Agreement.

In particular, the Association argues that the essential condition precedent to the implementation of LOA #8, namely, a “fully effective” agreement between United Express and AWAC was never met. Specifically, the Association contends that the agreement between United Express and AWAC never became fully effective because cost savings to United and a long term United Express agreement were never effectuated.

The Association argues that the sole purpose behind the negotiations leading to LOA #8, the pilot concessionary agreement, was to enable AWAC to retain United Express flying, and that the purpose of the pilot concessions was to give United cost savings in return for a long term agreement with AWAC as a United Express carrier. The Association says that instead of obtaining a long term commitment from United, AWAC obtained only an interim, contingent arrangement which permitted temporary United Express flying and which gave United no cost savings at all.

The Association says that both parties to LOA #8 negotiated protection against the possibility that the United Express Agreement might become illusory. The Association protected itself by insisting that LOA #8 would only go into effect if the United Express Agreement became “fully effective”, and AWAC protected itself by not passing any cost savings along to United unless and until United assumed the Express Agreement. The Association argues that under circumstances where the United Express Agreement was never assumed, where no cost savings were passed on to United, and where the United Express Agreement was canceled after little more than a year, it cannot be argued that the United Express Agreement was “fully effective”.

The Association argues that LOA #8 itself provides the best evidence that it was not intended to be implemented in the absence of a long term United Express Agreement. Specifically, the Association points to the list of wage comparators in LOA #8 by which wages would be set over a long period of time; also, the Association points to the 8 year duration of LOA #8 and argues that such a long duration is only understandable in the context of a similar long-term United Express Agreement.

The Association argues that, in light of the foregoing, AWAC’s retention of some $93 million that should have gone to pilots must be seen as an unearned windfall. The Association argues that it is evident from the history of negotiations over LOA #8 that the pilots never intended for the savings generated by their concessions to be kept by AWAC; they believed the cost savings were being passed on to United as part of an arrangement whereby AWAC would continue to serve as a United Express carrier.

The Association says that AWAC’s General Counsel Bill Jordan represented that all conditions necessary for the implementation of the United Express Agreement had been met or waived, and that he kept from the Association the fact that the United Express Agreement was a temporary arrangement and that the cost savings were not being directly passed on to United. The Association argues that the bargain between it and AWAC imposed upon AWAC an obligation to advise the Association when the deal with United was “fully effective”; the Association asserts that the confidential nature of the United Express Agreement prevented it from ascertaining such information independently. The Association says that it was willing to rely upon AWAC’s representation regarding the status of this Agreement because the parties (AWAC and the Association) had a history of good faith dealing between themselves. The Association says that if AWAC believed it needed to retain the concessions set forth in LOA #8 even after United refused to make a long term commitment, AWAC should have returned to the Association and worked with it to find a resolution; the Association says that the parties’ history suggests that they could have worked out such a resolution. Instead, says the Association, AWAC retained the cost savings that were never passed on to United and kept the Association in the dark about the United Express Agreement.

The Association argues that the testimony of AWAC’s bankruptcy expert, Peter Blain, should not be given any weight since he did not participate in the parties’ negotiations over LOA #8 and had no knowledge whatsoever about the parties’ intent with respect to the “fully effective” language. The Association says that the term “fully effective” is not a bankruptcy term of art and it does not appear anywhere in the bankruptcy code. Accordingly, says the Association, Mr. Blain’s testimony regarding “fully effective” has no relevance to the meaning of this term in this proceeding.

The Association says that despite AWAC’s contention to the contrary, it did not know that the United Express Agreement had not been assumed by United. The Association points out that the United Express Agreement was filed under seal with the Bankruptcy Court, and that the Association was not privy to its terms. The Association argues that “every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement”, and that given the confidential nature of the United Express Agreement, the Association was dependent upon AWAC’s good faith in informing it when the United Express Agreement was “fully effective”. The Association says that while AWAC informed it that “all of the conditions have been met or waived, and the amended United Express Agreement will be fully effective on October 1, 2003”, such information was false.

The Association argues that the remedy in this case should include an award of pre-judgment interest at the statutory rate. The Association says that this request is based on the need to make pilots whole for loss of use of their money during the time period in question.

In sum, then, the Association asks that the existing collective bargaining agreement (2001-05), as it read before the amendments imposed by LOA #8, be reinstated, that the pilots receive the differential between what they would have earned under the 2001-05 agreement and what they earned under LOA #8, and that the Board retain jurisdiction over the implementation of the remedy ordered herein.

 

Position of the Company

 

The Company (AWAC) contends that the Association has not met its burden of demonstrating that a violation of LOA #8 occurred in this case.

The Company urges the Arbitrator to observe certain principles in deciding this case. The Company says that the plain meaning of contractual language should be enforced as written, and that parol evidence may only be introduced under circumstances where ambiguity in contractual language exists. The Company further says that contractual language should be construed against the interests of the drafter under circumstances where the contractual language is ambiguous.

The Company says that the implementation of LOA #8 was conditioned on a new or amended Express Agreement that had to be “fully effective”. The Company says that since it and the Association had agreed upon certain pilot concessions prior to the time that negotiations between the Company and United had concluded on the amended Express Agreement, it and the Association agreed that LOA #8 would be implemented only after the Express Agreement had become “fully effective”. The Company says that “fully effective” meant that the Association would be bound to implement LOA #8 only after the Company and United had become bound to each other under the amended Express Agreement and the Bankruptcy Court had approved such amended Agreement. The Company says that is what “fully effective” should mean.

The Company points out that under the bankruptcy code, United had the right to reject the amended Express Agreement in the future even though the Bankruptcy Court approved such Agreement. The Company points out that rejection of an agreement by a debtor in possession is treated as a breach. However, the Company argues that rejection or breach by a debtor in possession has nothing to do with whether a contract is binding or fully effective. The Company says that nothing in LOA #8 required it to eliminate the possibility that flying under the amended Express Agreement might be put up for re-bidding in the future. The Company argues that there would have been nothing it could have done to eliminate this possibility while United was in bankruptcy, and that it never agreed to condition implementation of LOA #8 on an impossible condition. The Company notes that no grievance was filed in November 2004 when United asked AWAC to re-bid the flying contained in the amended Express Agreement.

The Company further contends that there is no language in LOA #8 mandating that the Express Agreement be of a certain duration or that it run longer than a year or two. The Company says that the Association initially proposed language requiring that the Express Agreement be of a certain duration but then withdrew that proposal.

The Company next argues that implementation of LOA #8 was not conditioned on United’s assumption of the Express Agreement. The Company points out that when a debtor in possession assumes a pre-petition contract under the bankruptcy code, it becomes a post-petition contract with administrative expense status if breached. While the Association claimed that failure to obtain assumption precluded the Express Agreement from becoming “fully effective”, the Company says that the language of LOA #8 is completely bereft of any reference to assumption. The Company further says that every attempt by the Association to dictate the terms of the Express Agreement were rejected by it. The Company also notes that the Association never submitted a proposal conditioning implementation of LOA #8 upon United’s assumption of the Express Agreement, and that the Association never explained to the Company that “fully effective” meant assumption by United of the Express Agreement. The Company argues that it would be unfair to impose upon it a condition never known to it and one which could have been addressed had the Company known about it. The Company further says that the additional payment arrangement it made with United made assumption of the Express Agreement a non-issue. The Company says that it negotiated an alternative to assumption with United and never returned to the Association because it saw no necessary reason to do so.

The Company contends that once LOA #8 was implemented in October 2003, the terms and conditions of employment for pilots did not snap back to those in effect in the 01-05 collective bargaining agreement after the termination of the Express Agreement. The Company says that LOA #8 was not tied to the duration of the Express Agreement or to the length of time the Company flew in the Express operation; rather, LOA #8 had its own independent duration clause which stated that LOA #8 remained in effect until October 1, 2011.

The Company argues that nothing in LOA #8 prohibited it from negotiating an additional payment arrangement with United and retaining a portion of that additional payment once the relationship with United was severed; the Company says that there is no language in LOA #8 on this point. The Company says that, as an alternative to assumption, it negotiated an additional payment arrangement which operated to create a financial penalty if United breached the Express Agreement and provided the Company with cash security for United’s performance. The Company points out that the payment arrangement it negotiated with United did reflect all the cost savings and margin reduction that it had been able to achieve in all areas of its operations. The Company says that after it signed a flying agreement with US Airways, it negotiated a termination of the United Express Agreement which included giving up a portion of its accrued, additional payments.

The Company says that the Express Agreement was an 11 year deal, and that in order to limit United’s liability under the Express Agreement during bankruptcy, United agreed to the additional payment arrangement in exchange for the Company’s agreement to accept a lower status claim for damages should United breach the Express Agreement. The Company says that the Express Agreement was an agreement between it and United, and that any claim for damages under that agreement belonged to it and not the Association. The Company points out that at the time the Express Agreement was negotiated, no one believed that any of the additional payments would end up in the Company’s treasury, and that a portion of the additional payments did not become Company income until 2005 when the Company and United negotiated a termination to the Express Agreement.

In sum, and for all of the reasons recited above, the Company asks that the grievance be denied.

 

Analysis

 

The issue presented by this case is whether the Company breached the “fully effective” language contained in Letter of Agreement #8 (also known as the Restructuring Agreement) dated June 16, 2003.

The “fully effective” language, as contained in LOA #8, reads as follows:

“WHEREAS, it is understood and agreed that these amendments shall only become effective if a new or amended United Express agreement between AWAC and UAL becomes fully effective, including, but not limited to, Bankruptcy Court approval.” (Emphasis added.)

The meaning of the term “fully effective” is in dispute in this case. I am persuaded on the basis of the record made here that the meaning of “fully effective” is not plain from the face of the term itself and that resort to extrinsic evidence, namely, bargaining history, is necessary to an understanding of the proper interpretation of these words.

The relevant history which led up to the negotiation of this “fully effective” language was as follows. In April 2003, United Airlines, which was in bankruptcy under Ch. 11, came to AWAC – a regional carrier for United – and said that it was putting its regional flying business up for bid and that the regional carriers had two weeks within which to submit their bids. AWAC knew that it had to lower its costs significantly to become a bidder of interest to United. AWAC immediately contacted the Association about this development, and the Association decided to enter into concessionary talks with AWAC in an effort to retain the existing regional flying for United. AWAC and the Association recognized that they were looking at a two step process: one step involved concessionary talks over reducing pilot costs, and if these talks were successful,⁹ then a second step of talks between AWAC and United over the terms of an amended Express Agreement would take place.

The uncontradicted evidence was that at the outset of bargaining between AWAC and the Association which occurred in a very compressed time frame, namely, one week, the Company forthrightly informed the Association that all cost savings generated by pilot concessions would flow through to United. This statement was made by CEO & President Geoff Crowley and confirmed in an April 16th memo to the Association’s MEC; in that memo the Company stated: “All cost and margin reductions will accrue to United.” Moreover, in the course of negotiations the Company reiterated that all savings derived from pilot concessions would be passed on to United and would not go to the Company. Also, at the beginning and during the course of negotiations, the uncontradicted evidence was that the Association informed the Company that it was not interested in negotiating concessions for a short-term, exit agreement from the relationship with United, and that it was only interested in an agreement that would secure the future. The Association defined a short-term exit agreement as an agreement that lasted only a year or two.

The restructuring agreement that the parties successfully put together in the course of a week of bargaining made it clear that the parties were not thinking in terms of a short-term exit agreement from the relationship with United but, rather, in terms of an agreement that would secure the future. The restructuring agreement had a term of 8 years, and during that term provision was made whereby pilot compensation could be reset periodically by reference to pilot compensation at other regional carriers.

After a number of failed proposals by both the Association and the Company during the week of bargaining about what the relationship between the Restructuring Agreement and the Express Agreement might be, the Association introduced the concept that the restructuring agreement would not take effect until the Express Agreement with United was “fully effective”. The words “fully effective” must be read in the context of two fundamental principles on which the AWAC-ALPA negotiations were predicated and on the basis of the reasonable assumption that these principles would guide AWAC in its negotiations with United over the Express Agreement. The two fundamental principles that the parties discussed in negotiations were that all cost savings from pilot concessions would flow through to United and not be retained by the Company and that the Express Agreement would be an agreement which secured the future and did not amount to a short-term exit agreement¹⁰ from the relationship with United. The above constitutes the extrinsic evidence which informs the meaning of “fully effective”.

What happened then when it came time for the Company to negotiate the amended Express Agreement with United? The Company was unable to get United to assume the amended Express Agreement; United insisted on language which it ultimately obtained and which made clear that United was not assuming the amended Express Agreement, that it was reserving its right to amend or reject the amended Express Agreement at a subsequent time, and that if such amendment or rejection occurred, the status of any claim against it would be in the lower category of an unsecured claim.

When the Company was rebuffed by United’s refusal to assume the amended Express Agreement, the Company to its great credit sought another approach – which United ultimately acceded to – and that approach involved an agreement whereby United would pay the Company based on the Company’s lowered costs (base payment) plus an additional payment in the amount of 10% of the base payment which roughly equated to the amount of the cost savings the Company would be passing on to United; the proposal further was that the Company would carry the additional 10% payment on its books as a deferred liability to be paid to United, in part, when United assumed the amended Express Agreement and, in part, when United emerged from bankruptcy.

The Company, however, informed the Association about none of the above bargaining history and bargaining outcomes and refused the Association’s request to inspect the amended Express Agreement on grounds that such Agreement was confidential.

Moreover, the unrebutted evidence was that the Association was not privy to the flow of documents, motions or in-court presentations in the bankruptcy proceedings. There was no evidence that the Association knew about the content of the Motion to approve the amended Express Agreement; the Association simply relied on the Company’s representations as to what was occurring in the negotiations with United and in the proceedings before the Bankruptcy Court. The Association received only a copy of the motion approving the amended Express Agreement which did not contain reference to the contents of the amended Express Agreement inasmuch as that Agreement was filed under seal with the Bankruptcy Court. One cannot fault the Association for relying upon the Company’s representations. The Association and the Company had a 12 year history between them of good faith bargaining; trust had developed as a result of this relationship.

Moreover, not only did the Company keep the above bargaining history and outcomes from the Association, but the Company also led the Association to believe that it had secured an 11 year Express Agreement with United. In a memorandum dated July 2, 2003, the Company informed the Association: “Our Memorandum of Understanding with United provides for an amended United Express Agreement that will run through 2014….” Since the Association was unaware of United’s refusal to assume the amended Express Agreement and of AWAC’s approach to incentivize United to adhere to the Agreement, the Association cannot be faulted for taking the statement – “the United Express Agreement… will run through 2014” – at face value. Thus, when the news broke a little more than a year after the implementation of the amended Express Agreement that United was planning to put AWAC’s regional flying up for bid again, the Association was caught entirely by surprise.¹¹ Captain Fleming testified that: “I do believe that the Company had a responsibility to come to us and explain that the deal that they made with United was not the deal we talked about in negotiations.” In a memorandum dated November 24, 2004, the Company wrote:

“Having reached a new agreement with United, we tried every which way to get them to assume the agreement…. We agreed to begin operating under the new agreement beginning October 1, 2003, but until they assumed the agreement, they would overpay us by an amount roughly equivalent to the difference between the rates in the old contract and the new one. When they assumed the agreement, we would turn over the overpayment to them. This compromise gave them the comfort that we were in fact delivering savings to them effective October 1 and gave

us some comfort that they would have a great disincentive to threaten rejection in the future because doing so would result in forfeiture of the overpayment…. It <the money> is on our books as an account payable, in other words as money we owe United and that they can collect at any time by assuming our contract.”

The above, frankly, was information that the Company should have disclosed to the Association prior to the execution of the amended Express Agreement and not a year later when United was threatening to reject yet another Express Agreement. Given the nature of the parties’ relationship over some 12 years and the trust that existed between them back in the Spring of 2003, it is more than likely that they would have able to work out a solution back then. Clearly, attempting to work out a solution in the Fall of 2004 after that trust had been breached would have been an infinitely more difficult task.

Also, it should not go without mention that AWAC and the Association had negotiated in a very compressed time frame, namely, one week, over a very complex matter (the Restructuring Agreement), and that given such time constraint, a great deal of reliance had to be placed on the trust that clearly existed between the parties in the Spring of 2003. Such trust was a critical ingredient in working out the terms of the restructuring agreement on such short notice and under such great pressure; each party needed to be able to rely upon the representations of the other when it came to the basic uncontested principles on which the formation of the concessionary agreement rested.

In sum, then, I find that the Company breached the “fully effective” language contained in Letter of Agreement #8 because it failed to bring to the Association’s attention the fact that not all the cost savings would necessarily accrue to United and that the amended Express Agreement would not necessarily secure the future for the Company and the Association with respect to United regional flying.¹²

In terms of remedy it is likely that some different and/or additional considerations might come into play in order to fashion an appropriate remedy under all the circumstances of this case. The interests of all the parties to this dispute is certainly a factor to be considered in the formulation of such a remedy. Given the foregoing, I think the best way to proceed is to give the parties themselves a 30 day opportunity to discuss an appropriate remedy with a request that they report back to the Chairman of the System Board on their progress at the mid-point of such 30 day period; if the parties reach impasse in their discussions, then either party may within 30 days from the date of this award petition the System Board for further proceedings with respect to the awarding of a fair and just remedy.

 

 

Lawrence T. Holden, Jr.

Impartial Chairman

 

 

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