Pinnacle Airlines Corp.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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:
In re 	: 	Chapter 11 Case No.
:
PINNACLE AIRLINES CORP., et al., 	: 	12-11343 (REG)
:
Debtors. 	: 	(Jointly Administered)
:
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DECISION ON DEBTORS’ MOTION, PURSUANT
TO BANKRUPTCY CODE SECTION 1113, TO
REJECT COLLECTIVE BARGAINING
AGREEMENT WITH AIR LINE PILOTS
ASSOCIATION
APPEARANCES:
DAVIS POLK & WARDWELL LLP
Attorneys for Debtors and Debtors in Possession
450 Lexington Avenue
New York, New York 10017
By: 	Benjamin S. Kaminetzky, Esq. (argued)
Lynn Earl Busath, Esq. (argued)
Paul S. Mishkin, Esq. (argued)
Matthew R. Maddox, Esq.
AKIN GUMP STRAUSS HAUER & FELD LLP
Conflicts Counsel to the Debtors
One Bryant Park
New York, New York 10036
By: 	Abid Qureshi, Esq. (argued)
COHEN, WEISS AND SIMON LLP
Attorneys for Air Line Pilots Association, Int’l
330 West 42nd Street
New York, New York 10036
By: 	Thomas N. Ciantra, Esq. (argued)
Bruce S. Levine, Esq. (argued)
Joshua J. Ellison, Esq.
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MORRISON & FOERSTER LLP
Attorneys for Official Creditors’ Committee
1290 Avenue of the Americas
New York, NY 10104
By: 	Brett H. Miller, Esq. (argued)
Erica J. Richards, Esq.
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TABLE OF CONTENTS
Findings of Fact .................................................................................................................. 5
1. Background ................................................................................................................. 5
(a) Regional Airline Industry ...................................................................................... 6
(b) Recent Challenges Facing the Mainline Airline Industry ..................................... 9
(c) Recent Challenges Facing the Regional Airline Industry ................................... 10
(d) Recent Challenges Specifically Facing Pinnacle ................................................ 11
2. Initial Cost Saving Measures .................................................................................... 16
3. Chapter 11 Filing and Immediate Aftermath ............................................................ 17
4. Initial May Proposal to Unions ................................................................................. 19
(a) Business Plan ....................................................................................................... 20
(b) Labor “Ask” ........................................................................................................ 21
5. Delta’s Price Gap Calculations ................................................................................. 22
6. Corroborating the Price Gaps.................................................................................... 23
(a) Hughes Analysis .................................................................................................. 24
(b) Kasper Analysis................................................................................................... 26
7. Revised Proposal ....................................................................................................... 27
8. Section 1113 Motion and Continued Negotiations ................................................... 29
9. Liquidity Crisis ......................................................................................................... 30
10. Section 1113 Trial ................................................................................................... 30
11. Ultimate Facts ......................................................................................................... 31
Discussion ......................................................................................................................... 32
A. Legal Standards ........................................................................................................... 33
1. Necessity .................................................................................................................. 36
2. Fair and Equitable Treatment................................................................................... 38
3. Good Cause to Reject Debtor’s Proposal................................................................. 39
4. Balance of Equities .................................................................................................. 41
B. Application to Facts Here ............................................................................................ 44
1. Procedural Matters ................................................................................................... 44
2. Necessity .................................................................................................................. 46
(a) Liquidity as Resulting in Necessity ..................................................................... 46
(b) Excessive Costs as Resulting in Necessity.......................................................... 48
(c) Necessity Requirement Conclusions ................................................................... 51
3. Fair and Equitable Treatment................................................................................... 52
4. Balance of Equities .................................................................................................. 56
5. Good Cause to Reject Company’s Proposal ............................................................ 58
Conclusion ........................................................................................................................ 65
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ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE:
Under section 1113 of the Bankruptcy Code, a chapter 11 debtor may reject an
executory contract that is a collective bargaining agreement if, but only if, the
Bankruptcy Court finds that rigid requirements imposed under that section have been
satisfied. Section 1113 attempts to “reconcile the public policy that favors collective
bargaining with the reality of bankruptcy, recognizing that Chapter 11 is not merely
business as usual but an extremely serious process that can lead to liquidation and the
loss of the jobs of all the debtor's employees as well as of the creditors' opportunity for
any meaningful recovery.”1 In this contested matter in the chapter 11 case of debtor
Pinnacle Airlines, a regional air carrier (which, together with its affiliates,2 has been
referred to variously in briefing and argument, and here, as “Pinnacle,” the “Debtor” or
the “Company”),3
Pinnacle contends, among other things, that it is in a liquidity crisis that impairs
its ability to survive. It further contends that the regional air transport industry has
become commoditized (making pricing the determinant of ability to compete in the
industry); that its Pilots’ wages, benefits, and work rules are greatly above market; and
the Company moves, pursuant to section 1113, for leave to reject its
collective bargaining agreement with the Air Lines Pilots Association (referred to in
briefing and argument, and here, as “ALPA” the “Union,” or the “Pilots”).”
1 ` 	In re AMR Corp., 477 B.R. 384, 393 (Bankr. S.D.N.Y. 2012) (Lane, J.) (“American Airlines”)
(quoting In re Northwest Airlines, Corp., 346 B.R. 307, 314 (Bankr. S.D.N.Y. 2006) (Gropper, J.)
(“Northwest Airlines”)).
2 The debtors include Pinnacle Airlines Corp.; Colgan Air, Inc.; Mesaba Aviation, Inc.; and
Pinnacle East Coast Operations Inc. Though discussion of the difficulties in the integration of the
operations of each sometimes requires mention of them separately, for the most part they have
been referred to collectively.
3 The Court varies in its use of these throughout this Decision, for greater clarity or emphasis in
particular contexts.
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that its labor costs must be reduced dramatically—to the extent of $59.6 million in cost
savings—and quickly for Pinnacle to survive. In fact, Pinnacle argues, its labor costs
must be reduced to make them the lowest in the industry—without which, Pinnacle
contends, it can survive in neither the long or even the short term. As a result, the
Company argues, the Pilots unjustifiably turned down the Company’s proposal—an
important element of a section 1113 motion showing.
The Pilots acknowledge the liquidity crisis, and that their labor costs need to be
reduced. But they contend that the extent to which the Company needs the very major
concessions the Company seeks has been overstated. And they further contend that the
Company’s demands—under which the Pilots’ labor costs would drop below the lowest
of any of Pinnacle’s competitors—would portend a “Race to the Bottom” in employee
labor costs under which employees would be the continual losers.
In that connection, the Pilots note that the Company dramatically increased its
demands—by 78%—in August, after the Pilots had already responded to an earlier
Company section 1113 proposal (then seeking $33 million in cuts) in a way that the
Pilots contend should have met the Company’s legitimate needs. The Pilots further argue
that the Company’s stated reason for the very large increase in its demands—that Delta
Air Lines, Inc. (“Delta Airlines” or “Delta”), the Company’s only present customer, told
Company representatives in June that Pinnacle was not competitive with the other
regional air carriers providing similar services to Delta—was insufficiently supported,
when Delta did not provide copies of the contracts with others that would support that
view.
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The Pilots further argue that the Company showed no downward movement
whatever in its aggregate demands. And the Pilots further argue (or at least proceed on
the assumption) that it does not matter that their costs are above market, as Delta is
locked into contracts with Pinnacle impairing Delta’s ability to give its work to other
regional air carriers.
For these reasons, and others, the Pilots argue that they were fully justified in
turning down the Company’s latest proposal.
***
After hearing the evidence, and related argument, the Court is compelled to agree
with the great bulk, but not all, of Pinnacle’s contentions. The Court finds, with great
regret, that immediate reductions in Pinnacle’s pilot labor costs are essential not only to
Pinnacle’s reorganization, but also to its survival. The Court further finds that nearly all
of Pinnacle’s “Ask” was justified, even as it was increased by Pinnacle’s proposal in
August, after Pinnacle took measures to corroborate what Delta had said.
But Pinnacle has failed to meet burdens on this motion—including, most
significantly, necessity for the proposed modifications and unjustified refusal to agree by
the Pilots (as described more fully in the legal discussion that follows)—in three respects.
First, Pinnacle has failed to show that cutting costs to a level below that of any of
the other regional airlines is justified and essential to the Company’s survival—
particularly given Pinnacle’s failure to take into account (at least on the record before the
Court) the costs Delta would incur to switch its business to other carriers. Pinnacle did
not convince the Court that a “Race to the Bottom” was necessary.
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Second, Pinnacle’s proposal to protect the Pilots from windfalls others might
enjoy after Pinnacle is nursed back to health fell short of that required for the Court to
make necessary findings of “Necessity” and “Fair and Equitable Treatment.” Pinnacle’s
need for cutting its Pilots’ labor costs, very substantially, was overwhelmingly
established. But under its proposal, the Pilots would share to only a very modest extent,
through profit sharing or equity participation, in the restored profitability that would
hopefully come after the Pilots’ sacrifices. That failed to satisfy the requirement of Fair
and Equitable Treatment, and they were fully justified in declining to agree to a proposal
structured in that manner.
Third, the Court was troubled by Pinnacle’s failure to make any movement
whatever in its aggregate demands after filing its motion, and by Pinnacle’s insistence on
bargaining only with respect to how the Pilots would make the overall concessions that
Pinnacle sought. While it is true, as Pinnacle argues, that a debtor seeking 1113 relief
should not make demands at a high level in contemplation of reducing them thereafter,
the Court is unwilling to endorse Pinnacle’s position that its absolute refusal to make any
concessions at all in its aggregate demand was required (or even justifiable), at least
under the facts here. Though Pinnacle’s misreading of the law in this area was excusable,
and the Court does not, as a consequence, now find bad faith, the Court holds that
Pinnacle’s total lack of movement gave the Pilots additional good cause to reject
Pinnacle’s proposal.
Accordingly, Pinnacle’s motion is denied without prejudice. If the parties cannot
reach agreement with the assistance of the Court’s analysis of the issues as set forth in
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this Decision,4 Pinnacle can file another motion based on a revised proposal. If any such
motion addresses the concerns the Court has articulated here, it almost certainly will be
granted.
With the exception of one of Pinnacle’s witnesses (whose testimony the Court
found in numerous respects to be unworthy of belief, but which was not particularly
important), the Court found all witnesses whose demeanor it observed to be credible and
candid.
Findings of Fact
5
1. Background
The Court’s Findings of Fact as a consequence of the two sides’ evidentiary
showings—by direct testimony declaration, live cross-examination, redirect, and any
subsequent examination, and exhibits—follow.
Pinnacle is a regional airline that, at the time of its chapter 11 filing, operated over
1,300 flights per day to cities in the United States, Canada, and Mexico.6 Founded in
1985 as Express Airlines I, pre-merger Pinnacle (“Pinnacle I”)7 was created to provide
regional lift to Republic Airlines.8 Republic was acquired by Northwest Airlines
Corporation (“Northwest”) in 1986, and in 1997, Northwest also acquired Pinnacle I.9
4 See Collier on Bankruptcy ¶ 1113.01 (16th Ed.) (“Collier”) (“The language and history of
In 2003, Pinnacle I was spun off by Northwest in an initial public offering although
section
1113 make clear that the preferred outcome under section 1113 is a negotiated solution rather than
contract rejection.”).
5 Likewise, the Court has no reason to doubt the credibility of the witnesses who testified solely by
declaration, and takes their testimony as true.
6 Declaration of John Spanjers, Pinnacle Corp’s Executive Vice President and Chief Operating
Officer, Pursuant to Local Rule 1007-2 (“Spanjers 1007-2”), ECF # 3, April 1, 2012, at ¶ 6.
7 Pre-merger Pinnacle, or “Pinnacle I,” refers to the original Pinnacle company prior to its
acquisition of Colgan Air and Mesaba Aviation, Inc. discussed below.
8 Kasper Decl. ¶ 57.
9 Id.
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Pinnacle I continued to provide regional flying services to Northwest under a multi-year
agreement.10 In 2007, Pinnacle I acquired Colgan Air (“Colgan”), and in July 2010, it
acquired Mesaba Aviation, Inc. (“Mesaba”).11
Currently, Pinnacle’s fleet consists of 140 50-seat Bombardier CRJ-200s and 57
76-seat Bombardier CRJ-900s.12 The aircraft operate as Delta Connection flights under
agreements with Delta Airlines.13 Pinnacle provides short- and medium-haul flights to
and from Delta’s hub airports in Atlanta, Detroit, Memphis, New York City (John F.
Kennedy Airport), and Minneapolis/St. Paul.14 Until recently, Colgan operated a fleet of
55 turboprops under regional lift agreements with United Airlines (or “United”) and US
Airways.15 Pinnacle wound down these operations as part of the restructuring, leaving
Delta as Pinnacle’s only remaining mainline customer, as discussed below in further
detail.16 As of August 2012, Pinnacle had approximately 5,800 employees, including
approximately 2,400 pilots, 1,500 flight attendants, and 80 flight dispatchers.17 More
than 75% of Pinnacle’s 5,800 employees are unionized.18
(a) Regional Airline Industry
Regional carriers, like Pinnacle, are airlines that provide flying services to
mainline carriers on routes where (or at times of day when) passenger demand is not
10 Id.
11 Hallin Decl. ¶ 2; Kasper Decl. ¶ 57.
12 Kasper Decl. ¶ 58.
13 Id.
14 Id.
15 Id. at ¶ 59.
16 Kasper Decl. ¶ 63.
17 Spanjers Decl. ¶ 11.
18 Id.
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sufficient to support using larger mainline aircraft.19 Though operated by a regional
carrier, regional aircraft and flights display the livery and adopt the brand of the mainline
partner.20 From the point of view of the passenger, therefore, the regional carrier flight
represents an integrated service on a single carrier.21
There are two types of regional carriers. Wholly-owned regional carriers are
owned by a mainline airline and generally provide regional lift exclusively to the
mainline carrier.22 For example, American Eagle and Executive Airlines are wholly-
owned subsidiaries that provide regional lift to AMR Corporation (“American Airlines”
or “American”).23 Independent regional carriers, on the other hand, are not owned by
any mainline carrier and frequently provide regional lift to multiple mainline airlines.24
Regional carriers are compensated by their mainline partners under one of two
types of agreements. Under a pro-rate agreement, the fee paid by the mainline airline is
dictated by ticket sales or the number of passengers, and the regional airline pays certain
“Pass-Through Costs” like fuel, engine maintenance, ground handling, insurance,
aircraft ownership costs, and other enumerated costs.25 Thus, both the regional and the
mainline carrier share risks associated with fuel prices, passenger demand, and fares.26
19 Kasper Decl. ¶ 32.
Most pro-rate agreements today cover turboprop flying, and often for subsidized
20 Id.
21 Id.
22 Id. at ¶ 37.
23 Id.
24 Id. at ¶ 38.
25 Kasper Decl. ¶ 42; Spanjers 1007-2 ¶ 7.
26 Kasper Decl. ¶ 40.
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“Essential Air Services” routes (routes between small communities and larger hubs that
receive a subsidy from the U.S. Department of Transportation).27
By contrast, under a “Capacity Purchase Agreement,” the mainline airline pays
the regional airline a fixed dollar rate per block hour, day, or departure to operate
regional aircraft (either turboprops or regional jets).28 Pass-Through Costs are also often
covered by the mainline airline under such agreements, under which the regional carrier
receives fixed fees, and the mainline carrier assumes all risk associated with passenger
demand and fuel prices.29 In addition, the mainline carrier is solely responsible for
determining the regional carrier’s schedule (both routes and flight times) and for the sale
and marketing of tickets.30 Profit under a Capacity Purchase Agreement is driven by a
regional carrier’s ability to control costs, since the regional carrier receives the fixed fees
irrespective of ticket sales or fares charged.31 And because so many of the other costs
(the Pass-Through Costs) are covered by the mainline airline, labor (which is not a Pass-
Through Cost) is generally the largest controllable cost for regional airlines.32
27 Id.; id. at 28 n.54.
By
shifting most of the risks to the mainline airlines, Capacity Purchase Agreements (which
now make up the bulk of agreements between regional and mainline airlines) have
essentially made the regional airline industry a commoditized business, with major
28 Id. at ¶ 41.
29 Kasper Decl. ¶ 42.
30 Id.
31 Id. at ¶ 43.
32 Id.
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airlines generally relying on a number of different regional carriers to provide regional
lift.33
(b) Recent Challenges Facing the Mainline Airline Industry
In recent years, mainline carriers like American, Delta, United, and US Airways
have faced increased pressure to control their costs as a result of several factors.34 “Low
Cost Carriers,” like JetBlue, Spirit, Virgin America, and Allegiant, have expanded
rapidly both in terms of size and geographic coverage.35 Low Cost Carriers benefit from
a lower cost structure as a result of simplified fleets of one or two types of aircraft only;
more flexible work rules; quick turn-around times; and employee populations of lesser
seniority than large network carriers because of their relatively recent entries to the
market.36 This dramatic growth of Low Cost Carriers as well as widespread passenger
acceptance of Low Cost Carriers has placed downward pressure on mainline carriers to
provide cost-competitive lift.37 Internet-based airline search and booking tools have
increased price transparency, resulting in further downward pressure on airfares.38
Higher fuel costs have forced mainline carriers to reduce services that cannot be operated
economically.39 Carriers are unable to cover the higher fuel costs without raising fares to
help offset the increased costs. But passenger demand decreases when fares are raised,
forcing mainline carriers to reduce capacity, which results in decreased revenues.40
33 	Id. at ¶ 44.
And
34 Id. at ¶ 7.
35 	Id.
36 Id. at 3 n.3.
37 	Id. at ¶ 8.
38 Id. at ¶ 11.
39 	Id. at ¶ 13.
40 Id.
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more stringent and time-consuming passenger screening procedures following the
September 11th terrorist attacks—what has become known as the “hassle factor”—have
also resulted in decreased passenger demand.41
These factors, among others, have contributed to over $30 billion in operating
losses for large mainline carriers since 2001, and are at least in part what has forced all of
the surviving mainline carriers (American, United, Delta, and US Airways) to file for
chapter 11 protection and seek reduction of controllable costs, including their costs for
regional lift.42
(c) Recent Challenges Facing the Regional Airline Industry
Although regional airlines initially were largely immune from the factors
affecting mainline carriers (due in large part to the protection regional carriers received
under Capacity Purchase Agreements from both demand risk and increased fuel costs),
regional carriers are now feeling the effects.43 The “hassle factor” has had a particularly
harsh impact on short-haul flying (less than 500 miles), where regional aircraft are most
commonly used, thus reducing demand by mainline carriers for regional carrier
services.44 Although fuel is generally covered by the mainline carrier under a Capacity
Purchase Agreement, increased fuel prices make regional aircraft—especially 50-seat
regional jets—less cost effective.45
41 Id. at ¶ 14.
For example, 50-seat regional jets consume 55% to
126% more fuel per seat hour than small mainline jets like the Boeing 737 or Airbus A-
42 Id. at ¶ 15.
43 Id. at ¶ 16.
44 Id. at ¶¶ 14, 48.
45 Id. at ¶ 19.
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320.46 Mainline airlines therefore have reduced the number of 50-seat regional jet block
hours flown by regional partners by 24% since 2005, and further reductions are
expected.47 During their chapter 11 restructurings, many mainline carriers reduced the
number of less efficient regional aircraft, including those operated by independent
regional carriers, and rejected or renegotiated unfavorable contracts with regional
carriers.48 In addition, the large number of mergers between mainline carriers over the
past several years has left independent regional carriers with fewer mainline airline
customers for whom they can provide regional lift services.49 In 2011, these factors,
among others, resulted in profit margins for regional carriers dropping to their lowest
levels in a decade.50
(d) Recent Challenges Specifically Facing Pinnacle
Pinnacle began experiencing financial difficulties in recent years as a result of a
confluence of issues. In 2011, Pinnacle operated at a net loss of $31 million, and
Pinnacle’s profit margin (-2.6%) reached its lowest level since 1998.51 Pinnacle replaced
its former Chief Executive Officer and Chief Operating Officer that year with Sean
Menke and John Spanjers respectively.52
46 Id. at ¶¶ 34, 49.
In July 2011, the new management conducted
an assessment of Pinnacle’s business and identified several factors that contributed to
Pinnacle’s questionable viability, including: (1) delays in integrating the flying of
Pinnacle I and Mesaba; (2) unanticipated developments arising out of a new “Joint
47 Id. at ¶ 19.
48 Id. at ¶ 17.
49 Id. at ¶ 18.
50 Id. at ¶ 21.
51 Id. at ¶¶ 22, 23.
52 Spanjers 1007-2 ¶ 16.
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Collective Bargaining Agreement” with the Debtors’ pilots; and (3) increasingly
unprofitable contracts with mainline airline customers.53
(i) Integration Delays
At the time it acquired Mesaba, Pinnacle announced its intention to merge the
three carriers (Pinnacle I, Mesaba, and Colgan) into two, with one operating regional jet
aircraft and the other operating turboprop aircraft.54 Although the pre-merger carriers
operated some common aircraft types, the carriers had independent operating standards
and procedures for those aircraft.55 To effectively merge the carriers, the operations
needed to be combined on a single operating certificate issued by the Federal Aviation
Administration (“FAA”).56 At the time, Pinnacle had three separate operating certificates
for each of its three airlines.57 Moving Mesaba under the Pinnacle operating certificate
was originally scheduled for May 2011, but Pinnacle was not able to obtain FAA
approval in time, and the move was delayed until January 2012.58 The delays resulted in
deferral of cost savings, and also required Pinnacle to hire additional employees and
consultants to accomplish the consolidation.59 Full integration of maintenance and flight
operations of the Pinnacle I and Mesaba jets is not expected to be completed until early
2013, even though the Mesaba jets have now been moved under the Pinnacle operating
certificate.60
53 	Id.
54 Hallin Decl. ¶ 3.
55 	Id. at ¶ 8.
56 Id.
57 	Spanjers 1007-2 ¶ 17.
58 Id. at ¶ 18.
59 	Hallin Decl. Exh. B (Presentation to the Labor Leadership, May 8, 2012), at 8.
60 Spanjers 1007-2 ¶ 19.
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(ii) Joint Collective Bargaining Agreement
Following the Mesaba acquisition, the Company and the Pilots entered into
negotiations in the fall of 2010 in an effort to create a single collective bargaining
agreement that would cover all three carriers.61 By February 2011, the Company reached
an agreement with the joint representative of the pilots for all three subsidiaries—the
Joint Collective Bargaining Agreement.62 But there were two problems that arose as a
consequence of the Joint Collective Bargaining Agreement: (1) recent analysis showed
the compensation of the pilots to be above market average with respect to wages,
benefits, and work rules; and (2) under the Joint Collective Bargaining Agreement, an
“integrated seniority list” had to be created that would merge the pilot seniority lists of all
three subsidiaries.63
With respect to the first of the problems (pilot costs), Pinnacle’s pilots’
compensation, in terms of wages, benefits, and work rules, is above market average.
Pinnacle’s pilot pay scale is among the highest in the regional airline industry, and this
disadvantage is exacerbated by Pinnacle’s “seniority disadvantage”—i.e., the relatively
high seniority of its pilots compared to those of competitors—which leads to significantly
higher costs.64 These higher costs, compared to younger airlines such as GoJet Airlines
(“GoJet”) and Compass Airlines (“Compass”), put Pinnacle at a disadvantage.
Pinnacle’s pilot work rules limit pilot productivity65
61 Hallin Decl. ¶ 4.
by a series of provisions, including
62 Spanjers 1007-2 ¶ 20.
63 Id. at ¶¶ 20, 21.
64 Glass Decl. ¶ 72.
65 Pilot cost per block hour is a common metric used to measure pilot productivity. It compares the
number of block hours paid to the number of block hours flown. Block hours paid will always be
higher than block hours flown because pilots are paid block hour time for vacation, training, sick
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work rules related to minimum day rigs, open time posting, and duty days.66 Pinnacle is
also uncompetitive with respect to rules governing pilots’ ability to take time off (e.g.,
vacation accruals, vacation credit, extended sick leave, and use of Family Medical Leave
Act).67 Under these terms, Pinnacle pilots are less productive, requiring Pinnacle to
utilize more pilots and more payable hours than competitors to fly comparable routes and
aircraft. Under Pinnacle’s current active medical plan, Pinnacle’s employee contribution
level is lower than that of employees at other carriers.68 Pinnacle is also one of only a
handful of airlines to still offer medical plans to its retirees.69 In addition, Pinnacle’s
current 401(k) plan is one of the most generous in the regional industry.70 For Pinnacle’s
most senior employees, for example, Pinnacle matches employee contributions up to
12.5%.71
With respect to the second of the problems (integration of the seniority lists),
difficulties arose in connection with the development of one unified seniority list. Pilots
bid on vacancies to obtain a new domicile, new aircraft, or new category, and bids are
honored based on seniority.72
leave, and similar things. The closer the ratio is to 1, the more efficient the company. Trial Tr.
151:5-22, October 17, 2012 (Kasper). 	After the Joint Collective Bargaining Agreement was
entered into, Pinnacle’s pilot cost per block hour rose dramatically. Trial Tr. 240:2-8, October 17,
2012 (Ryan).
The integration of the three seniority lists into one resulted
66 Id. at ¶ 35.
67 Id.
68 Id. at ¶ 41.
69 Id. at ¶ 42.
70 Id. at ¶ 43.
71 Id.
72 Spanjers 1007-2 ¶ 22.
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in new seniority relationships among thousands of pilots.73 Pilots undergo training each
time they move to a new aircraft or category, and under the Joint Collective Bargaining
Agreement, the pilots receive full salary during training.74 In addition, when a pilot
moves to fill a vacancy, his or her position must also be filled through the bidding
system.75 Prior to the integration, pilots at each airline were only permitted to bid on
vacancies at their airline specifically.76 Following the integration, pilots were permitted
to bid on vacancies at any of the three airlines, which opened up many new routes and
different aircraft possibilities for the pilots, all of which necessitated additional training.77
The Joint Collective Bargaining Agreement did not contain safeguards (or “fences”) that
would keep training costs for this type of movement of pilots in check by essentially
preventing pilots from bidding or being awarded positions at the other airlines before the
companies were operationally merged.78
The delayed integration (discussed previously) further added to the training costs
associated with the Joint Collective Bargaining Agreement because pilots not only
needed to be trained on transfers to different aircraft; they also needed to be trained for
transfers even to the same aircraft type if the aircraft was under a different operating
certificate.79
73 Id. Because the different pilot groups could not agree on an integration methodology, arbitrator
Richard Bloch was called upon to decide the seniority issue. Hallin Decl. ¶ 6. Bloch issued an
award establishing the integrated seniority list on June 16, 2011 (the “Bloch Award”). Id.
74 Spanjers 1007-2 ¶ 22.
75 Id.
76 Id.
77 Id.
78 Hallin Decl. ¶ 5; Spanjers 1007-2 ¶ 22.
79 Spanjers 1007-2 ¶ 23.
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The Joint Collective Bargaining Agreement does not become “amendable,” within
the meaning of the Railway Labor Act, until February 18, 2016.80
(iii) Unprofitable Contracts
An analysis of Pinnacle’s contracts in 2011 showed that non-compensable costs
incurred by Pinnacle under their existing contracts with mainline carriers, including
increased labor costs under the Joint Collective Bargaining Agreement and costs
associated with maintaining an aging fleet, were in excess (or soon would be in excess) of
fees received by Pinnacle under its contracts.81 Neither the pro-rate agreement under
which Pinnacle was providing Saab 340 turboprop flying to US Airways nor the Capacity
Purchase Agreement under which Pinnacle was providing Q400 turboprop flying to
United were profitable.82 Also, the profitability of Pinnacle’s three existing contracts
with Delta to provide CRJ-200 and CRJ-900 flying was also in question.83
2. Initial Cost Saving Measures
Prior to the filing, Pinnacle engaged in a number of cost saving measures in an
effort to avoid bankruptcy.84 Pinnacle reduced the number of officers from 29 to 18, and
26 “director”-level positions were eliminated—a 40% reduction.85 The number of
support staff and other employees was also reduced.86
80 Hallin Decl. ¶ 4.
Merit increases and discretionary
81 Spanjers 1007-2 ¶ 26.
82 Id.
83 Id.
84 Id. at ¶ 29.
85 Id. at ¶ 30.
86 Id.
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bonuses scheduled for 2012 were eliminated, producing an estimated savings of
approximately $3 million.87
Pinnacle sought concessions from its lenders and other creditor concessions. 88
Pinnacle was able to obtain some short-term liquidity in early 2012 as a result of an
agreement reached with Export Development Canada, Pinnacle’s lender in connection
with mortgages for purchased Q400 and CRJ-900 aircraft, to defer payments until April
2012.89
Pinnacle also reached out to its unions pre-filing to negotiate potential pay cuts
and work-rule concessions, and to secure limitations on pilot transfers that would help
mitigate the issues related to integration of the seniority lists. 90 The parties ultimately
were not able to come to an agreement.91
3. Chapter 11 Filing and Immediate Aftermath
The cost saving measures were not sufficient to stave off bankruptcy, however,
and on April 1, 2012, Pinnacle Airlines Corp. and its affiliates92
87 Id.
filed voluntary chapter
11 petitions. The following day, Pinnacle filed a motion requesting that the Court
authorize assumption of Pinnacle’s revised “Airline Service Agreements” (sometimes
referred to in testimony or briefing as “ASAs”) with Delta. Pinnacle also sought
88 Id. at ¶ 38.
89 Id.
90 Id. at ¶ 32.
91 Spanjers Decl. ¶ 14.
92 See note 2 above.
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approval of an agreement with Delta, as lender, under which Pinnacle would receive
debtor-in-possession (“DIP”) financing from Delta (the “DIP Financing Agreement”).93
Under the DIP Financing Agreement, Delta provided a $74.285 million DIP
facility, which, subject to various conditions, could be convertible to exit financing.94
The DIP Financing Agreement contained various milestones, financial covenants, and
additional requirements with which Pinnacle would have to comply to avoid an event of
default.95 The DIP Financing Agreement contained (among other financial covenants) a
minimum unrestricted liquidity covenant that dictated that Pinnacle’s unrestricted cash
and cash equivalents could not fall below $25 million as of the last day of any calendar
month, or the first day of the next month if the last day were to fall on a weekend.96
In addition, the DIP Financing Agreement contained various milestones with
which Pinnacle would have to comply relating to its collective bargaining agreements.
Pinnacle was required under the DIP Financing Agreement to file a motion under section
1113 “reasonably acceptable” to Delta in both form and substance if Pinnacle could not
reach a consensual agreement with its unions. The DIP Financing Agreement further
dictated a time frame in which this was to occur, which was extended through
amendments to the DIP Financing Agreement to a final deadline of September 13,
2012.97
93 Debtors’ Motion for Approval of DIP Financing (“DIP Financing Motion”), April 2, 2012,
ECF # 23.
94 Shapiro Decl. ¶ 7.
95 Id.
96 Shapiro Decl. Exh. 1 ($74,285,000 Senior Secured Super-Priority Debtor in Possession Credit
Agreement (“DIP Financing Agreement”)), May 18, 2012, Annex G/Section 6.10(a).
97 DIP Financing Agreement, Annex F/Section 5.10(II).
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Additionally, any final order of the Court granting a section 1113 motion or
approving consensual collective bargaining agreement modifications also needed to be
“reasonably acceptable” to Delta.98 Violation of any of the financial covenants,
milestones, or other requirements contained in the DIP Financing Agreement would
trigger an automatic event of default, entitling Delta to accelerate all amounts due to it
under the DIP Financing Agreement on five days’ notice.99
Although Pinnacle and its advisors had sought financing from a number of
potential sources, in the end, Delta was the only option.100
4. Initial May Proposal to Unions
The onerous milestones,
financial covenants and other provisions in the DIP Financing Agreement and the
associated DIP Financing Order had to be approved for lack of viable alternatives. They
remain in the DIP Financing Agreement and DIP Financing Order to this day.
On May 8, 2012, Pinnacle made an initial section 1113 proposal to its unions.101
More than 75% of Pinnacle’s workforce is unionized, with the pilots represented by the
Air Line Pilots Association (“ALPA”),102 the flight attendants represented by the
Association of Flight Attendants (“AFA”), and the flight dispatchers represented by the
Transport Workers Union (“TWU”).103
98 Id. at 5.10(II)(6).
99 Id. at Section 1.14; Order Approving DIP Financing (“DIP Financing Order”), ECF # 316,
¶ 9(a).
100 Spanjers 1007-2 ¶ 40.
101 Spanjers Decl. ¶ 15.
102 ALPA is the largest airline pilot union in the world, representing over 51,000 pilots at both
regional and mainline carriers. Wychor Decl. ¶ 2. 	ALPA represents pilot groups through a
“Master Executive Council” at each airline, the representatives of which are elected by the
ALPA membership at the airline. Id. at ¶ 3.
103 Spanjers Decl. ¶ 11.
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(a) Business Plan
At the May 8, 2012 meeting with Pinnacle’s unions, Pinnacle presented the
unions with a six-year business plan. Pinnacle’s remaining contracts,104 upon which the
business plan was based, involve two separate Capacity Purchase Agreements covering
50-seat CRJ-200 flying and 76-seat CRJ-900 flying for Delta.105 Pinnacle flies 140 CRJ-
200s and 41 CRJ-900s for Delta pursuant to those agreements.106 The agreements extend
through 2022, with termination of 78 of the CRJ-200s scheduled to begin in 2019, with
rate resets in 2018.107
In developing its business plan and calculating the initial labor “Ask,” Pinnacle
had three primary goals:
(1) attaining a cost structure that would avoid losing money on its only
existing contracts; (2) achieving a sufficient profit margin to attract an
investor to allow Pinnacle to emerge from bankruptcy and to generate
excess cash for future growth and protection against unforeseen
fluctuations; and (3) achieving an overall competitive cost structure
allowing the company to win future new business.108
104 As mentioned previously, Pinnacle terminated the turboprop flying being done by Colgan on
behalf of United Airlines and US Airways because the agreements were unprofitable. 	Kasper
Decl. ¶ 59; Spanjers Decl. ¶ 9; Spanjers 1007-2 ¶ 35. Pinnacle will also wind down 16 CRJ-900s
covered by a separate Capacity Purchase Agreement with Delta beginning in the first half of 2013.
Spanjers Decl. ¶ 9. Pinnacle also terminated its ground operations division, which offered ground
handling services like loading and unloading checked bags, for its mainline partners as well as
other airlines. Kasper Decl. ¶ 60. As a result, Pinnacle’s sole remaining flying is for Delta.
Spanjers Decl. ¶ 9.
Although Delta is Pinnacle’s sole mainline customer, Delta uses a number of other regional
carriers (“Delta Connection carriers”) to provide regional lift including SkyWest (and its
subsidiary ExpressJet), Republic (through its subsidiaries Chautauqua and Shuttle America), and
Trans State Holdings (through its subsidiaries GoJet and Compass Airlines). Kasper Decl. ¶ 63.
105 Spanjers Decl. at ¶9.
106 Id.
107 Id.
108 Spanjers Decl. ¶ 15; see also Trial Tr. 36:10-37:25, October 17, 2012 (Hughes).
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(b) Labor “Ask”
Based on these considerations, initially Pinnacle proposed a package of wage,
benefit, and work rule concessions (from all of its unions) that would produce total
savings of approximately $43 million annually.109 In developing the business plan and
determining the amount of the initial “Ask,” Pinnacle relied upon the rates agreed to in its
recent amendments to its contracts with Delta so as to ensure that labor cost reductions
would enable it to continue bidding for additional contracts at those rates.110 At the time,
Pinnacle believed these rates to be industry-competitive given Delta’s recent agreement
to them.111 Because pricing terms of regional airline contracts are generally not publicly
available, Pinnacle was not able to rely on competitors’ rates in determining its initial
$43 million “Ask.”112
Pinnacle first presented a general overview of the proposal to all of the unions,
and then met with each union individually.113 Pinnacle provided the unions with an
electronic “Data Room” and access to a “live” version of the model underlying
Pinnacle’s business plan, which the unions were free to manipulate.114
Of the approximately $43 million initial ask of labor, Pinnacle sought
approximately $33 million from pilots in revisions to wages, work rules, and benefits.115
109 Spanjers Decl. ¶ 15.
110 Id. at ¶ 16.
111 Trial Tr. 29:10-31:7, October 17, 2012 (Hughes).
112 Spanjers Decl. ¶ 16.
113 Id. at ¶ 17.
114 Id.
115 Hallin Decl. Exh. D.
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5. Delta’s Price Gap Calculations
In May 2012, as a result of an agreement Delta reached with its pilot union on
May 21, 2012, Delta announced that it would be adding 70 “dual class” regional aircraft
(70- or 76-seat aircraft that provide first class seating, as well as coach) and substantially
decreasing the number of 50-seat aircraft (single class) flown by its regional carriers.116
Delta plans to reduce its total number of 50-seat aircraft by at least 200 to 125 or fewer
over the next two to three years.117 Pinnacle’s fleet consists of 140 50-seat aircraft;
therefore, at least some of the reduction will need to come from Pinnacle’s fleet.118
On June 15, following Delta’s announcement of the new agreement with its pilot
union, Pinnacle advisor Virginia Hughes, of Seabury Advisors LLC (“Seabury”);
Pinnacle Chief Restructuring Officer Steven Rossum; and Pinnacle President and Chief
Executive Officer (“CEO”) John Spanjers met with Delta representatives in
Minneapolis.119 The Delta representatives then informed Pinnacle that Pinnacle’s rates
for 76-seat flying per aircraft exceeded the average rates charged by Delta’s other
regional carriers for similar-gauge aircraft.120 The Delta representatives noted that the
price spread amongst carriers providing 76-seat lift was narrow—ruling out the
possibility that the price gap was driven by one or two outliers.121
116 Id. at ¶ 23; Hughes Decl. ¶ 36.
They further reported
that Pinnacle’s rates for 50-seat flying also exceeded average rates charged by other Delta
117 Hughes Decl. ¶ 36
118 Id.
119 Spanjers Decl. ¶¶ 7, 19.
120 Id. Specifics as to the exact amount of the Delta price gap calculation (the “Delta price gap” or
“price gap calculation”), Pinnacle’s liquidity situation, and other confidential mattes, appear in a
supplement to this Decision filed under seal (the “Confidential Supplement”), setting forth
findings and analysis which are inappropriate for disclosure in the public domain.
121 Trial Tr. 52:7-13, October 17, 2012 (Hughes).
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Connection carriers.122 The Delta representatives did not reveal the details of their
analysis, however, citing confidentiality obligations to other Delta Connection
providers.123
Instead, Delta provided a letter to Mr. Spanjers, dated August 1, 2012, from
Senior Vice President of Delta Connection Donald Bornhorst, that memorialized the
conclusions and methodology Delta had employed in reaching the price gap
calculation.124 Delta compared the estimated 2012 base rate amounts payable by Delta
under its agreements with Pinnacle with the average estimated base rate amounts payable
by Delta under its agreements with other Delta Connection carriers.125
If the price gaps identified by Delta were in fact accurate, Pinnacle’s management
understood that Pinnacle would be hard pressed to win new flying from Delta or any
other major carrier if Pinnacle could not achieve cost savings sufficient to bring its rates
more in line with other regional carriers.126 The Court finds this not to be merely
Pinnacle management’s understanding; it is a fact. On June 22, 2012, Pinnacle
suspended negotiations with its unions to reassess its business plan, and set out to
corroborate the price gaps identified by Delta through Pinnacle independent analysis.127
6. Corroborating the Price Gaps
Without access to information on rates other regional carriers charge mainline
carriers, Pinnacle instead focused on validating Delta’s price gap calculation through a
122 Cude Decl. Exh. A. (Bornhorst Letter), at 2. Again, the exact amount of this differential can be
found in the Confidential Supplement.
123 Spanjers Decl. ¶ 19.
124 Id.
125 Cude Decl. Exh. A. (Bornhorst Letter), at 2.
126 Spanjers Decl. ¶ 19.
127 Id. at ¶¶ 7, 21.
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comparison of Pinnacle’s costs to those of competitors.128 Since Delta had announced its
intention to dramatically scale back its 50-seat flying with 70- and 76-seat flying,
Pinnacle chose to focus on the 76-seat flying price differential.129 To analyze the price
gap, Pinnacle employed the services of Seabury’s Virginia Hughes (which provides
advisory services to financially troubled companies),130 and Daniel Kasper, an airline
industry expert employed by consulting group Compass Lexecon.131
(a) Hughes Analysis
Ms. Hughes sought to corroborate Delta’s price gap calculation by comparing
Pinnacle’s labor costs to those of its competitors.132 Labor costs were singled out
because labor costs are the largest controllable (i.e., non pass-through) costs for regional
airlines—in Pinnacle’s case accounting for 70% of forecasted controllable costs.133
Pinnacle competitors Compass and GoJet were chosen as the most appropriate
comparisons because, as Ms. Hughes reasoned, the regional airline industry is
increasingly commoditized, and Pinnacle lacks any meaningful ability to compete for
additional business if it cannot offer rates that are among the industry’s lowest.134
128 Id. at ¶ 21.
129 Id. at ¶ 20.
130 Hughes Decl. ¶ 1. 	Ms. Hughes was initially retained by Pinnacle in November 2011, and
effectively functioned as Pinnacle’s de facto Chief Financial Officer (“CFO”), especially
following Ted Christie’s resignation as CFO in March 2012. Id.; Trial Tr. 9:18-10:1, October 17,
2012 (Hughes).
131 Spanjers Decl. ¶ 24.
132 Hughes Decl. ¶ 23.
133 Kasper Decl. ¶ 66.
134 Trial Tr. 53:19-23, October 17, 2012 (Hughes); Hughes Decl. ¶ 24.
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Cost comparisons were conducted based largely on two categories of information:
pay scales and seniority distributions.135 For a comparison of pay scales, Ms. Hughes
tracked the differences between the hourly rate paid to Captains, First Officers, and flight
attendants at each level of the seniority scale.136 She also tracked the differences in
seniority distributions at the different airlines by analyzing the number of Captains, First
Officers, and flight attendants at each level of the seniority scale.137 Pinnacle has a
substantial seniority disadvantage due to the airline’s longevity, which is exacerbated by
the Joint Collective Bargaining Agreement.138
Ms. Hughes applied the estimated seniority disadvantage in comparing Pinnacle’s
proposed pay rates under its May 2012 labor ask to its competitors’ pay rates.139 The
effect of Pinnacle’s 401(k) disadvantage was also calculated by applying the seniority
comparison and pay rates to each airline’s 401(k) match rates.140 Last, pilot work rule
advantages and disadvantages were assessed by comparing Pinnacle’s pilot work rules
under the May 2012 labor “Ask” to the work rules of Compass and GoJet.141
Based upon these categories, Ms. Hughes computed Pinnacle’s total estimated
cost disadvantage, as compared to Compass and GoJet, to be near Delta’s price gap.142
135 Hughes Decl. ¶ 25.
136 Id.
137 Id.
138 Id. at ¶ 26.
139 Hughes Decl. ¶ 27.
140 Id.
141 Id. at ¶ 28.
142 Id. at ¶¶ 29, 30. Ms. Hughes was not able to conduct a similar analysis to corroborate the price
gap identified by Delta related to 50-seat aircraft because there is no publicly available data with
which to reliably estimate the seniority distribution of 50-seat carriers. Hughes Reply Decl. ¶ 22.
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Ms. Hughes calculated that Pinnacle would need to obtain an additional
$33.9 million in savings above that requested in Pinnacle’s May labor “Ask” in order to
bridge the price gaps—increasing the total annual required savings to $76.5 million.143
(b) Kasper Analysis
Mr. Kasper relied on publicly available U.S. Department of Transportation (“U.S.
DOT”) Form 41 data (“Form 41 data”) to replicate the Delta price gap.144 The U.S.
DOT Form 41 database compiles the financial and traffic data required by federal
regulations to be submitted to the U.S. government on a periodic basis by individual
airlines.145 Because labor would account for the largest portion of controllable costs, Mr.
Kasper sought (as Ms. Hughes did) to corroborate the price gap by showing that the labor
costs alone approached this gap.146
According to 2011 Form 41 data, Pinnacle’s pilot costs per block hour for 76-seat
flying were higher than all other Delta Connection carriers operating 76-seat regional jets
(other than Comair, which was in the process of being wound down by Delta, and now
has ceased operations).147 Pinnacle’s costs per pilot block hour for 76-seat flying still
exceeded the other Delta Connection carriers, with the exception of SkyWest, even after
applying the labor cost savings under the May 18 ask (-18.3%) and adding in the
increased costs (2.9%) resulting from 16 CRJ-900s leaving the fleet (largely due to
increased pilot seniority).148
143 Hughes Decl. ¶ 33.
Mr. Kasper used this cost per block hour to determine
144 Trial Tr. 154:2-6, October 17, 2012 (Kasper).
145 Kasper Decl. ¶ 5.
146 Id. at ¶ 66.
147 Id. at ¶ 81; Trial Tr. 124:3-4, October 16, 2012 (Glass).
148 Id.; Kasper Reply Decl. ¶ 10.
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Pinnacle’s cost disadvantage vis-à-vis the other Delta Connection carriers,149 and
determined that, based on pilot costs alone, Pinnacle had a cost disadvantage per 76-seat
aircraft that exceeded the Delta price gap compared to Compass’ annual E-175 pilot
costs, and compared to the other carriers (Shuttle America, SkyWest, ExpressJet/ASA),
constituted a substantial portion of the Delta price gap.150
For smaller regional jets with 50 seats or fewer, Mr. Kasper computed Pinnacle’s
cost per pilot block hour to be just below the average for other Delta Connection carriers
(excluding Comair).151 But Mr. Kasper believed that the methods used to assess
Pinnacle’s 76-seat cost disadvantage using publicly available Form 41 data were not a
reliable basis for assessing Pinnacle’s 50-seat cost disadvantage “due to the chaotic status
of the current market for 50-seat flying” (i.e., the large reductions in 50-seat regional jet
block hours over the last several years by mainline carriers).152
7. Revised Proposal
Pinnacle delivered a revised section 1113 proposal to the unions on August 16,
2012, along with a revised business plan.153 The proposal consisted of wage, benefit, and
work rule modifications totaling $76.5 million (the amount Pinnacle and its advisors
determined would be required in aggregate labor savings per year to eliminate the Delta
price gap154 (and, the Court infers, to get “a little more”)).155
149 Annual pilot costs were calculated assuming two pilots per aircraft and 9.5 hours of aircraft
utilization 365 days a year. Kasper Decl. ¶ 82, 60 n.128.
The August proposal
150 Kasper Reply Decl. ¶ 10; id. at 6 n.18.
151 Corrections to Kasper Decl., ECF # 660, Exh. 24.
152 Kasper Reply Decl. ¶ 16.
153 Spanjers Decl. ¶ 7.
154 Id. at ¶¶ 25, 31.
155 See note 268 below.
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contained all of the work rule and benefit modifications included in the May proposal,
and in addition, various new items.156 Of the $76.5 million, $59.6 million was sought
from the pilots; $6.5 million from the flight attendants; and a little less than $200,000
from flight dispatchers.157 An additional $10.1 million in annual savings was expected
from salary cuts, benefit reductions, and work rule modifications for non-unionized
employees.158
Pinnacle reasoned that the Pilots were asked to contribute the greatest portion of
the overall savings because (1) pilot costs constituted the largest component of Pinnacle’s
labor costs, and (2) Pinnacle’s pilot costs were also furthest from the industry norm in
comparison to the other labor groups—especially when factoring in seniority
disadvantage. 159 To specifically address the seniority disadvantage, the proposal
included several changes to pay rates, generally reducing the premium in pay that would
result from seniority.160 For example, longevity steps would be capped at twelve years
for Captains, and four years for First Officers.161
Although the new plan incorporated the higher labor “Ask,” Pinnacle did not
adjust the revenue projections on the long-range outlook.162 A profit sharing plan,
however, was added to the plan.163
156 Trial Tr. 55:9-56:9, October 16, 2012 (Glass).
157 Hallin Decl. ¶ 30; Hunyor Decl. Exh. 1.
158 Hunyor Decl. Exh. 1.
159 Spanjers Decl. ¶ 31.
160 Glass Decl. Exh. 51 (Pinnacle Airlines 1113(c) Restructuring Proposal to the Air Line Pilots
Association, August 16, 2012 Term Sheet), Attachment A.
161 Id.
162 Trial Tr. 44:20-23, October 17, 2012 (Hughes).
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8. Section 1113 Motion and Continued Negotiations
On August 30, 2012, Pinnacle reached a tentative agreement with the TWU on
behalf of Pinnacle’s flight dispatchers, and the agreement was ratified on September 11,
2012.164
Unable to reach similar agreement with ALPA and the AFA on behalf of the
flight attendants, Pinnacle filed its motion, under section 1113, for leave to reject its
collective bargaining agreements with each union on September 13, 2012.
Negotiations continued following the filing of the motion, and Pinnacle and the
AFA came to a tentative agreement late on Friday, October 12, four days before the
scheduled trial.165 The agreement, which was later ratified by the AFA’s membership,
would achieve $6.4 million in savings.166
The negotiations between Pinnacle and the Pilots continued, with both parties
meeting with a mediator. But the two sides were unable to come to a resolution.167 The
Pilots presented various counter-proposals to the Company’s revised August proposal,
both before and after the section 1113 motion filing.168 The Company responded with
revised proposals, the last of which (prior to conclusion of the hearing) was presented to
the Pilots on October 15, 2012.169
163 Trial Tr. 45:5-6, October 17, 2012 (Hughes); Glass Decl. Exh. 51 (Pinnacle Airlines 1113(c)
Restructuring Proposal to the Air Line Pilots Association, August 16, 2012 Term Sheet),
Attachment B.
Although the Company informed the Pilots that it was
willing to consider different means of attaining the $59.6 million total dollar ask, it was
164 Spanjers Decl. ¶ 33.
165 Trial Tr. 21:5-8, October 16, 2012 (Glass).
166 Id.
167 Trial Tr. 12:16-18, October 16, 2012 (Company Counsel).
168 Hallin Decl. Exh. H-J.
169 ALPA Exh. 14.
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unwilling to reduce the dollar amount of the “Ask,”170
9. Liquidity Crisis
and showed no movement with
respect to the total “Ask” whatever.
The possibility of a liquidity shortfall was raised by Pinnacle as early as May 8,
2012, during its presentation to the unions.171 However, as the trial on this motion drew
closer, Pinnacle grew more concerned about its cash levels and its ability to avoid events
of default under various agreements. In her reply declaration submitted on October 12,
2012, Ms. Hughes explained that because Pinnacle does not have a “minimum
utilization” requirement in any of its Delta agreements, Delta is free to reduce its use of
Pinnacle services, and in fact Delta has reduced its use of Pinnacle aircraft, resulting in
reduced revenues for Pinnacle and lower projected cash levels.172
10. Section 1113 Trial
As noted previously,
specifics as to Pinnacle’s liquidity situation appear in the Confidential Supplement.
The Court held a four-day trial beginning on October 16, 2012. Consistent with
the Court’s Case Management Order and its need to receive quantitative and technical
information in writing, direct testimony was taken by declaration, and cross-examination,
redirect, and any subsequent examination proceeded live. Also, certain witnesses
supplemented their written declarations by providing oral direct testimony in Court as to
events that occurred since they submitted their declarations. The Court heard from
Pinnacle’s witnesses Jerrold Glass (Pinnacle’s lead labor negotiator), John Spanjers
170 Trial Tr. 64:5-7, October 16, 2012 (Glass).
171 Hallin Decl. Exh. B. (Presentation to The Labor Leadership of Pinnacle Airlines, May 8, 2012), at
14. Mr. Glass noted in his testimony that he directly raised the possible liquidity problem at the
negotiating table two or three months before the trial. Trial Tr. 29:10-21, October 16, 2012
(Glass).
172 Hughes Reply Decl. ¶ 5
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(Pinnacle’s President and CEO), Virginia Hughes (Seabury), Jason Cude (General
Manager of Delta Connection Finance), Daniel Kasper (Compass Lexecon), Mark
Shapiro (Barclays Capital), and Patrick Ryan (Vice President of Pinnacle’s Manpower
Planning and Staffing). The Court likewise heard from the Pilots’ witnesses Captain Paul
Hallin (Chairman of the Negotiating Committee of the Pinnacle Master Executive
Council), Marcia Eubanks (lead financial analyst for ALPA), and Captain Thomas
Wychor (Chairman of the Master Executive Council).
11. Ultimate Facts
The Court additionally makes the following findings of ultimate facts:
1. Pinnacle has made a proposal to the authorized representative of
the employees (i.e., the Pilots) covered by the collective bargaining
agreement.
2. The proposal was based on the most complete and reliable
information available at the time of the proposal.
3. Pinnacle provided the Pilots, to the extent Pinnacle could, with
such relevant information as was necessary to evaluate the proposal.
4. Pinnacle met, at reasonable times, with the Union to attempt to
reach mutually satisfactory modifications of the collective agreement.
Pinnacle did so in good faith.
5. In nearly all respects, though not in every respect, Pinnacle’s
proposal was necessary to permit the reorganization of the Debtor.
6. In nearly all respects, though not in every respect, Pinnacle’s
proposal assured that all creditors, the debtor, and all affected parties were
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treated fairly and equitably. To the extent it was not, it was by reason of
its unfairness to the Pilots.
7. The Pilots were justified in refusing to accept Pinnacle’s
proposal as the proposal was tendered to it—or, putting it in the terms of
section 1113(c)(2), the Pilots did not refuse to accept Pinnacle’s proposal
“without good cause.”
Section 1113 of the Bankruptcy Code imposes special requirements for the
rejection of a collective bargaining agreement, to reconcile the reorganization imperatives
of a chapter 11 debtor with the collective bargaining interests of organized employees.
Discussion
173
It was enacted in 1984 in response to the Supreme Court’s decision in N.L.R.B. v.
Bildisco & Bildisco,174 in which the Supreme Court held that a debtor could reject a
collective bargaining agreement as an executory contract by showing that the agreement
“burdens the estate, and that after careful scrutiny, the equities balance in favor of
rejecting the labor contract.”175
In the wake of the Bildisco decision, congressional concerns intensified that
certain companies were misusing the bankruptcy system as an end-run around collective
bargaining.176
173 Northwest Airlines, 346 B.R. at 320.
Consequently, Congress, overruling Bildisco in part, provided that
collective bargaining agreements would not be subject to the general provisions of
174 465 U.S. 513, 526, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) (“Bildisco”).
175 Northwest Airlines, 346 B.R. at 320.
176 See Wheeling-Pittsburgh Steel Corp v. United Steelworkers, 791 F.2d 1074, 1082 (3d Cir. 1986)
(citing Rosenberg, Bankruptcy and the Collective Bargaining Agreement—A Brief Lesson in the
Use of the Constitutional System of Checks and Balances, 58 Am. Bankr. L.J. 293, 312 (1984)).
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section 365, and laid down procedural and substantive prerequisites to a debtor's rejection
of a collective bargaining agreement.
These requirements are imposed on the debtor “to prevent it from using
bankruptcy as a judicial hammer to break the union.”177 The prerequisites, set forth in
section 1113, are aimed at facilitating consensual modifications to collective bargaining
agreements but include finite time periods in recognition of the fact that indefinite delay
can doom a chapter 11 reorganization.178 If the efforts to negotiate a consensual
resolution fail, the court can approve rejection when the statutory requirements have been
met.
Section 1113 has three subsections relevant to this motion. Its subsection (a)
provides that a collective bargaining agreement can be rejected only after compliance
with the requirements of section 1113. Then its subsection (b) lays out steps with which
a debtor or trustee must comply before a motion for approval of rejection can be filed,
and (after any such motion has been filed) before the hearing on it. Then its
subsection (c) lays out requirements for approval of any such motion.
A.
Legal Standards
Subsection (c) provides:
The court shall approve an application for rejection
of a collective bargaining agreement only if the
court finds that—
(1) the trustee has, prior to the hearing,
made a proposal that fulfills the
requirements of subsection (b)(1);
177 In re Maxwell Newspapers, Inc., 981 F.2d 85, 89 (2d Cir. 1972) (“Maxwell Newspapers”).
178 See Northwest Airlines, 346 B.R. at 320.
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(2) the authorized representative of the
employees has refused to accept such
proposal without good cause; and
(3) the balance of the equities clearly
favors rejection of such agreement.
Subsection (b)(1),179 referenced in subsection (c) as establishing the requirements
for any satisfactory modification proposal, imposes both procedural and substantive
requirements. As procedural matters, subsection (b)(1) requires that prior to rejecting a
collective bargaining agreement, a debtor provide the union with a proposal for proposed
modifications;180 that the proposed modifications be based on the most complete and
reliable information available at the time of the proposal;181 that the debtor provide the
union with all relevant information that is necessary to assist the union in evaluating the
proposal;182
179 Subsection (b) provides, in full:
and that the debtor bargain in good faith with the union in attempting to
(b)(1) Subsequent to filing a petition and prior to filing an
application seeking rejection of a collective bargaining
agreement, the debtor in possession or trustee (hereinafter in
this section “trustee” shall include a debtor in possession),
shall—
(A) make a proposal to the authorized
representative of the employees covered by such
agreement, based on the most complete and reliable
information available at the time of such proposal,
which provides for those necessary modifications in
the employees benefits and protections that are
necessary to permit the reorganization of the debtor
and assures that all creditors, the debtor and all of the
affected parties are treated fairly and equitably; and
(B) provide, subject to subsection (d)(3), the
representative of the employees with such relevant
information as is necessary to evaluate the proposal.
180 Bankruptcy Code section 1113(b)(1)(A).
181 Id.
182 Bankruptcy Code section 1113(b)(1)(B). 	Also, subsection (b)(2) requires that during the period
between the making of the proposal and the date of the hearing on the motion, the trustee meet, at
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reach mutually satisfactory modifications during the period from the date of the initial
proposal to the date of the hearing before the Court.183
As substantive matters, subsection (b)(1) requires that the proposal be “necessary
to permit the reorganization of the debtor,” 184 and that it “assure that all creditors, the
debtor and all of the affected parties [be] treated fairly and equitably.”185
Effectively then, by reason of the amalgam of the requirements of section 1113’s
subsections (b) and (c), a debtor must show, in addition to compliance with the
procedural requirements, that:
(1) the modifications it seeks are necessary to permit the
reorganization of the debtor;”
(2) the proposal assures that all affected parties are treated “fairly
and equitably;”
(3) the authorized representative of the employees has refused to
accept the proposal without good cause; and
(4) the balance of the equities clearly favors rejection of such
agreement.
The debtor bears the burden of proof, by preponderance of the evidence, on all
elements of section 1113.186
reasonable times, with the authorized representative (i.e. the union) to confer in good faith in
attempting to reach mutually satisfactory modifications of such agreement. 	This effectively
imposes procedural requirements (the duty to meet) and substantive ones (to do so in good faith).
183 Bankruptcy Code section 1113(b)(2).
184 Bankruptcy Code section 1113(b)(1)(A).
185 Id.
186 See Truck Drivers Local 807 v. Carey Transp., Inc., 816 F.2d 82, 88 (2d Cir. 1987) (“Carey
Transportation”); American Airlines, 477 B.R. at 406.
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1. Necessity
“A debtor must show that its proposed modifications to the collective bargaining
agreement are necessary for reorganization.”187 Indeed, as Judge Gropper observed in
Northwest Airlines, “[t]he most fundamental requirement for rejection of a collective
bargaining agreement is that the rejection must be ‘necessary.’”188
In that connection, the Court agrees with Pinnacle’s point, 189 quoting Second
Circuit authority, that a section 1113 proposal must contain “necessary, but not absolutely
minimal, changes that will enable the debtor to complete the reorganization process
successfully.”190 In the Second Circuit, it is true, as Pinnacle argues,191 that the debtor’s
proposal “need not be limited to the bare bones relief that will keep it going.”192
On the other hand, the Court does not understand that to mean, and in any event
the Court is unwilling to hold, that a necessity that exists as a general matter supports a
proposal that goes beyond the demonstrated necessity. That is the teaching of Judge
Lane’s decision in American Airlines, 193 and Judge Drain’s decision in Hostess
Brands194
187 American Airlines, 477 B.R. at 407.
—in each of which the court found that necessity for most of the proposed
188 Northwest Airlines, 346 B.R. at 321 (emphasis added).
189 Pinnacle Br. at 35.
190 Carey Transportation, 816 F.2d at 89-90.
191 Pinnacle Br. at 35.
192 New York Typographical Union No. 6 v. Royal Composing Room, Inc. (In re Royal Composing
Room, Inc.), 848 F.2d 345, 350 (2d Cir. 1988) (“Royal Composing Room”).
193 See 477 B.R. at 454 (denying section 1113 motion without prejudice, where necessity in most, but
not all, respects was shown). Judge Lane later granted section 1113 relief after the debtor
modified its proposal to cure the defects Judge Lane had identified. See In re AMR Corp,
2012 Bankr. LEXIS 4168, 2012 WL 3834798 (Bankr. S.D.N.Y. Sept. 5, 2012). As discussed
below, see page 67 below, this Court would be amenable to a similar scenario here.
194 In re Hostess Brands, Inc., Case No. 12-22052, Tr. of Hrg. of May 12, 2012 (Bankr. S.D.N.Y.
May 12, 2012) (denying section 1113 motion where debtor sought more than what was necessary).
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modifications had been shown, but that it did not support demands that went further.
Though stated in another section 1113 context, an observation by the Tenth Circuit has
broader application, and is equally applicable here: “[a] debtor may not overreach under
the guise of proposing necessary modifications.”195
But the necessity that may be shown includes necessity in the long term, as well
as the short term. To determine whether changes are necessary for a successful
reorganization, the court must “look[ ] into the debtor's ultimate future and estimate[e]
what the debtor needs to attain financial health.”
Thus, necessity that has been
established cannot be used as a Trojan Horse to support proposals that go beyond the
necessity that has actually been shown.
196 And as Judge Lane observed in
American Airlines, quoting earlier analysis by Judge Hardin in Delta Airlines:197
[A] court should focus “on the long-term economic
viability of the reorganized debtor, as opposed to
the debtor's short-term economics as they may have
evolved during the course of the bankruptcy....”198
195 In re Mile Hi Metal Sys., 899 F.2d 887, 893 (10th Cir. 1990).
196 Carey Transportation, 816 F.2d at 89 (emphasis added).
197 In re Delta Air Lines, Inc., 359 B.R. 468 (Bankr. S.D.N.Y. 2006) (Hardin, J.) (“Delta Airlines”).
198 American Airlines, 477 B.R. at 407 (quoting Delta Airlines, 359 B.R. at 477). Judge Hardin also
made another critical point. He stated that “[b]ecause a plan of reorganization may not be
confirmed if it is likely to be followed by liquidation or the ‘need for further financial
reorganization,’ the modifications are proposed with a view to the long-run success of the debtor's
business.” Delta Airlines, 359 B.R. at 477. That is so because section 1129 of the Bankruptcy
Code requires, if a debtor is to confirm a reorganization plan—the ultimate goal of any
reorganization—that the bankruptcy court find, among other things, that:
Confirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of
the debtor or any successor to the debtor under the plan, unless
such liquidation or reorganization is proposed in the plan.
Bankruptcy Code section 1129(a)(11). Thus, even if a debtor’s failure to get its house in order
isn’t critical in the short term, if liquidation in the longer-term is still likely, the debtor cannot
confirm a reorganization plan.
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Caselaw in this area also requires the Court to consider not just the costs inherent
in a debtor’s ability to survive, but also in its ability to compete—at least in cases (like
this one) where the debtor lacks the ability to charge its customers or its contract
counterparties whatever the debtor’s costs require, and the debtor’s ability to survive
depends on its ability to compete. As Judge Lane stated in American Airlines:
It is self-evident that a debtor's long-term ability to
compete in the marketplace for its product is
essential for the viability of any reorganization....199
And like Judge Hardin ahead of him in Delta Airlines, Judge Lane noted the Second
Circuit’s recognition, in Royal Composing Room, 200 of the necessity of rejection when a
debtor's labor costs are higher than those of its competitors and where the debtor faces
“enormous competitive pressure.”201
2. Fair and Equitable Treatment
Section 1113(c)—by reason of its incorporation, in section 1113(c)(1), of
requirements of section 1113(b)(1)—also requires that the debtor’s proposal “assure[]
that all creditors, the debtor and all of the affected parties are treated fairly and
equitably.” This requirement “spread[s] the burden of saving the company to every
constituency while ensuring that all sacrifice to a similar degree.”202
199 American Airlines, 477 B.R. at 407 (quoting Delta Airlines, 359 B.R. at 478).
200 Royal Composing Room, 848 F.2d at 345.
201 American Airlines, 477 B.R. at 407; Delta Airlines, 359 B.R. at 478, in each case quoting Royal
Composing Room, 848 F.2d at 350; see also Northwest Airlines, 346 B.R. at 321 (“[A] debtor’s
proposed modifications are considered necessary if they … are required for the debtor to …
compete in the marketplace upon emergence from Chapter 11.”).
202 Carey Transportation, 816 F.2d at 90 (quoting In re Century Brass Prods., Inc., 795 F.2d 265, 273
(2d Cir. 1986)); American Airlines, 477 B.R. at 408 (quoting Carey Transportation).
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As Pinnacle correctly states,203
Courts take a flexible approach in considering what
constitutes fair and equitable treatment due to the
difficulty in comparing the differing sacrifices of
the parties in interest. . . . . A debtor can meet the
requirement “by showing that its proposal treats the
union fairly when compared with the burden
imposed on other parties by the debtor's additional
cost-cutting measures and the Chapter 11 process
generally.”
there are no bright-line rules indicating whether a
proposal is fair and equitable. Instead, courts “apply a general, flexible standard” that
cost-cutting burdens be shared among affected parties—and that to the extent some
groups are asked to contribute more than others, the different contribution levels be
justified under the circumstances. As Judge Lane put it in American Airlines:
204
In that connection, “[t]he affected parties need not receive identical modifications,
and the concessions asked of the unions can reflect the differences in the individual
unions' wage and benefit levels.” 205
3. Good Cause to Reject Debtor’s Proposal
To grant section 1113 relief, the Court must also find, consistent with the
requirements of section 1113(c)(2), that “the authorized representative of the employees
has refused to accept such proposal without good cause….” The requisite “good cause”
in this context is not statutorily defined, nor are standards for finding it articulated in the
Code. But “good cause” has been fleshed out in the caselaw. Findings that a proposed
modification is necessary, fair and equitable do not by themselves compel an additional
finding that a union’s refusal to agree to a proposal is without “good cause.” The
203 See Pinnacle Br. at 47.
204 American Airlines, 477 B.R. at 408 (quoting Northwest Airlines, 346 B.R. at 326) (internal
citations omitted).
205 See American Airlines, 477 B.R. at 408.
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requirement of section 1113(c)(2) is an additional one, and cannot be read to be
surplusage.206
As the Second Circuit observed in Maxwell Newspapers:
What “good cause” means is difficult to answer in
the abstract apart from the moorings of a given case.
A more constructive and perhaps more answerable
inquiry is why this term is in the statute. We think
good cause serves as an incentive to the debtor
trying to have its labor contract modified to propose
in good faith only those changes necessary to its
successful reorganization, while protecting it from
the union's refusal to accept the changes without a
good reason.207
The Maxwell Newspapers court explained that:
the entire thrust of section 1113 is to ensure that
well-informed and good faith negotiations occur in
the market place, not as part of the judicial process,
and that reorganization procedures are designed to
encourage such a negotiated voluntary modification.
Knowing that it cannot turn down an employer's
proposal without good cause gives the union an
incentive to compromise on modifications of the
collective bargaining agreement, so as to prevent its
complete rejection. Because the employer has the
burden of proving its proposals are necessary, the
union is protected from an employer whose
proposals may be offered in bad faith.208
“Though the debtor retains the ultimate burden of persuading the court that the
union lacked good cause for refusing proposed modification, the union must come
forward with evidence of its reasons for declining to accept the debtor’s proposal in
206 See Carey Transportation, 816 F.2d at 91-92 (subtly questioning the propriety of a bankruptcy
court conclusion that because the bankruptcy court had held a modification proposal to be
necessary, fair and equitable, the union therefore lacked good cause to reject it—but holding that
such an analysis would be proper where, as there, the union had neither participated meaningfully
in post-petition negotiations nor offered any reason for rejecting the proposal other than its view
that the proposed modifications were excessive).
207 981 F.2d at 90.
208 Id.
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whole or in part.”209
Ultimately when making a “Good Cause” determination, a court will consider the
parties’ respective positions and conduct; the proposal that was rejected; and the context
in which it was rejected—all, as Maxwell Newspapers put it, as part of the “moorings of a
given case”
But those duties are more theoretical than real in practical terms.
Well represented debtors and unions will typically do much more than meet their burdens
of coming forward, and will flesh out in detail, in an evidentiary hearing, their respective
needs and concerns. They will do so to give the Court the raw materials it needs to make
a decision as to the union’s good cause in rejecting a debtor proposal as a classic mixed
question of fact and law.
210
4. Balance of Equities
—to determine, for example, whether the union’s decision to reject the
debtor’s proposal was out of intransigence or unwillingness to recognize economic
realties, on the one hand, or by reason of statutory or economic deficiencies in the
debtor’s proposal (or inappropriate debtor negotiating conduct), on the other.
Then, to grant section 1113 relief, the Court must additionally find, consistent
with the requirements of section 1113(c)(3), that “the balance of the equities clearly
favors rejection of such agreement.” In applying that subsection, it is important to note
the word “clearly” that appears as part of that clause; textual analysis tells us that
considerably more than a minimal tipping in the balancing is required.
This requirement is a codification of the standard set out in Bildisco.211
209 Carey Transportation, 816 F.2d at 92 (internal quotation marks deleted).
In Carey
Transportation, the Second Circuit identified “at least” six “permissible equitable
210 981 F.2d at 90.
211 See Carey Transportation, 816 F.2d at 92; American Airlines, 477 B.R. at 410.
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considerations” (many of which also factor into the other substantive requirements
imposed by section 1113) for use in determining if the equities favor rejection of a
collective bargaining agreement:
(1) the likelihood and consequences of liquidation if rejection is
not permitted;
(2) the likely reduction in the value of creditors' claims if the
bargaining agreement remains in force;
(3) the likelihood and consequences of a strike if the bargaining
agreement is voided;
(4) the possibility and likely effect of any employee claims for
breach of contract if rejection is approved;
(5) the cost-spreading abilities of the various parties, taking into
account the number of employees covered by the bargaining agreement
and how various employees' wages and benefits compare to those of
others in the industry; and
(6) the good or bad faith of the parties in dealing with the debtor's
financial dilemma.212
The equities must be examined in relation to the debtor's attempts to reorganize 	“[T]he
Bankruptcy Court must focus on the ultimate goal of Chapter 11 when considering these
equities. The Bankruptcy Code does not authorize freewheeling consideration of every
212 Carey Transportation, 816 F.2d at 93; see also American Airlines, 477 B.R. at 410 (listing the
Carey Transportation factors).
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conceivable equity, but rather only how the equities relate to the success of the
reorganization.” 213
But in this Court’s view, even recognizing that equitable considerations must be
limited to those that relate to the success of the reorganization, there is an additional
important matter to consider as well. In the past, when the Second Circuit has articulated
factors for the courts in the Circuit to consider, it has not infrequently done so by use of
expressly or impliedly nonexclusive lists. 214 And in the past, as it did in General
Motors,215 this Court, recognizing that the Circuit’s list was not exclusive, has suggested
additional factors to consider as well.216 That is appropriate here too, since the Circuit, in
Carey Transportation, articulated “at least six permissible equitable considerations.”217
Another key equitable consideration—perhaps implied, but not expressly stated,
in the considerations listed by the Circuit in Carey Transportation—is whether imposing
the requested pay cuts or other concessions would still be preferable to the loss of
everyone’s jobs, those of union members and non-union members alike. That
consideration is so important, in this Court’s view, that it deserves separate mention and
analysis.
213 American Airlines, 477 B.R. at 410 (quoting Bildisco, 465 U.S. at 527).
214 See, e.g., Comm. of Equity Sec. Holders v. Lionel Corporation (In re Lionel Corp.), 722 F.2d
1063, 1071 (2d Cir. 1983) (listing factors to consider in determining whether the bulk of a debtor’s
assets may be sold under section 363, rather than under a plan); Sonnax Industries, Inc. v.
Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1285 (2d Cir. 1990)
(listing factors to consider in determining whether to grant relief from the automatic stay to permit
litigation in another forum).
215 In re General Motors Corp., 407 B.R. 463 (Bankr. S.D.N.Y. 2009) (“General Motors”), stay
pending appeal denied, 2009 WL 2033079 (S.D.N.Y. 2009) (Kaplan, J.), appeal dismissed and
aff'd, 428 B.R. 43 (S.D.N.Y. 2010) (Buchwald, J.) and 430 B.R. 65 (S.D.N.Y. 2010) (Sweet, J.),
appeal dismissed, No. 10–4882-bk (2d Cir. Jul. 28, 2011).
216 See General Motors, 407 B.R. at 490.
217 See 816 F.2d at 93 (emphasis added).
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The Court then turns to its application of those legal principles to the facts it
found in the evidentiary hearing on this motion, rearranging them slightly for ease of
discussion.
B.
Application to Facts Here
1. Procedural Matters
The Court turns initially to the procedural requirements for section 1113 relief,
though they need only modest mention.
First, the Court has found as a fact, and now determines as a mixed question of
fact and law, that Pinnacle satisfied the necessary procedural requirements to make a
proposal; to provide any and all information that it could to enable the Pilots to evaluate
the proposal; and to negotiate with the Union.218
While section 1113(b)(1)(B) requires the debtor to provide “such relevant
information as is necessary to evaluate the proposal” (and while information unavailable
to the debtor could often be helpful, or even “necessary,” at least in the sense of being the
information that would be most helpful), section 1113(b)(1)(A) requires the proposal to
be “based on the most complete and reliable information available at the time of such
As a matter of law on an issue that the
Court believes to be one of first impression, the Court rules that to meet the procedural
requirements of section 1113(b)(1), a debtor can only be required to provide information
that is within the debtor’s power to provide.
218 In this connection, the Court cannot agree with the Pilots’ contention, see Pilots Br. at 38, that
“Pinnacle’s failure to negotiate or even consult with ALPA while it put together a regressive
proposal violated its obligation to meet at reasonable times with ALPA.” Deferring negotiations
pending validation of Delta’s assertions and considering how they might affect Pinnacle’s
arrangements with its various unions was at least appropriate, if not also essential.
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proposal.”219
The Court has little doubt that information available only to Delta—what its
contracts with other regional carriers provide, and, perhaps, what Delta has to support its
statements as to what other regional carriers’ costs are—would be the best indication of
what Pinnacle would need to do to compete and survive. But the Court is persuaded,
after hearing all of the evidence, that Pinnacle does not have that information except in
the form that Delta shared it, and in the form of the results of Pinnacle’s own efforts to
corroborate Delta assertions, which Pinnacle shared with the Pilots. Thus Pinnacle’s
inability to provide information that only Delta could provide is not fatal to Pinnacle’s
motion.
In the Court’s view, all of the provisions of section 1113(b)(1) must be
read together. And together they evidence, along with the remainder of section 1113 and
section 1113 caselaw, Congress’ intention that the parties try as hard as they can to reach
a negotiated, and nonjudicial, resolution. But the parties can only do what is possible,
and the statutory language, and common sense, require that the Court impose
requirements consistent with reality.
Second, as noted above and below, the Court was and still is troubled by
Pinnacle’s unwillingness to show any movement whatever in its aggregate demand. In
some cases, refusal to move in any way could reasonably be argued to evidence a failure
to negotiate in good faith, and might be found to be such in the future. But the Court
recognizes some subtlety in the caselaw as to this issue.220
219 Emphasis added.
As a consequence, the Court
is disinclined to rule that Pinnacle’s refusal to move in negotiations based on advice that
counsel may have given to Pinnacle with which this Court now disagrees rose to the level
220 See page 59 et seq. below.
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of either bad faith or a failure to satisfy statutory requirements for negotiation in good
faith.221 Thus the Court assumes, for the purpose of the analysis that follows, that
Pinnacle complied with the requirement under section 1113(b)(2) that Pinnacle meet to
confer in good faith with the Union after making its proposal.222
2. Necessity
As noted above,223
Though the Court regards it as unnecessary and inappropriate to here set forth in
detail evidence it heard in closed proceedings at trial, and findings it has set forth in the
Confidential Supplement, the bottom line is clear—and the question is not in any way
close. Pinnacle’s liquidity crisis is acute, and its pilot labor costs are considerably over
market. These are critical issues in the short run and the long run, and without correcting
both, Pinnacle cannot reorganize. Indeed, without correcting the former, Pinnacle would
quickly come to an end.
the most fundamental requirement for rejection of a collective
bargaining agreement is that the rejection must be “necessary.” The Court is compelled
to find that in nearly every respect, Pinnacle has made the required showing.
(a) Liquidity as Resulting in Necessity
The Court has addressed Pinnacle’s liquidity situation in the Confidential
Supplement. It is sufficient for purposes of this public discussion to state that Pinnacle’s
221 It did, however, give the Pilots good cause—and, under the facts here, additional good cause—for
their refusal to agree to Pinnacle’s proposal. See page 65 below.
222 The Court similarly declines to hold that the absolute size of the change in Pinnacle’s “Ask”—
even an attention-catching increase by 78%—was, as the Pilots argue, see Pilots Br. at 39,
indicative of bad faith negotiation. While an increase of that magnitude might be indicative of bad
faith when combined with more (or in the absence of any sound explanation), the absence here of
any more, and circumstances explaining the size of the increase (or at least most of it), cause the
Court to conclude that the mere size of the increase is insufficient to warrant a bad faith
conclusion here.
223 See page 36 above.
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liquidity situation is serious. The issue is not that the liquidity situation is disputed in any
way. To their credit, the Pilots acknowledge it.224
The Pilots are right with respect to the underlying facts, but not with respect to the
conclusion or what needs to be done. Section 1113 determinations are not an exercise in
finding fault; they are an exercise in problem solving—determining what measures are
necessary to enable a debtor to reorganize, and, in extreme cases, what measures are
necessary to enable a debtor to survive. It is not the Pilots’ fault that the Debtor has
serious liquidity issues,
But they say that the liquidity
problems are not their fault; that the liquidity problems were exacerbated, if not also
caused, by one-time transitional costs in 2011 and 2012; and that the cost-cutting
measures Pinnacle seeks would take so long as to be ineffectual in solving the liquidity
problem that there is no point to asking the Pilots to make the requested sacrifices.
225
The Pilots are also correct that even if they make concessions—particularly
concessions with respect to work rules—those concessions would not, by themselves,
but it is only through sacrifices the Pilots will have to make
that the liquidity problem may be resolved.
224 See Closing Args. Tr. at 29:24-30:3 (“[PILOTS’ COUNSEL]: Your Honor, we don’t dispute the
liquidity crisis. I think what’s in dispute is what flows from it and whether the company’s
demands are connected in any way to solving the crisis that they’ve put on evidence about.”).
225 The Pilots pointed out at trial, in both evidence and argument, that difficulties Pinnacle was
undergoing were not of the Pilots’ making, and that major components of the Pinnacle’s extra
costs appeared in the past and would not recur to the same extent in the future. In many respects,
the Pilots were right. It is true, by way of example, that Pinnacle suffered mightily from very high
costs associated with merging the Mesaba, Colgan, and Pinnacle I operations and work forces—
including, especially, the additional costs of training and certification for pilots to fly different
aircraft, or even the same aircraft under different operating procedures or under FAA certification
for different corporate entities. These matters cannot in any way be regarded as the Pilots’ fault.
And it is also true that costs of the type just mentioned would not recur, or would recur to a
considerably lesser degree. But Pinnacle is right that a determination under section 1113 does not
turn on fault; it turns on what is necessary to ensure a company’s ability to survive. And in that
connection, Pinnacle showed that even putting aside the very high costs incurred in the past,
Pinnacle’s present cost structure makes it impossible for Pinnacle to survive unless the Pilots
make wage, benefit, and/or work rules concessions representing the great bulk of the “Ask” that
Pinnacle sought.
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have a quick enough economic effect to respond to Pinnacle’s liquidity crisis. All parties
recognize that reality. The most likely source of a solution to that would be short term
relief from Delta—which undoubtedly has an incentive to keep Pinnacle alive (as Delta
has done through the duration of Pinnacle’s chapter 11 cases through DIP financing) to
keep Pinnacle’s planes flying to meet Delta’s own operational needs. But 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.
The Court well understands, of course, that there is no guarantee that if Pinnacle
does gets its labor house in order, Delta will assist. But the Court can and must make an
informed judgment as to the likelihood of assistance if Pinnacle does not get its labor
house in order. The most serious risk (if not also likelihood) is that Delta would keep
Pinnacle alive until Delta could put in place satisfactory substitutes for Pinnacle’s
services, and that Delta will then switch to cheaper alternatives, leaving Pinnacle then to
fail—with insufficient liquidity, no other customers, and no choice then but to liquidate.
That would be a tragic consequence for the Pilots and, of course, all of Pinnacle’s other
employees, and makes an overwhelming showing of what the Necessity provision of
section 1113 requires.
(b) Excessive Costs as Resulting in Necessity
The Court is also compelled to find that Pinnacle has shown the necessity for
dramatically reducing its Pilots’ labor costs even apart from its liquidity situation. The
Court has no doubt, based on its earlier Findings of Fact, that Pinnacle’s Pilot labor costs
are dramatically over market. A significant part of that overage results from the Pilots’
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high average level of seniority, but it is no less a problem. Other regional airlines have
dramatically lower costs.
The backup to Delta’s calculation as to the extent to which Pinnacle’s costs are
way over market was not made available—not to the Pilots and not to Pinnacle. So
appropriately, Pinnacle took steps to try to corroborate the Delta calculation. Pinnacle
did so through the Seabury analysis, explained by Ms. Hughes, and the Compass Lexecon
analysis, explained by Mr. Kasper—each of which the Court finds to have been
performed competently and in good faith. The corresponding analysis of the Union’s
own financial expert, Ms. Eubanks, was consistent with Pinnacle’s expert’s analysis, after
adjustment for a computational error which resulted in most of the discrepancy.
The dramatic extent to which Pinnacle’s costs are higher than market affects both
Pinnacle’s ability to get future work from other carriers and even from Delta itself, at
least in 2018 and thereafter. The evidence the Court heard as to the extent to which the
regional air transport industry is commoditized was effectively undisputed, and in any
event was unrefuted and highly persuasive. So was the evidence of Delta’s ability to
invoke the reset provisions of the Delta Connection Agreements.226
Additionally, the requirement that the Court look also to the long term
Pinnacle can offer no
bases for choosing its services over those of its competitors except on the basis of price.
It will need to be among the lowest-cost providers in the industry.
227
226 See text accompanying note
prevents
the Court from being satisfied with band-aid solutions. The Pilots cannot proceed on the
assumption that Delta is now stuck with Pinnacle, and that it doesn’t now matter that the
Pilots’ wages make Pinnacle grossly uncompetitive. The Court cannot find Pinnacle’s
107 above.
227 See page 37 above.
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proposal for wage cuts to be unnecessary simply because they will become most critical
only at a later time. When that later time comes, unless Pinnacle is then competitive, it
will almost certainly lose its Delta business—the business from its only present customer.
And there will be no reasonable basis for concluding that Pinnacle will secure
business from anyone else, unless its costs (and thus the rates it will be able to charge and
still make a profit) are at least near, if not also at the same level as, the rates of its
competitors. Then, without the dramatic reduction in costs that is necessary to make
Pinnacle competitive, the Court will find it impossible to find, as confirmation of a
reorganization plan requires,228
Thus the Court has found the requisite necessity for nearly all of the cost savings
that Pinnacle seeks. The Court cannot, however, find the requisite necessity for the
entirety of Pinnacle’s “Ask.” That is so because Pinnacle’s proposal at least seemingly
sought to place the Pilots’ aggregate labor costs below those of Pinnacle’s lowest cost
competitors.
that confirmation is not likely to be followed by
liquidation. A future liquidation will be a certainty, or a likelihood very close to one.
229
228 See note
That was aptly characterized by the Pilots as a “Race to the Bottom,” and
was unsupported by the evidence presented to the Court. It was particularly unsupported
with respect to the ongoing relationship with Delta, since there would undoubtedly be
costs—very possibly more than minimal ones—that Delta would have to incur upon
shifting from one regional carrier to another, which would at least seemingly have to be
trumped by any difference in pricing to warrant a shift away from Pinnacle, at least until
2018. And there was similarly no evidence that being below competitors’ cost levels—as
198 above.
229 See note 268 below.
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contrasted to being at approximately the same level—would be necessary to compete.230
The Pilots should not read too much, however, from the Court’s view that the
necessity for a “Race to the Bottom” has not been shown. Even with Pinnacle’s
somewhat excessive demands, the requisite necessity was shown for nearly all of
Pinnacle’s request. While Pinnacle asked for cost savings of $59.6 million, the Pilots
offered only $33 million, and the Court is not even confident that the Pilots’ valuation of
the savings under their offer could fairly be regarded as that much, or would continue for
the requisite time. The savings for which necessity has been shown are very near to the
Pinnacle figure, and not at all close to the Pilots’.
Pinnacle has met its burden to show the requisite necessity for the great bulk of the cost
savings it seeks. But for this reason, it has not shown the need for all of them.
(c) Necessity Requirement Conclusions
Because the proposal as put forward by Pinnacle was to a certain extent
overreaching, the Court cannot find that the Necessity requirement of section 1113(b)(1)
was satisfied.231
230 Pinnacle has called the Court’s attention to Judge Lane’s observation in American Airlines that:
But Pinnacle’s proposal was not overreaching by very much. The
failure to meet the Necessity requirement with respect to the proposal as put forward
In each prior airline bankruptcy then, the pattern appears the
same: the airline enters bankruptcy with labor costs that are at
or near the top of the industry and then emerges with costs at
or near the low end of the group.
477 B.R. at 419. The Court assumes that to be true, and applicable here as well, though it would
appear that Judge Lane got more direct evidence of that in American Airlines than this Court got
here. But assuming that it fully applies here as well, Judge Lane’s observation cannot be extended
beyond what he actually said. He found that the airlines would emerge with costs “at or near the
low end of the group,” not below them. He expressed no view as to the need for leapfrogging to
achieve lower and lower costs.
231 As the proposal was overreaching, the Court must also find that the Pilots rejected it with good
cause, causing the Company additionally to have failed to satisfy the requirements of section
1113(c)(2). See page 58 below.
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requires denial of the motion without prejudice. If negotiations do not otherwise lead to
agreement, a somewhat modified proposal may be put forward, and if necessary a new
motion may be filed.232
3. Fair and Equitable Treatment
With one exception (but only one), the Court determines that the modifications
Pinnacle seeks meet all of the requirements, discussed above,233
The principal potential unfairness addressed in briefing was the extent to which
the Pilots were asked to take pay cuts and make other concessions relative to other
unionized employees—especially flight attendants—and non unionized personnel. But
after review of the evidence, the Court is satisfied with the reason for the greater sacrifice
asked from the Pilots. A greater market disparity exists for the Pilots as compared to
other labor groups, both union and non-union.
for Fair and Equitable
Treatment.
Pinnacle presented unrebutted testimony that its two other unionized work groups,
the flight attendants and the dispatchers, were at or below market before any labor
concessions. That is a critical distinction, and it satisfactorily explains why the Pilots
needed to sacrifice more.
232 In closing arguments, the Pilots asked the Court to require, as a prerequisite for any section 1113
relief, three-way discussions amongst the Company, the Pilots, and Delta. This would probably be
very useful, but the Court cannot require it. The Pilots’ request goes beyond any of the
requirements that are imposed under the Code and related caselaw, which focus on the relationship
between the debtor and the union, without reference to third-party entities that might have
influence over a debtor’s fate. The Pilots’ request underscores the reality that parties have much
greater flexibility to address their needs and concerns in negotiations, as contrasted to judicial
determinations, where judges are bound to issue rulings within the four corners of the issues that
are before them for determination.
233 See page 38 above.
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Likewise, the Court regarded it as important to query whether Pinnacle’s non-
unionized personnel—and its senior management in particular—were likewise sharing in
the sacrifices asked of the Pilots. The testimony was unrebutted that Pinnacle’s
management receives below-market compensation. And while the evidence of sacrifices
management made did not come in as clearly as the Court would have hoped (and the
Pilots were not given the information as to this as early as the Court would have hoped),
the showing ultimately was made that management sacrificed too, with reductions in pay
of from 8% to 10%. That is not as much as the Pilots were asked to bear, but was in the
context of below-market compensation for management.
There was a fair and reasonable basis for the sacrifices the Pilots were asked to
make. In that respect, the “Fair and Equitable Treatment” requirement was satisfied.
There is, however, another consideration relevant to “Fair and Equitable
Treatment”—fairness with respect to other stakeholders—and in this respect the Court
finds deficiencies. Pinnacle is asking the Court for leave to abrogate numerous
contractual obligations. That would result in great pain to the Pilots. The need to
dramatically reduce the costs associated with the contractual obligations has been shown
to exist—but Fair and Equitable Treatment requires ameliorating the pain to the Pilots
(insofar as possible) by giving them, by means of appropriate profit sharing, or issuance
of equity, a share in the fruits of any profits that their sacrifice might entail, and avoiding
windfalls to others.
The Court is not satisfied that such has been offered here. Any such profit
sharing—not being a cost Pinnacle would have to bear, but kicking in only after Pinnacle
would be showing a profit—would have no impact on Pinnacle’s liquidity or ability to
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compete. The Court was not impressed by Pinnacle’s less than wholly direct response to
the Court’s concerns with respect to “the windfall that might perhaps happen if we
implement these cost savings,”234 or its vague assertion that we have a “very serious”
profit sharing proposal to Pinnacle’s unions.235 To the extent that Pinnacle contends that
its proposal for profit sharing is in any way significant, the Court is surprised by that
contention. The Court considers it very modest given the sacrifices the Pilots will have to
bear. This case contrasts with Northwest Airlines, in which substantial profit sharing was
offered to flight attendants under the proposal that ultimately warranted section 1113
relief.236
The words “fair and equitable” have, or may have, different meanings in at least
three different contexts in bankruptcy law. 237
234 Closing Args. Tr. at 58:10-11.
But the combination of making the Pilots
235 Id.at 58:17-22.
236 See In re Northwest Airlines Corp., 366 B.R. 270, 274 (Bankr. S.D.N.Y. 2007) (Gropper, J.)
(“Northwest-Claims”) (“The Debtor's proposal, which it was authorized to effectuate in
accordance with the § 1113 procedures, provides for substantial profit sharing by AFA and its
members. They will share in this manner in whatever better performance the Debtor may
achieve.”) (emphasis added).
237 Some of the different ways “fair and equitable” has appeared in bankruptcy caselaw were
discussed in this Court’s decision in In re Chemtura Corp., 439 B.R. 561, 593-95 (Bankr.
S.D.N.Y. 2010). Those words have one meaning in the context of settlements, where bankruptcy
courts want comfort that the debtor isn’t “giving away the store,” under standards articulated in
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414
(1968). They have a different meaning in the context of confirmation of reorganization plans, as
incorporating the “absolute priority rule”—though in In re Iridium Operating LLC, 478 F.3d 452,
463 (2d Cir. 2007) (“Iridium”) the Second Circuit held that unless deviation from the general rule
was shown to be justified, a settlement outside of confirmation of a plan would also have to be
“fair and equitable” in the absolute priority rule sense. The words “fair and equitable” in section
1113 are probably best thought of as applying in a third sense, as, consistent with their plain
meaning, including all aspects of fairness—including, but not limited to, requirements of caselaw
that has identified particular aspects that need to be focused upon, such as fairness as between
employee groups. And if Iridium doctrine were also deemed to apply here, it would suggest a
need to avoid benefits to more junior classes (like equity) at the expense of parties (like unions)
with contractual rights. The Court does not believe that the “Fair and Equitable” inquiry properly
should be limited to consideration of the treatment of one employee group as contrasted to others.
At the least, it should be construed to cover fairness vis-à-vis other stakeholders, if not also
covering fairness whenever fairness may be questioned.
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take such a large haircut with minimal sharing in the benefits would subject the Pilots to
the risk, if not certainty, of others (such as Equity) securing a windfall at the expense of
the Pilots—who have, at least until this motion is granted, contractual rights. That is
neither “fair” nor “equitable,” by any measure under which those words might be
construed. The Pilots must receive, in the form of equity or profit sharing, a greater share
of any benefits that result from the abrogation of their contractual rights before the Court
can find that they have received “Fair and Equitable Treatment.”238
238 If the Court were writing on a clean slate, it would construe “rejection” in section 1113 and
“rejection” under section 365 consistently and as a unified whole—to the end that the rejection of
a collective bargaining agreement after compliance with section 1113 results in the same
consequences as the rejection of any other executory contract, and that section 1113 merely
imposes additional requirements that must be satisfied before rejection can be invoked.
Traditional executory contract doctrine has developed to provide a means to relieve a debtor of
burdensome postpetition obligations (of which collective bargaining agreements may be the
paradigm), while still providing at least some recompense to the injured counterparty by means of
allowance of a prepetition claim. Allowing relief from those burdensome post-petition obligations
(and those alone), if the negotiation required under section 1113 fails, is at least seemingly also
consistent with the Congressional intent, to balance a company’s need to survive against the rights
of employees understandably wishing respect for their contractual rights.
However, in Northwest Airlines Corp. v. Association of Flight Attendants (In re Northwest
Airlines Corp.), 483 F.3d 160, 170-73 (2d Cir. 2007) (“Northwest-Circuit”), a case dealing with
the propriety of an anti-strike injunction after an 1113 motion was granted (and not the allowance
of a union’s claim), the panel’s two judge majority stated that the rejection of the collective
bargaining agreement under section 1113 would result not in the breach and resulting prepetition
claim that results from the rejection of executory contracts generally, but rather a court authorized
“abrogation,” id. at 170, 174; accord id. at 169, which would not result in an allowable claim for
the disclaimer of the debtor’s obligations. The Northwest-Circuit majority also made several
statements effectively compelling the conclusion that union claims for rejection damages could not
lie after a decision approving rejection under section 1113. See 483 F.3d at 174 (“[W]e thus
conclude that a bankruptcy court acting pursuant to § 1113 may authorize a debtor to abrogate its
[collective bargaining agreement], effectively shielding it from a charge of breach.”); id. at 172
(“If a carrier that rejected a [collective bargaining agreement] simultaneously breached that
agreement and violated the [Railway Labor Act], the union would be correspondingly free to seek
damages or strike, results inconsistent with Congress’s intent in passing § 1113.”). The
Northwest-Circuit majority also twice mentioned, though without substantive discussion, a
Tennessee bankruptcy court decision, affirmed at the district court level, that had held there is no
claim for breach of a collective bargaining agreement in light of section 1113. Id. at 169, 172
(citing In re Blue Diamond Coal Co., 147 B.R. 720 (Bankr. E.D. Tenn. 1992), aff’d, 160 B.R. 574
(E.D. Tenn. 1993).
After the decision in Northwest-Circuit, Judge Gropper of this Court, with extensive consideration
of what the Circuit panel’s majority had said, understandably ruled that Northwest-Circuit
required union claims for rejection damages to be expunged. See Northwest-Claims, note 236
above, 366 B.R. at 275-76. If Pinnacle can abrogate the Pilots’ contractual rights and deny them
even a prepetition claim, it is all the more important that the Court take appropriate measures to
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4. Balance of Equities
As discussed above, in Carey Transportation, the Second Circuit identified “at
least” six “permissible equitable considerations” for use in determining if the equities
favor rejection of a collective bargaining agreement.239 Though as is common when
courts articulate multi-factor tests, all are not equally applicable or significant,240
#1: liquidation is effectively a certainty if rejection is not
permitted;
four of
the named factors weigh in favor of rejection:
#2: there will be a dramatic reduction in the value of creditors’
claims if the bargaining agreement remains in force;
#5: the Pilots wages are above market with respect to those of
others in the industry;
#6: the Company dealt with the Union in good faith in dealing
with the Company’s financial dilemma.241
Factors #1 and #5 favor rejection particularly strongly.
Factors #3 and #4 are effectively addressed in law that has come down since
Carey Transportation—in Northwest-Circuit (holding, in the Railway Labor Act context,
that a union’s strike after an adverse section 1113 determination was granted could be
ensure that the Pilots are fairly and equitably treated in the section 1113 process, especially by
means that do not impair Pinnacle’s ability to survive.
239 See page 42 above.
240 See, e.g., In re Motors Liquidation Co., 457 B.R. 276, 291 (Bankr. S.D.N.Y. 2011) (Gerber, J.)
(“The remaining enumerated factors, as is so often the case when we judges exercise our
discretion using a list of factors we’re directed to consider, have no material relevance to the
controversy here.”).
241 The Court finds that the Pilots dealt with Pinnacle in good faith too, but it is Pinnacle that is
seeking the section 1113 relief. If Pinnacle had not shown the requisite good faith, the Court
would deny relief in a heartbeat.
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enjoined),242 and in Northwest-Circuit and Northwest Claims (effectively stating, and
holding, respectively, that union members’ rejection claims should be expunged).243
The Court noted above that it was free to consider other factors as well.
Factors #3 and #4 tend to cut against granting section 1113 relief here, because they cut
off mechanisms that Pilots might otherwise employ to ameliorate the harm to them
resulting from an adverse 1113 decision but they are insufficient to trump the other
factors, especially #1, which in this Court’s view is by far the most important of the
Carey Transportation enumerated considerations.
244
The Court would do the flight attendants and the
Debtors' thousands of other employees no favor if it
refused to grant the Debtors’
A
critical equitable consideration, in the Court’s view, is the consequences of inaction, and
the consequences to the other employees. As harsh as the consequences of relief here
would be to the Pilots, they pale in comparison to the loss of 5,800 jobs (including those
of the Pilots themselves)—which the Court finds to be a certainty if Pinnacle’s labor
costs are not dramatically reduced. As Judge Gropper put it in Northwest Airlines (also
in the context of the Balance of Equities analysis that section 1113(c)(3), and Carey
Transportation, require):
§ 1113 relief, and the
Debtors joined the ranks of the many other airlines
that have liquidated as a consequence of a Chapter
11 filing.245
Three deficiencies that the Court has addressed above and below prohibit, at this
time, section 1113 relief. But they do not go to the Balance of Equities. This
242 See Northwest-Circuit, 483 F.3d at 170-74.
243 See Northwest-Circuit, 483 F.3d at 170-74, and Northwest Claims, 366 B.R. 275-76, respectively.
244 See page 42 above.
245 346 B.R. at 330.
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requirement has been satisfied. If the deficiencies the Court has noted above and below
are satisfactorily addressed, and Pinnacle and the Union still cannot reach agreement, the
Balance of Equities will not in any way be an impediment to section 1113 relief.
5. Good Cause to Reject Company’s Proposal
The final requirement to be addressed, as also discussed above,246
Two of those respects have already been addressed. As noted above, Pinnacle
showed an overwhelming necessity for very major reductions in its Pilot labor costs—
having shown, among many other things, that its Pilot labor costs are substantially over
market, and are effectively going to kill Pinnacle. But Pinnacle overreached. Without
showing that the necessity it had otherwise shown required the Pilots’ labor costs to be
below market, Pinnacle at least seemingly asked the Pilots to agree to a proposal
premised on that.
is that of
section 1113(c)(2) that “the authorized representative of the employees has refused to
accept such proposal without good cause….” In this case, the Court finds that the Pilots
had good cause for declining to accept Pinnacle’s proposal as it was then put forward—
though they would no longer have such good cause if Pinnacle revised and negotiated its
proposal in the three respects the Court identifies here.
247
246 See page
Pinnacle sought what the Pilots aptly called a “Race to the Bottom,”
which was unjustified by Pinnacle’s showing of necessity. The Court does not need to
decide, and does not now decide, whether a “Race to the Bottom” would be appropriate
upon an appropriate evidentiary showing that a continuing leapfrog toward lower and
39 above.
247 See note 268 below.
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lower labor costs is necessary to compete or survive; it was not made here. The Pilots
had good cause to reject Pinnacle’s proposal for this reason.248
The Court has also addressed Pinnacle’s very modest proposal to assuage the pain
the Pilots would suffer by means of profit sharing mechanisms. To the extent necessity
could be shown (and as it was shown, with respect to the great bulk of Pinnacle’s “Ask”),
the Pilots would lack good cause to reject proposals for reduced compensation and
benefits, as each would directly impact cash flow and Pinnacle’s liquidity. But profit
sharing would not impact Pinnacle’s cash flow. It would come into play only if Pinnacle
were already making a profit. Pinnacle could have, and should have, offered more to the
Pilots to make up for their sacrifices in a way that would not have affected Pinnacle’s
ability to be profitable and survive. The Pilots had good reason to reject Pinnacle’s
proposal for this reason as well.
The Pilots also had good cause to reject Pinnacle’s proposal by reason of
Pinnacle’s negotiating conduct. While Pinnacle was willing to secure the cost savings it
wanted by flexible allocation between wages, benefits and work rules,249 it was unwilling
to show any movement whatever in its aggregate demand.250
248 For the avoidance of doubt, the Court does not rule that the Pilots had good cause for rejecting
Pinnacle’s proposal as a consequence of the 78% increase in Pinnacle’s “Ask” from $33 million to
$59.6 million. As annoying, and shocking, as the change in the “Ask” likely was to the Pilots, the
great bulk of the change was justified by subsequent developments and information that became
known to Pinnacle only after its original proposal was put forward.
249 See, e.g., Closing Args. Tr. at 23:1-7 (“And you heard the company’s position repeated again and
again at the bargaining table that it is completely agnostic as to whether it achieves cost savings
through work rules or pay cuts or any combination thereof. So the company, to the extent
possible, has shown absolute flexibility on how to get to that number.”)
250 As the colloquy went:
THE COURT: To what extent did the Company
show any movement in its overall “Ask” as contrasted to
having a willingness to shift around whether the cost savings
would come from pay, work rules, or benefits?
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Pinnacle says that it justified this approach by reason of its counsel’s review of
the underlying law in this area, and counsel’s conclusion that the statutory framework,
and earlier caselaw, did not permit movement in the overall “Ask” once Pinnacle’s
proposal was made—reasoning that if there was any room for negotiation, the proposal
would not be “necessary.”251 That view was incorrect. There is no requirement in
section 1113 law that in order to show “Necessity,” a debtor show no movement in its
overall demand whatever—particularly in the period between the filing of the section
1113 motion and the time of hearing on it, during which section 1113(b)(2) requires
continuing good faith efforts to try to reach agreement. If such stonewalling were in fact
required, that would wholly frustrate the “entire thrust of section 1113”252—as stated by
the Second Circuit in Maxwell Newspapers, “to ensure that well-informed and good faith
negotiations occur in the market place, not as part of the judicial process, and … to
encourage such a negotiated voluntary modification.”253
Pinnacle articulated the bases for its view on what it asserted was language in
American Airlines: a supposed statement—surrounded in quotes in the Closing
Arguments transcript consistent with the way counsel described it in argument, as if it
[COMPANY COUNSEL]: Well, … the answer is
that we stuck to the amount of labor savings that our analysis
showed we need … to become cost competitive.
THE COURT: Is that a euphemism for saying zero?
It has not changed its overall “Ask”?
[COMPANY COUNSEL]: As of now, I think that’s
fair in terms of the actual bottom line cost savings.
Closing Args. Tr. at 23:7-17 (transcription errors corrected).
251 See id. at 125:3-128:7.
252 Maxwell Newspapers, 981 F.2d at 90.
253 Id.
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appeared in the American Airlines opinion,254 and following counsel’s statement of “what
does Judge Lane say?”—that “good faith is satisfied by remaining open to alternative
saving approaches while adhering to a necessary cost saving target.”255 But that is not in
fact what Judge Lane said,256
First, Pinnacle gave insufficient attention to the context in which Judge Lane
made his remarks. The time to which Judge Lane was referring was the time before the
American motion was filed—not the time relevant here, between motion filing and
hearing, where Pinnacle’s failure to show any negotiating movement is of such concern
to this Court.
nor was it even a fair paraphrase—especially with the
failure to mention the other things Judge Lane said. Additionally, Pinnacle failed to
consider the context of the statements that were made by Judge Lane on the pages to
which Pinnacle referred; failed to address other things Judge Lane said, on those pages
and earlier in his decision; and failed to consider other relevant analysis, by Judges
Hardin and Gropper, in Delta Airlines and Northwest Airlines, the other cases on point.
257 Second, Pinnacle ignored the fact-driven nature of Judge Lane’s
conclusion that the failure to move was there justified under the facts of that case,258
254 It was said to appear at pages *161-*162 of the Lexis version of the opinion. That would
correspond to 477 B.R. at 444-45.
and
also ignored Judge Lane’s careful statement that, with respect to certain aspects of the
255 Closing Args. Tr. at 126:20-23.
256 The closest that came to it was Judge Lane’s statement that “it is not bad faith to adhere to a
necessary cost-saving target,” 447 B.R. at 444, after first saying, two sentences earlier, that on the
facts there, the failure to move was “not necessarily a failure to confer in good faith,” id.
(emphasis added), and then noting, in the following sentence, a general rule very much the
opposite: “a debtor [generally] cannot be said to comply with its obligation ... to ‘confer in good
faith in attempting to reach mutually satisfactory modifications' when it steadfastly maintains that
its initial proposal ... is nonnegotiable.” Id. (quoting Delta Airlines, 342 B.R. at 697) (brackets in
original; emphasis added).
257 See 477 B.R. at 443 (“The [Allied Pilots Association] first complains that American did not
change its labor ‘ask’ from its initial proposal on February 1, 2012 to the last proposal before the
filing of the Motion.”) (emphasis added).
258 See id. (“Given the facts in this case, the Court does not agree.”) (emphasis added).
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American proposal, American’s unwillingness to move was “not necessarily” a failure to
confer in good faith.259
Third, but no less important, Pinnacle failed to address rulings by other judges in
this district, in Delta Airlines and Northwest Airlines, noted by Judge Lane, that as a
general matter had recognized the importance (though not necessity in every case) of a
debtor’s willingness to show negotiating movement, at least in some respects, in the
period after filing of a motion. In his earlier general discussion of the law, 260 before his
later, fact-driven, discussion of the facts there before him,261
Section 1113(b)(2)
Judge Lane analyzed Judge
Gropper’s and Hardin’s earlier rulings in Northwest Airlines, and Delta Airlines,
respectively. In significant reliance on those earlier holdings, Judge Lane observed, in
American Airlines:
requires that after a proposal is
made, but before a hearing on rejection, the debtor
meet with the union at reasonable times to negotiate
in good faith. To satisfy the requirement of
negotiating in good faith, a debtor cannot approach
negotiations with a “take it or leave it” mentality.262
Judge Lane noted, and endorsed, comments by Judge Hardin in Delta Airlines.
Judge Hardin stated:
[A] debtor cannot be said to comply with its
obligation under Section 1113(b)(2) . . . when it
steadfastly maintains that its initial proposal under
subsection (b)(1)(A) is non-negotiable . . . . [T]he
evident purpose and objective of Section 1113(b)(2)
is to compel the debtor to negotiate in good faith to
259 Id. at 444 (“American's unwillingness to move on the other savings requested in its initial proposal
is not necessarily a failure to confer in good faith.”) (emphasis added)
260 See id. at 409-10.
261 See id. at 443-45.
262 477 B.R. at 409 (quoting Northwest Airlines, 346 B.R. at 327, which in turn had quoted Delta
Airlines, 342 B.R. at 697).
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reach “mutually satisfactory modifications.” With
rare exceptions ... true negotiation necessarily
requires compromise in each side's bargaining
positions. When one side presents a nonnegotiable,
take-it-or-leave-it proposal, negotiation stalls
because there is nothing of substance to bargain for
when one side must bid against itself.263
It was only then that Judge Lane went on to state an exception to the general rule:
This should be determined, however, on a case by
case basis. For “depending on the facts of the case,
a debtor may not be obligated to reduce the total
amount of cost savings requested in its original
proposal to demonstrate good faith.”264
When the totality of what Judges Hardin, Gropper and Lane said is put together, a
more accurate description of the general rule emerges. It starts with what Judge Hardin
initially said in Delta Airlines, goes on to what Judge Gropper said in Northwest Airlines,
and then goes on to what Judge Lane actually said in American Airlines: a debtor
generally cannot be said to comply with its obligation to confer in good faith in
attempting to reach mutually satisfactory modifications when it steadfastly maintains that
its initial proposal is nonnegotiable. But parts of a debtor's section 1113 proposal may be
non-negotiable if they are essential to a debtor’s reorganization.265
263 Delta Airlines, 342 B.R. at 697; see also American Airlines, 477 B.R. at 409 (quoting Delta
Airlines).
It is not necessarily
bad faith to adhere to a necessary cost-saving target, but this depends on the facts of the
case, and depending on the facts of the case, a debtor may not be obligated to reduce the
264 477 B.R. at 409 (quoting Northwest Airlines, 346 B.R. at 327). Judge Gropper had similarly
stated, citing Delta Airlines, that “[t]he ‘good cause’ and good faith requirements have been held
to preclude a debtor from simply offering a ‘take it or leave it’ proposal,” 346 B.R. at 327, and that
“depending on the facts of the case, a debtor may not be obligated to reduce the total amount of
cost savings requested in its original proposal to demonstrate good faith.” Id.
265 See 477 B.R. at 443 (quoting Delta Airlines, 341 B.R. at 697).
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total amount of cost savings requested in its original proposal to demonstrate good
faith.266
But most importantly, there is no legal duty imposed on a debtor to stay put in
negotiations, so as to preserve the debtor’s showing of necessity or for any other reason.
In fact, movement, and not stonewalling, should be the norm. 267
Ultimately, all of this depends on whether the entirety of the demand put forward
by a debtor at the time of the filing of the motion is indeed necessary. As Judge Hardin
recognized in Delta Airlines, the entirety generally will not be. And here the Court finds,
on the facts of this case, that the entirety of Pinnacle’s demand was not necessary, and
that Pinnacle’s insistence on no movement whatever in its aggregate demand, after it filed
its motion, was error.
Given the need to synthesize several cases to get to the right result, and the false
signals that apparently resulted when language was taken out of context, the Court is not
of a mind to tag Pinnacle here with bad faith. But Pinnacle was wrong when it concluded
that it had had an absolute right (or, worse yet, a duty) not to budge as to its aggregate
demand in the negotiations following the filing of its motion. Under these circumstances,
266 The Court is unpersuaded by Pinnacle’s contention that it could comply with its duties by simply
demonstrating a willingness to reallocate components of its proposal while adhering to a non-
negotiable total. While that could, under certain circumstances, be justified under the facts there
shown, it is unjustifiable as a general matter. Calling that “negotiation,” as a general matter, is a
play on words.
267 In this connection, the Court also agrees with Judge Lane when he observed that a debtor must
approach negotiations under section 1113 from a vantage point different from that usually taken
during collective bargaining. See 447 B.R. at 443. As Judge Lane observed, while in typical labor
negotiations, both sides begin with a more aggressive position than they believe can be achieved,
and then negotiate toward a middle ground, parties in section 1113 negotiations do not have that
luxury. It is true, as Pinnacle argues, that a debtor seeking section 1113 relief should not make
demands at a high level in contemplation of reducing them thereafter. But that is very different
from demonstrating an unwillingness, in the discussions that must take place after the filing of a
section 1113 motion, to make any movement in the overall demand at all.
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the Pilots certainly had good cause to reject Pinnacle’s proposal when it evidenced no
movement by Pinnacle whatever.
Pinnacle has come very close to making the showing it must make to reject its
collective bargaining agreement with the Pilots. Pinnacle’s need for significant
reductions in labor costs is profound. Though Delta failed to do everything it could have
done to document the extent to which Pinnacle’s labor costs exceed those of other Delta
regional carriers, Pinnacle’s own efforts to investigate that issue satisfied the Court that
Pinnacle’s pilot labor costs are way over market. And Pinnacle’s liquidity issues make it
clear that Pinnacle cannot continue under the status quo. As unfortunate as pay cuts for
the Pilots would be, the liquidation of Pinnacle, and the loss of 5,800 jobs, would be far
worse.
Conclusion
Thus the necessity for dramatic cuts in Pilot labor costs has been shown. So have
all of the other requirements for the relief Pinnacle seeks on this motion, with very
limited exceptions. The only remaining issues are (1) the full extent of the necessary cuts
in Pilot labor expense, by reason of failure to show necessity for a “Race to the Bottom”
making the Pilots’ costs lower than anyone else’s;268
268 It is possible, but unlikely, that Pinnacle’s proposal to the Pilots was intended to merely match the
competition and not leapfrog below it. (The record is vague, but Pinnacle implied to the contrary:
see Closing Args. Tr. at 137 (when asking for pay concessions, Pinnacle “then built in a little
more…”)). If Pinnacle was only trying to match (and not get below) its competition, Pinnacle did
not make that point in briefing or argument, nor introduce evidence to establish the basis for that
distinction.
(2) whether the Pilots’ pain should
Both sides now know the Court’s views as to this. Pinnacle has shown the necessity to get its
costs down to a level at which it is near or among the lowest cost carriers, but has not shown a
need to leapfrog below them. If, with that knowledge, the two sides still cannot reach agreement,
Pinnacle can refile its motion, putting in evidence on the distinction between what it needs to be
among the lowest cost carriers and what it was asking (or is now asking) to leapfrog below that.
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have been ameliorated, at least to some greater extent, by a better proposal to allow them
to share, through equity or profit sharing, in fruits of concessions they were asked to
make; and (3) whether Pinnacle properly could have shown no movement whatever in its
overall cost savings demand.
With respect to each of these matters (but these matters alone), the Court finds
Pinnacle’s proposal insufficient to pass muster under sections 1113(b) and 1113(c).
While necessity was shown for the great bulk of the requested pay cuts, necessity was not
shown for all of them, resulting in a failure to satisfy section 1113(b)(1).
The failure to offer greater equity or profit sharing to better offset the Pilots’ wage
and benefits sacrifices—which, in the absence of any modification, would give others a
windfall at the Pilots’ expense—resulted in a failure of the section 1113(b)(1)’s
requirement that Pilots be treated fairly and equitably.
And the three deficiencies just noted gave the Pilots good cause not to accept
Pinnacle’s proposal.
Pinnacle may be well served to present a new proposal that cures the deficiencies
just noted. If Pinnacle does so, and if that does not by itself result in consensual
agreement after negotiation with the Pilots, a subsequent motion for 1113 relief will
almost certainly be granted.
Dated: New York, New York 	s/Robert E. Gerber
Of course, even if Pinnacle was only seeking to match (and not get below) its competition, its
proposal was deficient in the other two respects the Court noted, and thus relief could not be
granted today in any respect. But the Court would think that all three deficiencies are relatively
easy to fix, providing a basis for consensual agreement, or (though this would greatly disappoint
the Court) providing a basis upon which a renewed motion could be granted. Because so little is
necessary to complete the record, the Court will hear any such renewed motion on shortened
notice.
November 16, 2012 	United States Bankruptcy Judge
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