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December 04, 2014

American: 'me-too' profit-sharing and healthcare plan options give possible flight attendant contract greater value

On the second day of arbitration hearings between American Airlines and its flight attendants union, the carrier argued that additional clauses for profit-sharing and healthcare plans would make a possible flight attendant contract more valuable.

Both parties have already agreed that the new joint contract between the Association of Professional Flight Attendants and the company will be valued at $112 million more annually than the legacy contracts at American and US Airways.

In its presentation to the arbiters, American's witnesses said the options for profit-sharing and healthcare plans still hold an economic value over the span of the five-year contract, even if the union never exercises the options.

"It may be the case that AA never offers a PS or health plan that is of no more value and APFA never takes these options. But today, these options are at their peak value because these are exercisable for five years," a company witness said, according to a tweet from APFA, which is live-tweeting the hearings on its Twitter account.

American completed its presentation of its arguments on Thursday and the arbiters said they planned to meet that afternoon to discuss a schedule on when it will present its binding arbitration findings.

Keep reading for a full account of Day 2 of the hearings as tweeted by APFA.

-Andrea Ahles

Day 2 - Interest Arbitration - AA called Dr. Darrin Lee, Airline Economist as an expert witness.

Company witness (Dr. Lee) is providing an economic assessment of whether the value of the me too clauses puts the value above $112 million which is the stipulated value of what must be added back into the combined contracts to equal market based in the aggregate. Dr. Lee: (summarized) Any option that is exercised (me too clauses) would provide a greater value than the $112 million. If the options weren't exercised, even unexercised they have a value - a basic economic theory. The profit sharing option is particularly valuable because it allows APFA to reverse the decision that it's already made to take the $50 million value and, based on new information it doesn't currently possess, exercise the option if it serves their purpose.

The me too options provide value as all options do. The holder of the option is bestowed a right. The right via APFA is to have the company match terms on some future event. Example: PS option, APFA has the option of reversing its decision of $50 million if the company is to agree on PS for another workgroup. There's a counter party to an option. The company is obliged to exercise the option. If the union exercises option of PS in the event another workgroup is offered PS, APFA has yet another option which is to revisit the earlier decision and decide whether it's more valuable to retain the $50 million or take the PS. Same goes for the health me too clauses. 3 reasons why the options have values: 1. exercised options provide value to the holder of that option. It's reasonable to assume that APFA would only exercise the health or PS option if it made them better off. This is called revealed preference. Unexercised options - APFA may decide not to exercise. At that point, do those clauses provide APFA with any value. Yes they do. All options provide the holder with value. BLOCH: If there is no possibllity of a payoff, isn't if fair to say that the option is much less value? Lee: Yes very good point. the price of the option is based on a whole number of things. time, probability of events in the future... say the only thing in the morning you eat is Cheerios. Your grocery story has 100 types of cereal. The fact that the store offers all of those options, and you only eat Cheerios, there is still 100 types of cereal. You may develop one day in the future an aversion to oats. You then have an option to switch cereals. Block: If I were offered the first trip to Pluto, I probably wouldn't take it. Lee: Someone might be. This isn't a tradeable option - it's between APFA and the company. pricing might be more complicated because there is no market for the option. The key factor is we have a party who is bestowed a right and a party that is given an obligation. The counterparty (AA) is imposed cost and there's a party who receives a benefit (APFA).

Roberta Golick (one of the arbitrators): how does one attribute an economic value to a right that may not be exercised. Lee: I've not been asked to price the option. What is the price you'd place on the option, I would have to give it some thought. I can tell you for sure that with 100% certainty that it does have real economic value. I have slides that will speak to profit sharing. The issue of economic value is thinking of it in 2 ways. "What cost does it impose on the company?" one example is - it limits the options / flexibility of the company going forward to negotiate future CBAs. The company has no intention of starting profit sharing for other unions. These twists and turns in bargaining is unpredictable. When another work group is negotiating, and because the other work group was williing to trade wages for a better health care plan, that may work for them. Knowing that APFA has the right to trade in the $50 million for PS imposes a real cost to the company. The company doesn't want to be restricted in any way.

LEE: It may be the case that AA never offers a PS or health plan that is of no more value and APFA never takes these options. But today, these options are at their peak value because these are exercisable for five years. BLOCH: Isn't there a distinction to be drawn for a few reasons... 1 - the options in the hands of the FAs early on, in a market situation at its highest, that option has no value at all unless you have the contingency of the company offering this to another group correct? LEE: No. The time value is positive even if it wasn't exercisable. The very fact that you have a future option to do something you wouldn't otherwise be able to do. BLOCH: some value maybe but here you postulate a slope downward as the expiration date draws closer. In this case wouldn't it go the other way. LEE: No. the JCBA contemplates a 5-year period. My understanding is that AA has before it multiple additional CBAs needing negotiations because of the merger. These will take time. The greater the time period covered, the greater the value must be. The time it is worth the most is measured by the amount of time ahead of you to exercise.

LEE: Moving on, we've covered the first 2 reasons why options have value. Finally, the info component in PS. APFA has determined its valuation for uncertain PS is $50 million. That's the amount APFA has ascribed aka the certainty equivalence. What's important about the $50 million is that it's based on the info APFA had as of the time of its proposal re: future profitability for the company and industry. Info is key to a number of things particularly in the airline industry. Additional info re: how well the company and industry are doing (synergies, oil prices) are important to consider. The me toos are structured allowing APFA to take advantage of info it doesn't currently possess.

LEE: It allows APFA, at some point in the future, to revisit the decision it has made today with the benefit of additional information it doesn't currently have (price of fuel, etc...) allowing it to leverage that additional information when making a choice. It also allows APFA to switch back to the $50 million (the certainty equivalent) if they don't want to stick with the PS piece. Let's assume they do that. If the economy were going in the tank, or there were a terrorist attack, Ebola, APFA would be able to use that info at that time and make an informed judgment to revert to that $50 million. That 2nd component allowing APFA to give back the PS risk and go with the $50 million certainty at a time the company may not have made money that year. Basically, going to Vegas and not placing your bet until you've seen your cards is what this provision is equivalent to.

CROSS EXAMINATION FREUND (APFA): You've been asked to provide an econ / finance theory on the value of options correct? LEE: That's one component of what I was asked to do. That's a large part of what I needed to do to arrive at my conclusions. But I was asked to look at the proposed JCBA and in light of the stipulation, determine whether the me too clauses provided economic value and would, therefore, exceed $112 million.

FREUND: If you'd never seen the JCBA, you'd testify that if you were asked whether options of any kind had value you would say Yes, correct? LEE: I suppose if you asked me on the street if options have value I would say yes.

FREUND: You weren't asked to evaluate the value of these me too clauses, correct? LEE: I became familiar with and developed an understanding of the general framework. We didn't know what the disputed issues would be. FREUND: You didn't participate in any of the decision making re: assumptions and values attached to the costing model, correct? LEE: Correct.

<back from short recess> FREUND: The panel asked whether the options (such as Apple stock) were the same as the me too options in APFA's proposal. The options in the proposal have no market and can have no market, correct? LEE: I never like to paint absolutes in that way. However, it's unlikely a market would develop in this market. I'll grant you that.

FREUND: to clarify another portion of your testimony, one of the values of the option is the ability to "make a choice based on changed information." LEE: Yes. FREUND: That ability enhances the ability in this case of the FAs to make a choice between keeping $50 million value in JCBA or taking a PS plan, correct? LEE: Yes. FREUND: you do understand that the PS proposal would require the FAs to make the choice in year 1 as to whether - in year 2 - it was going to reduce its wages by $50 million for PS in the following year. LEE: I do understand that FAs wouldn't be able to look back, see profits and make a choice. But, the information that you have for subsequent years is conditioned on everything you know up to that point in time. Where the option of trading back for the guaranteed money, suppose we were back here in 9/12/01 and that right became exercisable then, we don't know the profits of '02 and '03, but we have a lot more of an idea what the profits would be than we did on 9/09/01.

Lee has been excused as a witness.

Company calls Patrick ?? (I'll get that name later) as a witness. AA: what is your position? Patrick: Principle at AA on the labor analysis team in February of this year. Patrick: Responsible for valuation activities for CBAs and other responsibilities re: unionized work groups. During bargaining, in charge of labor finance for the AA nego team. Involved with the costing models. Worked with APFA's Dan Akins on the costing. AA ATTORNEY: Is there an economic cost to the company if wages are made retroactive? PATRICK: yes. AA: what is the cost? Patrick: it would be about $3 million for every month between the eff. date of the JCBA and the retro date of 12/2/14. AA: What would that do to the annual average of the $112 million market based. Would making wages retroactive affect any other terms? PATRICK: yes, beyond just the eff. date of the payments, all of the subsequent annual increases would occur a month earlier [adding even more value to the $112 m]. For every month those wages are put forward, it would be $2 million per year every year added to the $112 million making it $114 million average per year added to the value of the current combined contracts. CROSS EXAMINATION: FREUND: What would be the effect of having a January increase assuming a 12/2 start date for wages, if, as Laura Glading suggested in her testimony, the amendable date was pushed back a month? PATRICK: if the contract had gone into place on 12/2/14, your scenario would retain same economics that were modeled. However the eff. date of 12/2/14 is not necessarily to be the eff. date of the contract. FREUND: What if an amendable date was set for 12/2/14, would that create a $112 million valuation? PATRICK: Yes. FREUND: And you heard Ms. Glading make a comment about the possibility of moving the amendable date, correct? PATRICK: Yes.

FREUND: Did you place a value on the me too clauses? PATRICK: We did not place a value on the me too.

FREUND: In the LUS Redbook, there is a me too clause for health insurance in the event another workgroup gets it. Did you assign any value to it when it was removed from the Redbook with regards to the T/A? PATRICK: We did not assign any value to it.

PS: Witness' full name is Patrick Guiltinan.

Witness is excused. Company calls Jerry Glass as a witness. Employer is FMH Solutions group/management and labor relations consulting group

GLASS: Specialty is labor relations and contract negotiations. I'm the president. We have 17 employees that cover a variety of topics at my company. I've worked on 150 labor/management contracts. I've been chief negotiator for 145 or so of those. I was also the chief negotiator for the company in the AA/APFA negotiations.

AA: Any me too value in the LUS contract? GLASS: Yes. - for example Per Diem is valuable. AA: How does this impact AA? GLASS: A me too of a certain value such as the PS or medical me too could affect bargaining with another union and fixing their problem. Say we are in Section 6 negotiations with the dispatchers and they decide for whatever reason they are willing to pay whatever amount of money for their current health plan. We're in a cooling off period and I end up on the last night of the cooling off period (because you can't replace dispatchers) If I'm going to consider solving this problem with the dispatchers but I have a me too for 25,000 other employees tied to resolving the issues that is a huge problem for the company.

CROSS EXAMINATION: FREUND: you said one of the reasons a company doesn't like retro is because 1 - it wasn't negotiated in the T/A. GLASS: Yes. FREUND: but we're here to create an agreement through this panel, correct?) GLASS: It's already largely created FREUND: we're here to establish what will be the Agreement between the parties correct? GLASS: Yes. [Glass is now reviewing T/As 1, 2 and 3 at LUS and reminding the board that there was no retroactivity in any of those T/As.] This T/A is largely based on the LUS contract.

FREUND: the dispatchers' hypothetical negotiations scenario you proposed earlier [that could have "harmed" negotiations with the dispatchers in the final hour if the weight of 25,000 flight attendants and an equivalent program had to then be put in place for them, too] could have actually happened at LUS, correct? (referring to the "me too" clause in the LUS contract for medical) GLASS: Yes. [and a lot of explaining ensued about why it's different for flight attendants today than it was for the LUS contract back then...}

Glass is excused from the stand. Company rests its case.

Following a recess, the Board is addressing the room. Arbitrator Bloch is suggesting to the parties that they do not need closing arguments because of the thorough presentations already given. The Board will convene immediately following the meeting today to discuss calendars and the timing of a decision.

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