# In Re Mesaba Aviation, Inc.

> United States Bankruptcy Court, D. Minnesota · May 18, 2006 · 341 B.R. 693

URL: https://www.frixlaw.com/law-library/cases/1857202

## Case

- **Full name:** In Re MESABA AVIATION, INC., Dba Mesaba Airlines, Debtor
- **Court:** United States Bankruptcy Court, D. Minnesota
- **Decided:** May 18, 2006
- **Citations:** 341 B.R. 693; 46 Bankr. Ct. Dec. (CRR) 142; 2006 Bankr. LEXIS 1057; 2006 WL 1352328
- **Precedential status:** Published
- **Opinion:** Opinion by Kishel
- **Judges:** Gregory F. Kishel
- **Cited by:** 16 later opinions in the Frix Law Library

## Citator (automated)

- **Red flag:** Reversed on other grounds by Association of Flight Attendants-CWA, AFL-CIO v. Mesaba Aviation, Inc., 350 B.R. 435 (2006).
- Negative treatments: 1
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1857202

## How later opinions describe it (automated extraction)

- noting that Mesaba “has the burdens of production and persuasion” on the fair and equitable element

## Opinion text

ORDER DENYING DEBTOR’S MOTION FOR AUTHORITY TO REJECT COLLECTIVE BARGAINING AGREEMENTS
GREGORY F. KISHEL, Chief Judge.
This proceeding came on before the Court for an evidentiary hearing on the motion of the Debtor under 11 U.S.C. §§ 1113 and 365(a), for authority to reject its collective bargaining agreements with the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants-CWA, AFL-CIO (“AFA”), and the Aircraft Mechanics Fraternal Association (“AMFA”). The hearing was conducted on February 24, 27, and 28, and March 3, 6-9, 13-14, and 20-24, 2006. The Debt- or appeared by its special labor counsel, Kenneth B. Hipp and Cynthia M. Surrisi, of Marr Hipp Jones & Wang, LLLP, Honolulu, and by its Chapter 11 counsel, Michael L. Meyer, of Ravich Meyer Kirkman McGrath & Nauman, Minneapolis. ALPA appeared by its attorneys, James L. Lin-sey and Joseph J. Vitale, of Cohen, Weiss and Simon, LLP, New York, and by James M. Jorissen, of Leonard, O’Brien, Spencer, Gale, & Sayre, Ltd., Minneapolis. The AFA appeared by its attorneys, Robert S. dayman, of Guerrieri, Edmond, dayman & Bartos, P.C., Washington, D.C., and Joel D. Nesset of Henson & Efron, P.A., Minneapolis. AMFA appeared by its attorney, Nicholas P. Granath, of Seham, Seham, Meltz & Petersen, LLP, Minneapolis. MAIR Holdings, Inc. (“MAIR” or “MAIR Holdings”) appeared by its attorney, Lenard M. Parkins, of Haynes and Boone, LLP, Houston. The Unsecured Creditors Committee appeared by its attorneys, Scott A. Kane and Sean T. Cork, of Squire, Sanders & Dempsey, LLP, Cincinnati and Phoenix, and Thomas J. Lallier, of Foley & Mansfield, PLLP, Minneapolis. Upon the evidence received over the course of the hearing, the briefs and arguments of counsel, and other relevant files and proceedings in this case that were made a part of the record, the Court memorializes the following decision.
THE RELEVANT PARTIES
The Debtor filed a voluntary petition for reorganization under Chapter 11 on October 13, 2005. The Debtor is an airline, currently doing business as a “regional airlink partner” of Northwest Airlines (“Northwest”). Since 1984, it has contracted with Northwest in various capacities to transport passengers from smaller and more remote airports to one of Northwest’s three hub locations at Minneapolis-St. Paul, Detroit, and Memphis.
Northwest itself has been in Chapter 11 in the Southern District of New York since September 14, 2005. This circumstance is one of those that makes the Debtor’s case nearly unique among those of the airlines that have sought relief under 11 U.S.C. § 1113 .
As of the commencement of the case, the Debtor was a party to collective bargaining agreements with four unions that repre
*703
sented specific groups of its employees, namely ALP A, AFA, AMFA, and the Transport Workers Union of America (“TWU”).
1
Before the Debtor’s bankruptcy filing, these collective bargaining agreements and the parties to them were subject to the Railway Labor Act, 45 U.S.C. §§ 151 ,
et seq.
The remainder of the Debtor’s employees' — consisting of management personnel, directors and officers, customer service agents, and “non-contract hourly” employees (crew schedulers, stock clerks, and administrative personnel)— were not unionized.
All of the Debtor’s outstanding stock is owned by MAIR Holdings. MAIR itself is a publicly-held and -traded company. At the times relevant to this motion, Northwest held 27.5% of the shares in MAIR. The remainder were held by over six hundred shareholders.
MOTION AT BAR
The Debtor has moved for authority to reject its collective bargaining agreements with ALPA, AFA, and AMFA.
2
In the first instance, the Debtor is vested in the right to seek such relief by 11 U.S.C. § 365 (a).
3
11 U.S.C. § 1113 , however, sets the specific requirements for rejection of a collective bargaining agreement that must be met by the Debtor. 11 U.S.C. § 1113 (a) (“The debtor in possession ... may assume or reject a collective bargaining agreement only in accordance with the provisions of this section.”).
As this Court’s senior member remarked shortly after the enactment of § 1113, the statute “is not a masterpiece of draftsmanship
..." In re American Provision Co., 44
B.R. 907, 909 (Bankr.D.Minn. 1984) (Kressel, J.). Nonetheless, as Judge Kressel observed, “nine requirements for court approval of the rejection of collective bargaining agreements can be gleaned from § 1113.”
Id.
As counsel here have acknowledged, the requirements of § 1113 include some that are procedural in orientation, and others that are substantive in nature. A debtor-in-possession that would reject a collective bargaining agreement must prove up the economic merits of a proposed alternative to the terms of the collective bargaining agreement, which must comply with the statute’s prescriptions. In addition, it must show that it went through fairly exacting procedures to air its .proposal to the union(s), to try to prevail upon the union(s) to accept those merits, and that the union(s) “refused to
*704
accept such a proposal without good cause,” § 1113(c)(2).
United Food and Comini Workers Union, Local 328,
AFL-
CIO v. Almac’s, Inc.,
90 F.3d 1, 6 (1st Cir.1996);
In re Mile Hi Metal Sys., Inc.,
899 F.2d 887, 891-892 (10th Cir.1990);
In re Carey Transp., Inc.,
816 F.2d 82, 88 (2d Cir.1987);
In re Century Brass Prods., Inc.,
795 F.2d 265, 273 (2d Cir.1986);
In re Wheeling-Pittsburgh Steel Corp.,
791 F.2d 1074, 1081 (3d Cir.1986). The burden of production of evidence on some of the elements of the procedural side may shift over to the respondent union.
In re American Provision Co.,
44 B.R. at 909-910 . However, the burden of persuasion as to all of the statute’s requirements remains with the debtor-movant.
Id.
at 910 .
A welter of evidence was put before this Court in a grueling four-week evidentiary process. It is nearly overwhelming in its length, variety, complexity, and (at times) technicality. Given the severe time constraints for rendering of decision that Congress inflicted on the hapless presiding jurist,
4
the most traditional format of trial court decision does not conduce. An exacting recitation of found facts and a regurgitation of the same content in extended conclusions of law just is not feasible; and, it is not likely to be the most illuminating exposition anyway. The enormity of this all requires something different, portentous as it is in size of record, cacophony of issues, and ultimate consequence to individuals, constituencies, and regional economy alike. Some initial recap of the transactional history is appropriate, to lay out a context. However, to best effect, the treatment of the issues should be structured by the nine requirements identified in
American Provision Co.,
albeit with those elements marshaled to procedural and substantive sides.
5
TRANSACTIONAL AND CONTRACTUAL BACKDROP
Ultimately, the substantive side of the Debtor’s burden comes down to a matter of economics. In a Chapter 11 case, of course, those economics rest on a debtor’s ability to generate income. For the relevant portion of this Debtor’s history, that income was derived in nearly-full proportion from contracting with another business, by providing one set of services to the order of only one customer. This, of course, was through the Debtor’s airlink
*705
partner relationship with Northwest.
6
For the relevant future, the Debtor will continue to position itself in the airline industry in the same way, as a “regional carrier” feeding passengers into “mainline” or “network” carriers under contract with them.
7
From 1996 until 2005, it was bound exclusively to Northwest to provide this service under two Airline Service Agreements (“ASAs”), each covering a separate component of the Debtor’s fleet of aircraft. However, at present the Debtor is not tied to Northwest on an exclusive basis, and it may well not be tied in that way ever again.
This is all a product of the succession of ASAs under which the Debtor has served Northwest. These ASAs have been identified to packages of business that are defined by the type of aircraft the Debtor has flown for Northwest. As of early 2005, the Debtor had a fleet of 98 aircraft total, consisting of two components: 63 Saab 340 turbo-prop airplanes (“Saabs”), and 35 Avro 69-seat, four-engine regional jets, manufactured by British Aerospace (“Avros” or “ARJs”). The Debtor had separate, free-standing ASAs with Northwest for each fleet component. In April, 2005, Northwest awarded the Debtor the right to fly CRJ-200/440 50-seat, two-engine regional jets, manufactured by Bombardier (“CRJs”). This award was for a total of 15 CRJs initially, augmentable via an exclusive right in the Debtor to fly additional CRJs for Northwest (up to 20 if Northwest decided to add them to its fleet), and by a right in Northwest to place up to 150 additional CRJs with the Debtor.
Under the 1996-2005 ASAs, Northwest leased nearly all of the subject aircraft from third parties and then subleased them to the Debtor. Northwest retains substantial power to alter the routing and scheduling of the flights that the Debtor services; and, hence, it has the right to ground aircraft if it reduces service to particular destinations. This, of course, results in lessened revenues for the Debt- or.
Under the several sorts of their ASA relationships, the Debtor agrees to use the aircraft subleased from Northwest to operate those flights designated by Northwest in its discretion, under the standards for performance specified in the ASA. In return, Northwest pays the Debtor for the provision of the flying service, in a base amount calculated by the number of “block hours” flown times a stated rate.
8
The ASA contains complicated formulas in relation to this and other forms of payment to the Debtor. The details are not relevant to the matter at bar.
This “fee for departure” arrangement is common in the network carrier-regional carrier relationship. The mainline sets all rates for charges to the individual flying
*706
customers and freight shippers, and it alone receives and keeps all revenues from this provision of retail service to the public. The regional, in turn, is only a provider of the flying service to the network carrier; it has no control over or access to the customer-derived revenues that are generated directly from the exploitation of the aircraft in service.
Under the 1996-2005 ASAs, the Debtor was prohibited from providing airlink service to any mainline other than Northwest.
As the Debtor’s parent company, MAIR received payment from the Debtor over the years. These payments were made under various denominations, including consideration for the provision of “management services” to the Debtor under an agreement executed in 2003. The services included the provision of directors’ and officers’ liability insurance and audit support services to the Debtor; advice and consultation on negotiations with Northwest (including the formulation of the Omnibus ASA) and aircraft manufacturers and vendors; and “significant legal counsel.” During the period of overlap of their respective employments, John G. Span-jers — the Debtor’s President and Chief Operating Officer — and Paul Foley— MAIR’s Chief Executive Officer and President — consulted very frequently and intensely, often on a daily basis.
9
In the spring and summer of 2005, it was widely known that Northwest was experiencing significant financial distress. Speculation that Northwest would seek protection under Chapter 11 was rampant in the regional and national media, given that other legacy carriers like United Airlines and U.S. Airways were already in bankruptcy at the time.
At the same time, representatives of the Debtor and Northwest were negotiating over the two companies’ overall relationship. These negotiations centered around the fact that the aircraft in the Debtor’s Saab and Avro fleets were in blocks with different lease durations, and the Debtor had just obtained an entirely new line of business and potential expansion through the CRJ award. With the advice of counsel, the Debtor’s management had concluded by mid-summer that the Debtor would be best off to obtain and execute a comprehensive single ASA with Northwest, bringing together the operation of all three components of the Debtor’s fleet under one contract. In their mind it was key that this be done before Northwest went into Chapter 11. The idea was that having a unitary contractual relationship would make it more legally onerous for Northwest to reject outright under § 365(a), to “cherry-pick” those parts of the Debtor’s operation that would be most advantageous to Northwest and abandon the rest, or to interrupt its post-bankruptcy performance in any way. This way, the Debt- or’s management concluded, the Debtor’s interests in continued flying for Northwest would be better protected, whatever the outcome of Northwest’s decision regarding bankruptcy.
As a result, during August, 2005, representatives of the Debtor, MAIR, and Northwest negotiated an Omnibus ASA. That document was executed by the Debt- or and Northwest on August 29, 2005. On the same date, MAIR and Northwest executed an agreement that memorialized certain obligations that MAIR was undertaking “as partial inducement for Northwest to enter into the [Omnibus] ASA.” The relevant ones among these obligations were a reconfiguration and repricing of
*707
certain warrants for the purchase of additional stock in MAIR that had been previously issued to Northwest but not yet exercised by it; a requirement that MAIR make a “one-time cash contribution” (denominated as a “Capital Contribution”) of $37,100,000.00 to the Debtor, within three business days of August 29, 2005; and a right in Northwest to “nominate and recommend for election by the shareholders of MAIR” a number of directors such that three directors designated by Northwest would be on MAIR’s board if those nominees were elected.
Shortly after the Omnibus ASA was executed, Northwest had the first two CRJs delivered to the Debtor, to be put into service under the 15-unit award. On September 7, 2005, MAIR timely paid the $37,100,000.00 “cash contribution” to the Debtor.
In early September, 2005, it seemed to the Debtor’s management that the Debtor had reasonably bright prospects before it, despite the contemporaneous reports about Northwest. The commencement of CRJ delivery represented the Debtor’s first entry in years into a new line of service, and one that seemed to be the future of the regional industry. The groundwork was laid for a more predictable future for the Saab and Avro fleets. In 2007 the Omnibus ASA would permit a resetting of the profit margin recoverable by the Debtor via its rates. The Omnibus ASA had a ten-year term, promising a long-term stable base of operations. And the Debtor was freed of the exclusivity provisions of the 1996-2005 ASAs: it now could take airlink work for other carriers, as long as that did not feed into any of Northwest’s three hubs. On several occasions over the ensuing weeks, representatives of Northwest told the Debtor’s senior management that Northwest intended to abide by the terms of the Omnibus ASA.
However, within two weeks of executing the Omnibus ASA, Northwest put itself into Chapter 11. Contemporaneously, or within three weeks of that, Northwest:
1. withheld a total of $36,000,000.00 in payments to the Debtor under the Omnibus ASA, which were due immediately pre-and post-petition in Northwest’s case;
2. gave the Debtor notice to withdraw a total of 19 Saab and Avro aircraft from service in the very near future;
3. gave the Debtor notice that it was canceling the subleases on all of the remaining Avro aircraft, effective December, 2005; and
4. advised the Debtor that it would not place the remainder of the 15 CRJs into service with the Debtor.
The Debtor was eventually able to prevail on Northwest to defer the withdrawal of most of these Saabs and the Avros, to later dates. However, it was immediately thrown into financial crisis by the accompanying reduction in scheduled flights, the withholding of payment under the ASA, and the refusal to place the 13 CRJs.
10
The Debtor’s management went through a monthlong evaluation of options with counsel and financial consultants, using a quickly-constructed software model.
11
On the
*708
basis of their recommendation, the Debt- or’s board of directors authorized its management to file a petition under Chapter 11. As required by the respective companies’ bylaws, MAIR’s board gave the same authorization after a presentation by the Debtor’s representatives.
12
Through the adjournment of the hearing on the Debtor’s motion, Northwest had taken no action to reject the Omnibus ASA.
DISCUSSION
7.
Remedy of Rejection, as Applied to the Unions’ Collective Bargaining Agreements.
As the courts noted early after its enactment, § 1113 imposes both procedural and substantive requirements on a debtor-in-possession that seeks to reject a collective bargaining agreement:
Section 1113 ... created an expedited form of collective bargaining with several safeguards designed to insure that employers did not use Chapter 11 as medicine to rid themselves of corporate indigestion. Employers may only propose modifications in an existing labor contract that are necessary to permit an effective reorganization of the debtor. Further, the debtor must propose these modifications to the union before seeking approval to reject its collective bargaining agreement. [citation omitted] Only if the expedited bargaining fails does § 1113 permit a debtor to apply for rejection of the labor agreement.
In re Century Brass Prods., Inc.,
795 F.2d at 272 . Preserving the numbering of the elements as set forth in the
American Provision Co.
analysis, they fall into these categories as follows:
A. Procedurally-Oriented Elements
The first group of elements goes to the way in which the debtor-in-possession brings forward its proposal, and the actions it takes to try to head off the need for formal relief under § 1113.
1. The Making of a Proposal to Modify the Collective Bargaining Agreements.
The debtor-in-possession must first show that it has made a proposal to its union(s), for a modification of their collective bargaining agreements. 11 U.S.C. § 1113 (b)(1)(A);
In re American Provision Co.,
44 B.R. at 909 .
Here, once it was under the protection of Chapter 11, the Debtor continued to work with its financial consultant for bankruptcy issues, Mercer Management. After building out the Mercer Model to make it “dynamic,” i.e., to project profitability on the basis of complex input of data on revenues and expenses, the Mercer consultants and the Debtor’s management fed it data based on historical operations, plus certain assumptions on fleet size, income generation, and a desired post-restructuring profit margin. Their goal was to arrive at the aggregate amount by which the Debtor’s costs of operation would have to be cut in order to sustain it as a going concern after all of Northwest’s actions had come to
*709
fruition. Ultimately, they assumed that the Debtor would be reduced to a “steady-state” fleet of no more than 49 Saab turboprop aircraft by the end of 2006.
13
The Debtor’s management then identified four “key areas” through which to meet the cost-reduction goal identified by the first stage of the analysis. These were: an “operational restructuring” that focused on reducing fixed costs of administration and physical plant; a “vendor restructuring” that entailed renegotiating rates for the future provision of various goods and services to the Debtor; an “exercise of § 1110 rights,” under which the Debtor used 11 U.S.C. § 1110 as a legal platform to pare out unneeded aircraft engines and parts from its inventory and to renegotiate rental rates and return terms on other such assets; and “labor cost savings,” under which it would reduce the wages and benefits payable to all of its employees, and to take other measures that it deemed necessary to reduce the personnel-related cost of providing service.
The Debtor’s management and the Mercer analysts went through the Debtor’s cost structure in that order, targeting individual line-entries of expenditure and reducing the projected amounts as much as they could consistent with maintaining the integrity and quality of a reduced operation based on a 49-Saab fleet. They turned to reducing labor costs only after extracting as much as they could out of the other three areas.
14
When all of the other cost reductions were quantified and deducted from the anticipated revenues from a steady-state fleet, the Debtor’s management concluded that $17,100,000.00 had to be cut from its labor costs per year,
after
the reduction in labor force that would be required by the retirement of half of its 2005-level fleet at Northwest’s direction. Taking this figure as a numerator and the Debtor’s aggregate labor costs after fleet reduction as the denominator ($89,700,000.00), the Debtor’s management identified a 19.4% overall reduction in labor costs as the target for this “key area” in a restructuring.
They then made a policy determination that the several “labor groups” within the Debtor’s workforce would all be subject to the same 19.4% reduction in costs. This was to include officers, directors, and all management personnel, as well as both unionized and non-unionized hourly employees. Recognizing that the structure of compensation differed between some of the labor groups, they planned for the same percentage cut in the total labor costs within each group but allocated the reduction differently among the existing components and determinants of compensation for each group. Those components included salary or hourly wages; performance-related incentive pay; and benefits such as medical and disability insurance coverage, sick time, and vacation accrual; and “work rules” under collective bargaining agreements, which directed the way in which
*710
individual employees would accrue their compensation actually received.
It was decided to increase the share of medical insurance premiums paid by an individual employee, and to do so by an equal fraction for all employees.
15
That share was to go from 30% to 50%. Employees’ entitlements to disability pay (short- and long-term) and sick pay were to be reduced.
Since management employees had been “incentivized” by having a substantial component of their compensation in the form of incentive pay based on annually-evaluated individual and company performance, the percentage cut to this entitlement was to be significantly greater than the percentage cut to their base salary rate. The percentage cut to the wages of hourly-paid union employees was to vary somewhat as between the unions, depending on the availability of other measures not directly related to wage rates that the Debtor’s managers identified as ways to contribute to an overall 19.4% cost reduction for each union group.
16
On various dates in late September and early October, Spanjers, as the Debtor’s President, met with representatives from each union to advise them of the “dramatic fleet changes the [Debtor] was going to experience as a result of the Northwest bankruptcy” and to ask for the unions’ cooperation in lowering expenses via consensual modifications to their collective bargaining agreements. After ensuing discussions between representatives of the Debtor and the unions did not significantly advance the issue, Spanjers used a November 21 letter to propose an “expedited negotiation schedule from November 29, 2005, to December 19, 2005,” to reach consensual modifications that would “allow [the Debtor] to avoid a Section 1113 filing.” In that letter, he gave notice to each of a separate meeting between the Debtor and each union, all to convene on November 29. These meetings were to kick off the negotiations, via an informal presentation of the Debtor’s post-bankruptcy business plan and other materials in support of the proposals for modification that the Debtor would then make.
At the meeting, Spanjers explained the Debtor’s business plan and made remarks to open a more structured discussion on the matter of voluntary concessions from the unions. After that, the Debtor sent to each union a first “Section 1113 Proposal Term Sheet.”
17
Each of these documents contained a summary of terms under which the Debtor proposed to “restructure the current [collective bargaining] Agreement to enable the transformation of the Debtor consistent with the announced business plan” that had been presented at the November 29, 2005 meeting. All of them provided for a “new Agreement” with an effective date of April 1, 2006, and an “amendable date” of March 31, 2012.
18
*711
These initial term sheets contain three or four pages of outlined content, plus more lengthy attachments with financial detail. As to all of the unions, the outlines summarized the Debtor’s proposals to change terms that governed the amount of pay; “work rules” and staffing provisions that governed scheduling, duty assignments, and furlough and recall; and benefits, including sick leave, medical insurance, and the disability program. It also contained the Debtor’s proposal to establish a profit-sharing plan for all employees. Finally, each proposal had additional provisions going to the types of employment terms that were unique to that union, greatest in number for the pilots who belonged to ALP A. These included the dismissal of certain pending grievances by individuals or groups, to which the Debtor assigned some savings value.
Each proposal contains supporting charts that summarize the valuations that the Debtor placed on each element of compensation under the collective bargaining agreements, and the savings it anticipated as to those elements it proposed for modification. These “costing sheets” are detailed. They set forth the projected costs of the several components of compensation for each union group over the six-year duration of the proposed concessions, with the values attached to each type of concession. The bottom line of each is the total of “Target Cost Savings” calculated via these projections for each union group for each year, as compared to the proposed valuations set forth in the earlier term sheets.
In conjunction with the presentation of the Debtor’s business plan, these three documents did set forth a proposal for modification of each union’s collective bargaining agreement that was sufficient to satisfy the first element identified in
American Provision Co.
19
2. Basis for Proposal in Most Complete and Reliable Information Then Available.
The debtor-in-possession must then establish that the proposal was “based on the most complete and reliable information available at the time of such proposal.” 11 U.S.C. § 1113 (b)(1)(A). The Debtor bears the initial burden of production of evidence on this element.
In re American Provision Co.,
44 B.R. at 909-910 .
*712
The Debtor based its initial proposals to its unions on a business plan dated December 2, 2005. This business plan projected the Debtor’s operation over a term of 6.5 fiscal years, from the second half of fiscal year 2006 to the end of fiscal year 2012. The business plan was built on information gleaned from three major sources: the Omnibus ASA; the Debtor’s actual budget for fiscal year 2006; and the projections of revenues and expenses that the Debtor’s management and the Mercer consultants made on the basis of the Debtor’s past operating experience and certain assumptions as to the parameters of the future operations.
Those assumptions were:
1. The Debtor would experience a 5% drop in any revenue that it continued to derive from flying for Northwest.
2. The Debtor would have to generate an 8% operating margin by fiscal year 2012, as a condition of receiving “exit financing” for the consummation of a Chapter 11 plan, for receiving future RJ flying for a network carrier, or both.
3. The Debtor would be successful in reducing costs via the operational and vendor restructuring and exercise of § 1110 rights that it had undertaken as a first resort, in the respective measures of 43%, 10%, and $7,700,000.00.
4. The Debtor would bring about the 19.4% overall labor cost reduction that it had calculated as part of the restructuring.
5. At minimum, by the beginning of its fiscal year 2008, the Debtor would be reduced to a “steady state” fleet of 49 Saab aircraft, flying for Northwest under terms equivalent to the provision for that fleet component under the Omnibus ASA but less the 5% rate increment noted earlier.
As such, the business plan was both a compilation of basic data and an analysis and projection of that data. For its presentation on its motion, the Debtor proffered the business plan and its source financial data as the “information” on which it based its first proposals to the unions, arguing that they were “the most complete and reliable ... available at the time of such proposal[s].”
In their original written objections, the unions did not expressly raise any challenge to the Debtor’s showing on this requirement, articulated as such. In their post-hearing submissions, however, they framed an objection under this element. They premised this on three alleged shortcomings: the lack of alternate projections based upon a larger fleet size and broader scope of work, beyond that done with the 49-Saab fleet component; a lack of any expense line-entry for a future management fee payable to MAIR; and an alleged defect in the Debtor’s assumptions as to the incidents of employee attrition after an imposition of wage and benefit cuts.
These complaints, however, are not relevant to the second element under
American Provision Co.
By the essence of the modifiers “complete and reliable,” the second requirement goes to the comprehensiveness of the underlying factual support for a debtor’s projections under § 1113(a) — its breadth, depth, and objective credibility. Clearly, the statute’s idea is that a debtor-employer must make a proposal firmly grounded in the historical reality of operational economics, an unvarnished evaluation of its current straits, and a thorough analysis of all of the incidents of income and expense that would bear on its ability to maintain a going concern in the future, whether subject to the financial obligations of its collective bargaining
*713
agreement(s) or not. The requirement essentially bars a debtor-in-possession from making a proposal that is cursory or arbitrary, or one whose specific terms are result-driven in isolation rather than process-derived and based on actual experience.
The three points that the unions raised post-hearing do not go directly and immediately to the breadth or completeness of the financial inputs for the Debtor’s analysis. Rather, they go to the merits of three assumptions that structured the way that the Debtor treated the underlying source data in its analysis, once it was commenced. These points are relevant to the merits of this motion, but to a different statutory element. They do not go to whether the Debtor mustered a sufficiently comprehensive, detailed portrait of its financial posture and prospects before it formulated its proposals, and then used it in doing so.
Given that conclusion, it is not difficult to pass the Debtor on the second element under
American Provision Co.
All of the evidence reflects that the Debtor’s management and the Mercer professionals assembled data on past operations that was accurate in its detail and content, and that was up-to-date as of early December, 2005. The Debtor used the only contractual structure for future business that had any conceivable utility as things stood then— the remaining component of the Omnibus ASA that Northwest had not yet repudiated by action.
Taking each of the factors of
American Provision Co.
in its own right, it is most appropriate to use each one as a
successive
modifier of the first. Considering the early December, 2005 proposals in their own right, it is clear that they were based upon the most complete and reliable information available to the Debtor at that time. The unions have not challenged the reliability of any of the raw source data via evidence that is directly probative. The Debtor had relied on the historical data itself, since it came from its own books. Nor have the unions suggested any other sort of information
that the Debtor should have considered
when it formulated its proposal.
Thus, the Debtor has satisfied the second hurdle of
American Provision Co.
Whatever the vulnerability of the proposals on the matter of the three aspects raised by the unions through this element, it will be as a function of whether the proposed cuts are “necessary” to the Debt- or’s survival as a reorganized and viable going concern, or whether the modifications are part of a reconfiguration of all constituencies that is fair and equitable to all.
5. Provision of Relevant Information to the Unions to Enable Their Evaluation.
The next procedurally-oriented requirement under
American Provision Co.
is the fifth in its enumeration. After the Debtor made its proposals to its unions, it was required to provide them “with such relevant information as [was] necessary to evaluate the proposals].” 11 U.S.C. § 1113 (b)(1)(B). As to this element, the Debtor bore the initial burden of production, as to “what information it [had] provided.” Then the burden shifted to the unions, “to provide evidence that the information provided was
not
the relevant information which was
necessary
for [them] to evaluate the proposals].”
In re American Provision Co.,
44 B.R. at 909-910 (emphasis added).
The prefatory language of § 1113(b)(1) requires a debtor-in-possession to do this
“prior to filing
an application seeking rejection of a collective bargaining agreement ...” (emphasis added). Congress’s purpose in creating such procedural prerequisites on top of substantive elements
*714
was to ensure that labor law’s substratum—the protection and encouragement of a
process
of collective bargaining—would have one last meaningful chance before a debtor-in-possession could resort to the bankruptcy-law remedy of rejection.
In re Ionosphere Clubs, Inc., 922
F.2d 984, 989 (2nd Cir.1990) (as to concession sought as part of restructuring in bankruptcy, debtor must “attempt to negotiate with the union prior to seeking to terminate a collective bargaining agreement ... ”).
See also
130 Cong. Rec. S8898 (daily ed. June 29, 1984) (statement of Sen. Packwood: § 1113 was enacted to “stimulate collective bargaining and limit the number of cases when a judge will have to authorize the rejection of a labor contract”; requirements of § 1113 “place[ ] the primary focus on the private collective bargaining process and not in the courts ... ”).
In a very general sense, “the debtor must provide to the union enough information to justify
each
of its proposed modifications.”
In re K & B Mounting, Inc.,
50 B.R. 460, 467-468 (Bankr.N.D.Ind. 1985) (emphasis added). Another court has observed that the debtor must provide “the most meaningful financial and statistical information available.”
In re Liberty Cab & Limousine Co., Inc.,
194 B.R. 770, 777 (Bankr.E.D.Pa.1996). In a more specific sense, providing cost analyses for the proposed modifications, financial statements for the debtor, tax returns, and other related information may be sufficient.
In re Bowen Enters., Inc.,
196 B.R. 734, 741 (Bankr.W.D.Pa.1996).
Clearly, the breadth and depth of the requisite information will vary with the circumstanees, including the size and com-plicacy of the debtor’s business and work force; the complexity of the wage and benefit structure under the collective bargaining agreement; and the extent and severity of modifications that the debtor is proposing.
Compare In re Bowen Enters., Inc.,
196 B.R. at 741 ;
In re Appletree Markets, Inc.,
155 B.R. at 438 (debtor that “opened its books” to union and made other “information” available during preliminary § 1113 bargaining process satisfied requirement); and
In re Big Sky Transp. Co.,
104 B.R. 333, 335 (Bankr. D.Mont.1989) (supplying debtor’s “financial data and business plans” was sufficient),
with In re Valley Steel Prods. Co., Inc.,
142 B.R. 337, 338 (Bankr.E.D.Mo. 1992) (provision of yearly operating statements and monthly operating reports for bankruptcy case sufficient), and
In re Royal Composing Room, Inc.,
62 B.R. 403, 412-413 (Bankr.S.D.N.Y.1986) (provision of single sheet of paper with summary of debtor’s revenue and expenses was sufficient).
The debtor in this case is engaged in a large, complex, and interrelated industry governed in all directions by contract, regulation, and collective bargaining agreement. Thus, in general, far more information is called for to satisfy the fifth requirement, rather than less.
20
The real question is what sort of information is to be provided in this greater amount, and of what character.
Given the underlying purpose of promoting pre-motion bargaining, the information to be provided is not “relevant” merely by its objective, empirical charac
*715
ter alone. If the statute is to operate as intended, the provision of the information has an additional function, dovetailing into the broader congressional purpose of fostering consensual resolution before presentation to the court. That is to enable a union’s representatives and members to subjectively attach some bedrock legitimacy to a debtor’s proposal — to convince them that the process of formulating the proposal was not arbitrary, not “loaded” toward a particular result, not manipulated to produce an unfair allocation of burdens among the constituencies to the bankruptcy case. This aspect is more diffuse than the financial import of the facial content of the documentation that a debtor may provide under § 1113(b)(1)(B). However, it is no less vital.
21
It is here that the unions’ major cavil with the Debtor’s production of information has its context. After it went into Chapter 11, the Debtor reengaged Mercer Management to create a digital tool to enable it to do a financial forecast for its post-bankruptcy operations under the fleet configuration that its management considered to be the irreducible base for a restructuring in Chapter 11. This effort resulted in the so-called post-petition “Mercer Model” noted
supra
at n. 11, p. -, a built-out spreadsheet that used the Debtor’s budget for fiscal year 2006 as a start and received financial input to cascade it through the various incidents of operation over a period of future years. The output would be income, balance, and cash-flow statements for an airline operation of a specific fleet configuration. These documents would show future bottom-line financial results that would vary depending upon the amounts of revenue and expense that were input into the categories.
As constructed to produce the December 2, 2005 financial overview, the Mercer Model would forecast for a fleet of 49 Saab turbo-prop aircraft. This more “dynamic” version had some capacity to generate overview projections for other fleet configurations, but this output would not be reliable; the lack of matching formulas in the hard-coding structure of the spreadsheet could throw off the cascading process. A minimum of two weeks of concentrated programming would be necessary to ensure accuracy for analysis of any fleet scenario other than the Debtor’s steady-state 49-Saab configuration. This version of the Mercer Model retained “artifacts” from the static pre-petition model on which it was constructed, the incomplete beginnings of a framework for other functions, and it lacked the full architecture to properly “cascade” input data through a different set of assumed configurations.
After the early December, 2005 presentations to the unions, union representatives repeatedly requested that the Debtor provide them with a “live” working digital-format copy of the Mercer Model, as part of the information they wanted in connection with the “pre-1113 bargaining.” As repeatedly, the Debtor and its representatives refused to turn over a copy of the program, during the time relevant to the consideration of this motion.
22
*716
The Debtor’s stated reason varied with the identity of the witness who testified to this point. Steven Black, the Mercer consultant who participated in the creation of the post-petition model, established the model’s lack of reliability in application to other fleet configurations, and without controversion from the unions. Hien Cao, the Debtor’s Director of Strategic Planning, cited the possibility of “very erroneous results,” “unless you know exactly how to input,” as the reason why the Debtor would not release the Mercer Model outside its control. He (as well as Black) alluded as well that refinements were being made to the model almost constantly during the winter months of 2005-2006, though he did not cite this directly as a reason for not acceding to the unions’ request. Under cross-examination, Thomas Schmidt, the Debtor’s Vice President of Finance, cited a proprietary character of the input data as the reason for not giving the access, though he could not opine as to whether the infrastructure of the programming was proprietary to Mercer. Ultimately, Schmidt attributed the Debtor’s refusal to the fact that the provision of the model would have been “distracting” to the pre-motion negotiations, given the limited time available for them.
With the evidence of the Debtor’s justifications as much over the map as it was, it is hard to make a finding on the issue. In the last instance, however, no version is adequate — and the Debtor’s case on the fifth element fails because it withheld the Mercer Model.
The reason is contained in the testimony of two witnesses for AFA, David Borer, its General Counsel, and Daniel Akins, its expert witness on the valuation of the Debt- or’s proposal and various procedural issues. Borer testified very credibly to the AFA’s experience in “maybe a dozen” pre-motion and post-hearing negotiations with debtors-in-possession under § 1113, including “three or four” with regional airlines. He noted that in every other case with which he had been involved, the airline-debtor had provided AFA with both its business plan and a working version of its software model for projections, to enable AFA to see how it had “costed” the concessions it was asking. This included the recent case of United Airlines, where that debtor’s consultants had given “eventually nine or ten different versions” of its so-called “Gershwin Model,” “spectacularly detailed” and in continual updating throughout the case.
Borer testified that in this case, and in particular on the matter of the Mercer Model, the Debtor had been “completely opaque.” He stated that this was outside his experience in all other cases under § 1113. He contrasted this case, which was then deep into a several-week eviden-tiary hearing on the Debtor’s motion, with all of the other cases in which AFA came to an agreement with the carriers as to permanent concessions that it would give. In those cases, Borer testified, the concessions granted by AFA “usually [were] ... 100% of the company’s ask,” almost always made before an evidentiary hearing commenced. Borer attributed this difference to the fact that AFA’s negotiators had not been able to content themselves on the value of what the Debtor was asking AFA to give up. And that, he said, was due in large part to the lack of a working copy of the Debtor’s model through which they could test the soundness of the methodology-
Akins similarly testified that he had requested access to the dynamic Mercer Model to test the Debtor’s methodology on its costing for a 49-Saab fleet, as well as any utility the model might have to the costing of “expansion scenarios.” He too stated that he had been given comparable
*717
access in prior Chapter 11 cases of other airlines, and had found that essential to advising AFA in order to successfully conclude negotiation under § 1113.
The Debtor had no real evidentiary response to this showing. Clearly, these two witnesses’ testimony reflect a “legal culture” that has evolved for the treatment of this issue, as airline reorganization cases have proliferated and as the application of § 1113 within them has bloomed. This development has not occurred in a vacuum, nor as an evolutionary “sport.” Rather, as Borer’s uncontroverted testimony establishes, it has spread because of its very utility to the negotiation of these complex disputes. In turn, that utility is borne out by the fact that most all of those disputes have been resolved in a way that promoted the survival of the airline-employer.
The provision of an airline’s dynamic model might be considered as part of a custom and usage peculiar to proceedings under § 1113, or it might be measured as a matter of causality in fact, against a record of past effectiveness. In either case, this industry-wide experience establishes such a model as
“relevant
information as is
necessary
to evaluate” an employer’s proposal for concessions from a union. Thus, the Debtor’s failure to provide it to its unions, which could have been done under reasonable controls and under appropriate circumstances,
23
means that the Debtor did not provide the information to them that the fifth
American Provision Co.
element required it to do before it brought this motion.
The unions raised other contentions with the Debtor’s pre-motion provision of information to them. None of them are as weighty as the one just treated, but they should be addressed.
The first is that the Debtor did not provide the unions with either the RFP for CRJ flying that Northwest issued in December, 2005, or the Debtor’s response to it, before the Debtor filed its motion. The RFP itself was issued on December 9, 2005, a few days
after
the Debtor presented its first proposal to the unions. The Debtor submitted its initial bid to Northwest on January 17, 2006, and amended that on January 31, 2006. The Debtor cannot be faulted, then, for not turning over anything from its response before it actually made it. After that, the Debtor’s management was justified in insisting on the highest level of protection for the confidentiality of the response. As things turned out, the Debtor was and still is in pitched competition to win back this work from Northwest. In all, eight bids came in on the RFP. It was utterly clear that Northwest was going to be extremely demanding of the winner. The Debtor’s competitors would certainly have welcomed any leak of any portion of its pro
*718
posal. This could have put the Debtor out of the running. Further, the Debtor’s management was well-founded in insisting on something more than the unions’ proffer, the execution of a confidentiality agreement by one or more individual persons. The bid could have passed through many, many hands on the unions’ side in the course of pre-motion bargaining. There would have been no way at all to account for physical possession or transmission and dissemination of the content under the governance of a confidentiality agreement executed by any initial or later recipient of the bid.
24
In short, the Debtor did not fail the obligation of production under the fifth element in the way it handled this information.
Beyond the two areas just discussed, AMFA raised three specific requests for information on which it said the Debtor failed the production requirement. All of these were identified in testimony by Kevin Wildermuth, the chair of AMFA’s local negotiating committee:
1.
A calculation of the Debtor’s operating margins for each aircraft-model component of its fleet, for the preceding three years:
The Debtor prevails on this item. Given the flux of contemporaneous events, and the ongoing changes in the Debtor’s fleet composition, this information simply was not relevant. It was indisputable that the Debtor was to lose the Avro component within one calendar year. The Debtor fully expected an even more aggressive Northwest to shift the ground under the Saab operation, if it even left that work with the Debtor. Certainly, all bets were off as to whether three months of operating experience with only two CRJs had anything to do with what Northwest would fix for a permissible recovery of profit on the post-petition award of business for that sort of flying. Besides, AMFA did not establish that the Debtor had already done the analysis to produce this specific information. Section 1113(b)(1)(B) cannot be read to mandate a debt- or’s performance of further analysis on existing source data; it only compels the disclosure of that data and any previously-performed analysis. Finally, it is entirely possible that the basic data on this issue, and possibly even the requested analysis, could have been gleaned from the 30-months’ worth of Monthly Performance Reports that the Debtor did release to the unions. These are internal documents generated only for the highest levels of the Debtor’s management that the Debtor turned over to the unions as a part of the pre-motion disclosure.
2.
Line-item breakdown of management incentives/“bonuses”:
Wilder-muth did not elaborate on what he meant by this phrase. If he was referring to a breakdown by individual management employee, as to such a person’s past and anticipated receipts from the Debtor’s several incentive compensation programs, that simply would not have been relevant. The Debtor’s proposal was to inflict the same degree of cut by percentage on each employee
group,
including all managers, under its theory of the fairness and equity requirement of § 1113(b)(1)(A). A
*719
breakdown by individual, named employee would have service only in a very “personalized” discussion of the equity of burdens under the Debt- or’s proposal. That might be something to resonate with employees’ feelings of personal betrayal, but it would only serve as an inflammatory distraction from the truly difficult issues of a dispute under § 1113.
3.
Financial assessment of impact of work stoppage resulting from imposed terms:
Wildermuth asked the Debtor to provide him with the results of any financial analysis the Debtor had done in contemplation of its unions striking, were it to prevail on this motion and to impose its proposed cuts unilaterally. The Debtor’s response was that it had not performed such an analysis. During the hearing, AMFA did not develop any evidence that the Debt- or had. Thus, because the Debtor could not produce nonexistent financial information, it is unclear why this issue persisted in AMFA’s objection.
This is the sum of the unions’ other specific complaints about pre-motion provision of information. None of them gives additional grounds to hold against the Debtor on its showing under the fifth element, though the Debtor did fail on the matter of providing the Mercer Model.
6. Meeting with the Union(s) at Reasonable Times.
The sixth-numbered element under
American Provision Co.
gets down to the actual convening of the pre-motion bargaining that the statute promotes. It requires the debtor-in-possession to set up that very process: “Between the time of the making of the proposal and the time of the hearing [on the motion under § 1113], the debtor must meet at reasonable times with the Union.”
In re American Provision Co.,
44 B.R. at 909 . The debtor bears the initial burden of production on this element.
Id.
At the outset, it should be observed: this requirement only goes to the
fact of
the meeting(s) taking place, and the reasonableness of the arrangements. It does not go to what actually transpires at the meeting(s), that being the province of the seventh element under
American Provision Co.
The unions’ post-hearing submission on this element was so short as to amount to a full concession to the Debtor. For the record, though, it must be said, and with some backup, that the Debtor has met it.
Before the Debtor made its first formal proposal to each union in the first week of December, 2005, its representatives met with representatives of each union to communicate its request for voluntary concessions on the wage and benefit terms, and to share a general review of the Debtor’s status in bankruptcy and its financial situation. Then, over a stretch of eight weeks in December, 2005 and January, 2006, the Debtor set up and conducted bargaining sessions with AMFA (10 formal meetings, consuming approximately 20 hours), AFA (14 formal meetings, again consuming approximately 20 hours), and ALPA (20 formal meetings, consuming approximately 35 hours). With each of these unions, the Debtor aired its first five successive proposals via detailed term sheets, and the parties discussed them.
Needless to say, the strings of meetings did not result in a comprehensive accord with any of the three unions. Nonetheless, in terms of their timing and length, these meetings were reasonably arranged. By initiating and conducting them, the Debtor staged a pre-motion bargaining process and structure that satisfied its
*720
sixth requirement under
American Provision Co.
7. Conferring in Good Faith Toward Mutually Satisfactory Modifications.
American Provision Co. ’s
seventh requirement goes to the strategy and conduct of a debtor-in-possession
during
pre-motion negotiations. The Debtor is required to show that it “confer[red] in good faith in attempting to reach mutually satisfactory modifications of [the collective bargaining] agreement.” 11 U.S.C. § 1113 (b)(2). Assuming that a debtor has satisfied the sixth requirement, the burden of production on this seventh element shifts to its union(s). “It is incumbent on the union to produce evidence that the debtor did not confer in good faith.”
In re American Provision Co.,
44 B.R. at 910 (emphasis added).
In evidence and post-hearing submission, the Debtor’s unions have cited multiple circumstances and actions that they characterize as badges of the Debt- or’s overt bad faith in pre-motion bargaining. A couple of these go to very fundamental aspects of the Debtor’s stance throughout the process; others go to particular issues or tactics, sometimes to only one or two of the unions. All of these points must be weighed as to whether they evidence a lack of good faith on the Debt- or’s part. As one court succinctly and nicely put it, “[g]ood faith bargaining is conduct indicating an honest purpose to arrive at an agreement as a result of the bargaining process.”
In re Walway Co.,
69 B.R. 967, 973 (Bankr.E.D.Mich.1987).
It is most appropriate to rule first on the unions’ points that go to various aspects of the Debtor’s
style
in conducting the bargaining, particularly actions it took in structuring its proposal and then dealing with the unions’ contentions.
The first such is the complaint that the Debtor had “the same persons who [were] litigating the Section 1113 motion simultaneously serving as the company’s negotiators at the bargaining table.”
ALPA raised this issue. Its witnesses danced around the real point in their testimony. However, remarks by the unions’ counsel both on and off the record suggested that their problem was with the Debtor’s election to use
the same individual attorneys,
from the law firm that served as its special labor counsel, to handle both the extensive discovery preparation and in-court trial work on the motion itself, and to appear on the Debtor’s behalf in both pre-motion bargaining and the negotiation sessions that the parties continued to hold after the motion was filed and on off-days during the pendency of the hearing.
Bruce York, ALPA’s Director of Representation, testified that this was “very unusual,” even for a small airline in Chapter 11. Captain Mark Nagel testified to what could be called an “emotional overhang” that he thought had made productive negotiations very difficult, when an attorney who had been sharply questioning and confronting union members in deposition or on the witness stand then sat across the bargaining table from those same persons a day or a week later.
As intangible and slippery as this consideration is, one can see the point. But, though the practical wisdom of this staffing practice can be questioned, and its ultimate efficacy for successful bargaining is probably low, it cannot be branded as a deliberate tactic to inflame union representatives in bargaining or to derail negotiations. At best, it was an election flawed in its conception, most likely prompted by a particular notion of economy for the bankruptcy estate and the limitations on the
*721
availability of enough personnel to serve all functions in a very intense process.
25
Second, ALPA cites a number of instances when the Debtor simply withdrew particular components of its proposal for modifications, taking them off later term sheets, and refused to further discuss them as potential cost-saving measures, after the unions had raised strong objections to them and suggested significant revisions. (The ones cited were those that went to systems for pilot assignment, training, and the like, and the possible withdrawal of pending individual and group grievances.) The insinuation here is that the Debtor was whipsawing the unions, forcing the investment of resources into responding to issues that it was not really serious about in the first place.
The Debtor’s response to this issue is credible, and it defuses the matter as a badge of bad faith. The Debtor opened negotiations on December 5, 2005. However, ALPA did not make a comprehensive counterproposal until January 3, 2006, nearly a month later. That counter-proposal did not cover the range of issues that the Debtor had raised, suggested only
interim
relief, and was not directly or immediately responsive to the Debtor’s insistence that it needed historically-unprecedented cost containment or it would not survive as a going concern. The Debtor was not out of bounds in concluding that these issues were not central to its goal in commencing the § 1113 process, or when it perceived ALPA as concentrating on those matters to the exelusion of the central issues. Taking them off the table as a means to force more focus did not evidence a lack of good faith.
26
A third point, commented on by witnesses for ALPA and AFA, was that the Debtor started by casting its target labor cost reduction as a percentage of payroll expense, rather than as an absolute dollar-amount like other airline-debtors had previously done in their experience. This was about all that Borer and York said, trying to project a sense of being very non-plussed at an effrontery. Without more context than that, it is difficult to see the point. There is no detail to establish that the quantification more in the comfort of their past experience would be more comprehensible or useful to the unions. The Debtor ended up quantifying the cuts to specific dollar-amounts for each labor group anyway.
And the bigger picture, in a case that is unique or near-unique in its business configuration, furnishes the rationale. As a regional carrier under contract with only one network carrier when it went into Chapter 11, the Debtor was already boxed in on many options for restructuring toward profitability. It lacked control over nearly all of the pricing and distribution variables that most businesses have. It was right in the brunt of an externally-imposed downsizing. It was potentially vulnerable to further reduction in business volume. And it was possibly to be deprived of
all
revenue. This left its man
*722
agement and bankruptcy counsel not knowing any firm boundaries for the income and expenses that it would be dealing with eventually. Given that, fixing the target labor cost reduction by a percentage of the existing cost was not only not arbitrary, it was the only meaningful factor that could give the Debtor some flexibility in a situation that boded to be in flux for an unknown time.
Fourth, the unions take the Debt- or to task for forcing the issue of modification through § 1113 before the Debtor had any assurance of retaining any flying for Northwest, and in particular before Northwest had made an award under the December, 2005 RFP for CRJ flying. Building out to the side from this point, the unions also complain that the Debtor structured its bid under that RFP by assuming the 19.4% reduction in labor costs that it would be seeking from its unions, long before any consensual modification or court-permitted imposition of cuts. This, they maintained, “effectively presented the Unions with a
fait accompli,
and ... precluded good faith negotiations.”
As the root for this objection, York and Borer both testified to their unions’ experience in past Chapter 11 eases where an airline’s ultimate business volume was still uncertain due to the possibility of a bidding process or other factor that prevented a reliable long-term business plan. In those cases, the unions stated, the debtors agreed to “contingencies in their proposals or ... interim deals to delay bargaining until them business plans [had] greater certainty.”
To some extent that argument spills over into the merits, as to the necessity of the depth of the proposed cuts. However, to the extent that all this goes to the good faith of pushing the issue under § 1113 when it was pushed, the argument fails to recognize the peculiarities (or even the near-uniqueness) of the Debtor’s situation just two months into the case. It was having half its fleet stripped from it, with a like fraction of its financial means for survival. Northwest gave every semblance of being implacable in its own drive toward economy, and there was nothing to refute that.
27
Yet Northwest presented the only conceivable avenue for the Debtor’s mid-range survival, even on a diminished basis, by the prospect of retaining the “core” Saab flying or by retaking the CRJ work under terms different from the Omnibus ASA. It was clear enough by November, 2005 that the Debtor would have a struggle to retain even a “steady-state” fleet. Both of these work components were overtly in play when the Debtor got the pre-motion process under way in early December. The Debtor’s management, its consultants, and its bankruptcy counsel all concluded that the only chance of retaining and rebuilding lay in projecting greatly-reduced costs; and the Debtor had to apply that projection right away, in its response to the Northwest RFP.
All the circumstances — in particular the utterly cold and distanced way in which Northwest presented itself to the Debt- or — dictated that the Debtor go ahead with the modification process right away. Its management reasonably believed that it had no chance of maintaining competi
*723
tiveness for the Northwest work if it did not rely on an ability to effect the reductions, and if it did not build them into its pitches to Northwest. Intervening events in Northwest’s RFP process have borne this out.
28
Terming what the Debtor did as
a fait accompli
is a florid bit of rhetoric. Under the circumstances, there was nothing else the Debtor could have done; and, if it ends up not being able to deliver to Northwest on such terms if it wins the bidding, the CRJ work will likely vanish.
29
So, simply stated, the Debtor had no time to lose, and the circumstances gave no warrant to soften the brunt of the issue by delaying its raising with the unions. The Debtor did not lack good faith in pushing the matter of modifications to the collective bargaining agreements forward when it did, in relation to the incipience and pendency of the Northwest CRJ RFP or the prospect that Northwest would then push for concessions on the pricing of continued Saab flying by the Debtor.
The unions’ ultimate suggestion is that in light of the contemporaneous uncertainties the Debtor should have fashioned contingencies into its proposals to them — automatic “snap-backs” to previous rates and conditions, the reopening of bargaining, etc. This vaults even further into the merits of the proposal as made. Discussing that at length in this procedurally-oriented context would jump the gun on these issues, situated as they are far more centrally to the unions’ challenge to the Debtor. However, given the outcome on the substantive aspect, treated
infra
at pps. 742 - 743, it is enough to say that the Debtor did not lack good faith in its proposal and bargaining in this regard either.
AMFA raises the fifth style-and-process issue, on considerations that are mostly unique to it.
Alone out of the three unions, AMFA’s collective bargaining agreement with the Debtor had become “amendable” under the Railway Labor Act in 2003. The two parties had engaged in sporadic rounds of “Section 6” bargaining after that. This process had not resulted in any overall recasting of the terms of AMFA’s 1999 collective bargaining agreement. However, the parties had reached tentative agreement on a number of component issues, by the time the Debtor had filed for Chapter 11.
When the Debtor made its first post-petition overture to AMFA under § 1113, it withdrew its consent to those terms that the parties had tentatively settled in the Section 6 process. However, when it made its first formal proposal to AMFA under § 1113, it included a cost value assessed to the subject matter of these terms. AMFA takes exception to this, terming the Debtor’s about-face to be a badge of bad faith.
Perhaps some umbrage is appropriately taken. However, the Debtor’s seeming insouciance does not rise to the level of bad faith. The Section 6 negotiations did
not
result in a legally-enforceable full recast
*724
ing of the AMFA collective bargaining agreement. There is no evidence that the Debtor and AMFA had ever effectuated any of the component modifications before the Debtor’s bankruptcy filing. Thus, though the Debtor appeared cheeky by pushing away and then pulling back the products of the Section 6 process, there was nothing legally or contractually untoward in what it did with them in the § 1113 process.
30
The unions’ sixth charge against the Debtor’s case for good faith is broader: that the Debtor set “false deadlines” for the unions to come to a consensual resolution. The insinuation here is that the Debtor hoped to undercut the unions’ ability to meet a full defense of their constituents’ interests, by creating a semblance of dire emergency in accelerating the issues to a formal resolution in court under § 1113.
The sweep of the evidence belies this accusation. To be sure, when the Debtor opened the formal pre-motion process in very early December, 2005, it demanded that the parties complete negotiations by December 19. The chances of that happening were close to nil, given the number of issues, the freshness of the process, and the complexity of the backdrop. However, it was not out of line to do something to crack the front that the unions had presented up to that point — what the Debtor characterizes as a failure to acknowledge the utter urgency of the need to substantially cut costs. It is not necessary to find that the unions blunted the subject of discussion before December 5, 2005 to peripheral matters not related to the hard questions of wage and benefit cuts. But there certainly is evidence in the record to that effect.
31
The more weighty issue is the Debtor’s timing of the § 1113 process in the overall context of this case. The Debtor first broached the issue of modifications to the collective bargaining agreements on an informal basis very early after filing for Chapter 11. It started the formal pre-motion process before the two-month anniversary of the filing. When the Debtor requested a “procedures order” for this motion,
32
its counsel urged that the Debtor had to “book” labor cost reductions by the March 31, 2006 end of its fiscal year, to be effective on April 1, 2006. That was represented to be an utter necessity, whether the reductions were obtained consensually or were imposed after a court-authorized rejection of the collective bargaining agreements.
The rationale for this timeline was the perceived need to finalize a cost structure
*725
before Northwest took action on the CRJ RFP and the matter of continued Saab flying, and in time to enable the negotiation of final terms on the debtor-in-possession financing that the Debtor was then pursuing. The Debtor admitted that this would entail a very rapid clip for a complex legal matter. However, it maintained that any longer time in litigation would substantially increase the Debtor’s risk on the two undertakings, i.e., that Northwest or a DIP lender would lose confidence in the Debtor’s ability to provide and perform on the transactions, and they then would decline to do further business with the Debtor. Over strong objection from the unions’ counsel, the Court agreed with the Debtor and set a schedule for the motion that contemplated a full submission for decision in time for the rendering of decision before March 31.
As the unions now point out, nothing had happened on either of the backdrop transactions when the record was closed on this motion in late March; even by mid-January, the Debtor’s projected “cash-negative date” had gone further out in time; and in late March Northwest had not yet made an award on the CRJ RFP and was still very much in the process of evaluating bids and prodding bidders.
The unions and their counsel complained that they had been run rough-shod and bruised in this process, and there is some basis for that. The cause for their complaint, however, really lies with the dire straits the Debtor was in generally, and in particular in the multi-natured hammerlock that Northwest held and was exercising over the Debtor’s operations and future. There is no direct evidence that the Debtor’s management or counsel advocated the expedited schedule as a ploy, to deprive the unions of a fair opportunity to either negotiate or litigate or to put them under undue pressure to make concessions. The circumstantial evidence cuts to the opposite effect, as does the direct evidence the Debtor proffered:
at the time,
and under their limited knowledge of either Northwest’s or MAIR’s ultimate aims,
33
the Debtor’s management and counsel believed in good faith that bringing the issue of labor cost reductions to a full head by April 1, 2006, was the best way to stabilize the Debtor’s position for the next steps of securing the Northwest business, seeking other regional-flying arrangements, and obtaining needed capital.
Intervening events, or the lack of them, have undercut the utter urgency of the April 1 date that seemed so compelling in mid-winter. However, very nearly all of those were not directly or strongly under the Debtor’s control.
34
So the Debtor was not out of line in pushing the matter ahead as quickly as it did, as the circumstances
*726
then known to it suggested enough of a chance that disaster could result in late spring or early summer if the Debtor maintained its pre-petition level of labor costs throughout the case.
And, though the unions do not have to prove actual and resultant prejudice as a part of their initial burden on a lack of good faith, they have not done so. All of them mustered enough resources to meet with the Debtor throughout the pre-motion period, and to evaluate the Debtor’s successive proposals to the point of preparing responses and alternatives.
35
The failure of the pre-motion process to generate consensual modifications is far more due to the persistence of the parties’ stalemate on the issue of the general 19.4% reduction and a six-year duration for the reduced terms, than it is to any curtailment of an open-ended time to meet and bargain.
That loops back around to the unions’ contentions with the three major substantive aspects of the Debtor’s proposal, which characterized all pre-motion versions of the proposal: the overall cut to labor costs of 19.4%, the six-year duration, and a structure that did not envision reversal or amelioration of the cuts for any change in the Debtor’s circumstances during the six years. The unions’ complaint is that the Debtor opened the pre-motion bargaining with an offer structured on these three fundaments, and closed the process with the same, without giving a point, a minute, or an inch on any of them. Characterizing this as a “take-it-or-leave-it” attitude, the unions deny that the Debt- or was even “bargaining” in light of its inflexibility, let alone bargaining in good faith.
The Debtor’s response is that it was required by law and fact to open with a proposal that was “first-and-last” on these framing characteristics. The legal impetus, it argues, came from the “necessity” and “fair and equitable” requirements of § 1113(b)(1)(A), under which its first proposal had to be the
least invasive
of the union members’ contractual rights to compensation and benefits under all the circumstances. The inflexibility of its stance on the three points, it maintained, was dictated by the several threats the Debtor undeniably faced: the certainty of a revenue cut at Northwest’s instance, if it was even able to retain business from Northwest; the weighting of the seniority of all of its union employee groups toward the upper reaches of compensation rates, in contrast to most regional carriers; and the need to project an emergence from bankruptcy with a profit margin strong and consistent enough to make the Debtor attractive to lenders for interim and exit financing, and to give it a financial cushion against future instability in the industry. Thus, the Debtor insists, the looming threat of financial failure made its three assumptions a bedrock from which it could not depart, unavoidable and indisputable; and if any of the unions’ members were to retain employment with the Debtor, their representatives had to accept that bargaining would be limited to the allocation of labor cost reduction among various
forms,
with the
amount
of the reduction to be a non-negotiable given.
This is another point on the matter of good faith that veers over into the merits of the Debtor’s proposal, the necessity of that proposal to a reorganization. The appropriate context for the analysis of these considerations is the second phase of
*727
this decision, the application of the substantively-oriented elements of § 1113. Reserving the discussion for that phase makes more sense, in terms of logic and comprehensibility. Suffice it to say, at this point, that the Debtor was not acting without good faith when it insisted on structuring the boundaries of both the bargaining and its outcome with these three points as a given.
To be sure, this did not follow the conventions of “Section 6” bargaining under the Railway Labor Act, as Borer testified to them. But if the Debtor had started off at some polar position in its proposal, completely beyond the bounds of a reasonable and temperate resolution, it would have been far, far more vulnerable to an accusation of bad faith gamesmanship
in the context,
under § 1113(b)(2). Under bankruptcy law, there was neither the time nor the warrant to go through an extended exercise of posturing, blustering, grinding, and incremental falling back — whatever expectations of that the unions may have brought into the process, couched by the dynamics under mainstream labor law.
The last matter asserted as a badge of the Debtor’s bad faith is raised by ALPA. It involves concerns unique to ALPA.
When in September, 2005, Northwest announced the reductions to the Debtor’s fleet, the Debtor began to plan for reassigning its pilots between types of aircraft. Before then, the Avro regional jets had been considered as the superior form of flying done by the Debtor, assigned to pilots with higher seniority. With the phase-out of that sort of assignment, those pilots were entitled to be reassigned to the Saab turbo-props.
36
Under FAA regulations, the reassigned pilots had to go through training for their new craft. Apparently ALPA’s collective bargaining agreement had terms for retraining that were more involved or costly than that legally required.
In a voluntary effort toward cost savings, and in light of the inevitability of the reassignments, ALPA agreed to make concessions on the Debtor’s obligations to the pilots consequent to the fleet downsizing, in the specifics of retraining and possibly in other matters.
37
This resulted in “Letter of Agreement 18” (“LOA 18”), dated October 24, 2005, which modified the 2004 collective bargaining agreement. The parties agreed that ALPA’s concessions resulted in cash savings of $2,390,000.00 for the Debtor, which would be realized over the term of the Avrorelated downsizing.
During the negotiations toward LOA 18, the matter of larger and more permanent concessions from ALPA was broached, in contemplation of later proceedings under § 1113. Captain Mark Nagel, the local Negotiating Chairman for ALPA, asked the Debtor’s special labor counsel whether ALPA would get “full credit” for the concessions made under LOA 18 against the larger § 1113 modifications or whether the Debtor would inflate the amount of its initial demand under a § 1113 proposal to negate the value of the credit for LOA 18. In response, counsel stated that the Debt- or would “offset the credit” for LOA 18 against the “ask” under § 1113.
38
*728
When the Debtor presented its costing sheet to support its first § 1113 proposal to ALPA, it added the total amount of anticipated costs for retraining pilots for the downsized fleet in 2005-2006 to the raw cost of wages and health and dental insurance, to get the total to which the 19.4% factor would be applied to arrive at a dollar-value for the cuts attributable to ALPA’s members.
39
When confronted about this at the December 5, 2005 meeting, one of the Debtor’s lead negotiators admitted that the Debtor had always intended to do this.
40
In that first costing sheet, the Debtor valued the pilot training for downsizing “above the line” at $10,790,000.00. When the 19.4% reduction factor is applied to it, the result is an additional $2,090,000.00 by which
other
labor costs attributable to the pilots — in the main, wages — must be reduced.
41
ALPA characterizes this specific sequence of events as a badge of bad faith on the Debtor’s part. It is impossible to disagree with that. There was no testimony going to whether ALPA’s representatives relied on the Debtor’s counsel’s representation regarding the mechanics of crediting savings under LOA 18, but that is beside the point. ALPA was responsive to the Debtor and forthcoming on the matter of an immediate avenue for labor cost savings. As obdurate as its representatives may have been for the next couple of months on the true and bigger issues, that deal should be a deal.
42
While it is true that the Debtor does not incur these very substantial training costs for any employee group other than the pilots, the use of any device to extract a reduction in pilots’ compensation that is traceable back to retraining costs is historically unprecedented in the Debtor’s operation. In light of the assurance given to Nagel in connection with ALPA’s concessions under LOA 18, it is just not warranted. The attempt to merge this issue into the extractions from ALPA, rather than treating it as an assumed general cost of operations that would not be subject to reduction, was an act that was not in good faith toward ALPA.
The ultimate point on good faith to be treated on the unions’ plaint is the Debt- or’s failure to turn over to them a “working” digital-format copy of the Mercer Model. The unions raise this point somewhat as an afterthought, but it is worth treating. As the issue of the Mercer Model began to roil around in court hearings
*729
during the weeks before the evidentiary hearing, it was tempting to attribute the Debtor’s refusal to a wish not to give a dangerous weapon to its opponents — something that could in fact enable them to make an arguable case against the Debtor. (This was before any party had mentioned the evolved custom-and-usage in other airline Chapter 11 cases as relevant to the issue.) As things emerged on the record, however, that was never a reason that the participants on the Debtor’s side articulated to themselves, let alone argued to the Court. At most, the reluctance was justified on the possibility of “misleading” or inaccurate output from the model — something to lead the unions astray, and probably further from a position that the Debtor wanted, but not something to build an affirmative case to counter the Debtor’s.
Since the Debtor’s vague and somewhat plastic excuses came down to nothing effective, the failure to surrender does have to be attributed to a less-than-replete intent to reach an agreement
in which the unions were fully informed.
At that time, then, this too gave support to a finding that the Debtor was not meeting and bargaining in good faith.
So, in the end, the Debtor did not make a full showing for the seventh element under
American Provision Co.
either, and cannot be deemed to have met that requirement.
43
B. Substantive Requirements
The second group of elements under
American Provision Co.
goes to the substantive content of the proposal by the debtor-in-possession, and to the merits of the unions’ pre-motion rejection of it.
The third element under
American Provision Co.
is certainly the most fact-intensive of all of them; the proposed modifications must be “necessary to permit the reorganization of the debtor.” 11 U.S.C. § 1113 (b)(1)(A). The debtor-in-possession has the initial burden of production under this element.
In re American Provision Co.,
44 B.R. at 909-910 .
Like § 1113 in general,
In re Family Snacks, Inc.,
257 B.R. at 891-892, the statutory language for this element is cumbersome and difficult. First, there is the duplication of a key adjective, the debtor-employer’s proposal being required to “provide[] for those
necessary
modifications ... that are
necessary
to permit the reorganization of the debtor ...” (emphasis added). Second, the operative verb, “to permit,” is an odd choice, not reflecting the wording of any other relevant provision of Chapter 11 and not having a very precise connotation in context.
This facial looseness of language, as well as the lack of any strong and suitable legislative history, early led to a split between the circuits in the construction of the statute’s principal modifier, the word “necessary.” The two lines of authority emerged soon after the enactment of § 1113, in decisions from the Second and Third Circuits.
The Third Circuit rendered its decision first.
See In re Wheeling-Pittsburgh Steel Corp.,
791 F.2d at 1074 . The
Wheeling-Pittsburgh
court construed the “necessity requirement” of § 1113 in a fashion more
*730
deferential to labor unions’ fixed expectations under their collective bargaining agreements. It started by parsing through the published statements of several congressional participants in the evolution of § 1113. From those, it concluded that the “legislators[ ] ... placed the emphasis in determining whether and what modifications should be made to a negotiated collective bargaining agreement on the somewhat shorter term goal of preventing the debtor’s liquidation, the mirror image of what is ‘necessary to permit the reorganization of the debtor.’ ” 791 F.2d at 1089 . Opining that § 1113 was the product of an “insistent congressional effort” toward a standard “that was more sensitive to the national policy favoring collective bargaining agreements,” the Third Circuit contemplated that § 1113 be applied with an “emphasis on the reorganization, rather than the longer term issue of the debtor’s ultimate future.”
Id.
Thus,
Wheeling-Pittsburgh
has been read consistently as limiting the range of modifications to those “necessary” to preventing an employer’s reorganization case from being converted to a liquidation under Chapter 7. This contracts the horizon of consideration to the potential duration of the bankruptcy case. More to the point, it substantially reduces a debtor’s latitude in imposing cuts in wages and benefits.
44
In re Appletree Markets, Inc.,
155 B.R. at 440;
Int’l Union, UAW v. Gatke Corp.,
151 B.R. at 212-213.
Within a year, the Second Circuit rendered its opinion in
Carey Transp.
The
Carey Transp.
court rejected the
Wheeling-Pittsburgh
analysis of legislative history, noting tersely that the floor remarks quoted in
Wheeling-Pittsburgh
went to a version of language that ultimately was not enacted in § 1113. To the Second Circuit, “this suggested] that [Congress] was uncomfortable with language suggesting that a debtor must prove that its initial post-petition proposal contained only bare-minimum changes.” 816 F.2d at 89 . To the contrary, the court held, given the backdrop of requirements for confirmation of a plan under 11 U.S.C. § 1129 ,
in’ virtually every case, it becomes impossible to weigh necessity as to reorganization without looking into the debtor’s ultimate future and estimating what the debtor needs to attain financial health.
Id.
Thus, as the
Carey Transp.
court concluded,
the necessity requirement places on the debtor the burden
of
proving that its proposal is made in good faith, and that it contains necessary,
but not absolutely minimal,
changes that will enable the debtor to complete the reorganization process successfully.
816 F.2d at 90 (emphasis added). This standard has been characterized as “more flexible” than the
Wheeling-Pittsburgh
formulation.
In re Family Snacks, Inc.,
257 B.R. at 893; Ultimately, “more flexible” is properly read as “more deferential to the debtor,” in terms of the depth of concessions that may pass muster under the necessity requirement — or, from another perspective, less deferential to the
*731
fixed terms of the collective bargaining agreement in question.
The
Carey Transp.
standard appears to have taken a majority among subsequent published decisions. E.g.,
In re Big Sky Transp. Co.,
104 B.R. at 336 ;
In re Texas Sheet Metals, Inc.,
90 B.R. 260, 265 (Bankr.S.D.Tex.1988);
In re Amherst Sparkle Market, Inc.,
75 B.R. 847, 851 (Bankr.N.D.Ohio 1987);
In re Walway Co.,
69 B.R. at 973 ;
In re Valley Steel Products Co., Inc.,
142 B.R. at 341 ; and
In re Express Freight Lines, Inc.,
119 B.R. 1006, 1014 (Bankr.E.D.Wis.1990). And, of the two, it is founded on a more accurate reading of the odd legislative history of § 1113. Finally, it is more responsive to the provision’s context. Section 1113 is, after all, a part of a broader enactment providing for the long-term rehabilitation of distressed businesses, toward which the abrogation of contracts disadvantageous to a debtor’s financial stability provides a supporting remedy. It is not found in the large intertwinement of legislation that established a national labor policy in the early 20th century. It is thus to be read in light of the future survival of the employer as a stably-operating (and employing) enterprise — however that may lay against the terms of a collective bargaining agreement negotiated in a different time and under different economic conditions.
This conclusion has little effect on the treatment of many of the individual contentions raised by the unions in this case. It does, however, establish a frame of reference: what, indeed, must be extracted by way of wage and benefit reductions and other employee concessions to so improve the Debtor’s cash flow that it could emerge from Chapter 11, financially stable and viably competitive in its sector of the airline industry, and could remain so? As noted earlier, this inquiry is quite fact-intensive. Ultimately, the standard calls for a group of measures that would promote fiscal soundness in the longer term, before and after emergence from Chapter 11, but which will not curtail union members’' prior contractual entitlements more than is reasonably necessary for that promotion.
With that level of focus, one can examine the specific aspects of the Debtor’s proposal that are in contest.
The Debtor built its initial proposal on the December 2, 2005 business plan, a long-term projection of revenues and expenditures that targeted a desired operating margin (to be loosely equated with the layperson’s conception of “profit”). The plan’s projections were built on a group of fundamental assumptions, summarized
supra
at p. 712. Some of these assumptions went to factors that originated outside of the Debtor, and some were “internal” to it.
Because the business plan dictated the ultimate depth of labor cost reductions, its assumptions and methodology are key to the question of whether the Debtor’s proposal meets the necessity requirement of § 1113(b)(1)(A). The unions have challenged almost all of these assumptions, in their attack on the Debtor’s ease for that element.
3. Necessity of the Modifications to Permit the Reorganization of the Debtor.
a. Anticipation of 5% Drop in Revenue.
On the input side of its business plan, the Debtor assumed that its revenues from airlink flying for Northwest would decrease by 5% by fiscal year 2006, and would remain at that decreased level over the six-year term of the plan. In their original responses, the unions put the Debtor to its burden of proof on this assumption, as a matter of fact. In their closing, they summarily maintain that the
*732
Debtor “has offered no admissible evidence to substantiate [this] assertion.”
45
In the end, the unions’ response on this issue is only so much dithering for show. The evidence is both pointed and uncontro-verted, that at the very best the Debtor will have to agree to a reduction of 5% in the rate it charges, down from that to which it was entitled under the Omnibus ASA, as a condition of retaining any form of airlink flying from Northwest. Northwest essentially has already yanked the CRJ flying that it contracted to Debtor under the Omnibus ASA. That work is now out on a bidding process that was quite competitive in the first round in early 2006. Through statements from its executive in charge of “Network Strategy and Airlink Administration,” Northwest communicated its expectation that the Debtor would reduce its rate by at least
5%,
and possibly up to 8%, as a condition of keeping the Saab flying in the wake of Northwest’s about-face on the CRJ placement. The communication here was more in the passive — “not disagreeing” with a suggestion to that effect that Hien Cao, the Debt- or’s Director of Strategic Planning, floated to that executive to sound out Northwest’s position. However, the communication was quite unequivocal, that this was what Northwest would extract for the continuation of its favor.
Though the unions have tacitly sneered at the credibility of this evidentiary proffer, there is not a reason to doubt either the likelihood of this eventuating or the soundness of the Debtor’s reliance in building the reduction into its assumptions. All of the witnesses who spoke to Northwest’s bargaining style and its substantive positions on contractual terms affirmed that Northwest had been a tough bargainer on financial matters for many years, rarely if ever “leaving anything on the table” at the close. Northwest’s assumption of the fiduciary role of debtor-in-possession in its own Chapter 11 case layered an overarching legal obligation onto its established practice of hard-bitten and relentlessly self-interested negotiation. So, Northwest has not only a de facto need to claw itself back to profitability, it has the imposed obligation to manage its assets for the greatest gain to its own bankruptcy estate. With those two drivers, there is no goal that can credibly be imputed to Northwest other than to squeeze all it can out of the parties with which it contracts, as long as it can ensure a requisite level of service from them under those sharper terms.
Thus, the Debtor was entirely in bounds in building the assumption of a 5% reduction in its revenues from Northwest into its business plan, and in thus establishing the boundaries of aggregate income with which it had to work in formulating an operating budget of expenditures.
46
Its
*733
use of this assumption as a base component of its proposal does not fail the necessity test. It is quite likely that the Debtor will have to operate within these confines of revenue for the future foreseeable after an exit from bankruptcy.
b. Projection of Operations on 48-Saab “Steady-State” Fleet.
The next assumption goes to the input side of the Debtor’s business plan as well. In forecasting business volume for its revenue projections, the Debtor assumed that it would conduct business over the six-year term of the plan using a fleet of 49 Saab turbo-prop aircraft alone, flying for Northwest to the local markets that are most suited for service by these smaller and lesser-range aircraft.
47
In numbers of craft, this fleet would be half the size of the one that the Debtor was operating when it went into Chapter 11.
The unions challenged this assumption, with the insinuation that it is an artifice— reflecting a temporary state of affairs at most, and in any event resulting in a substantial understatement of potential revenues and profitability, all toward a crafted exaggeration of the need to substantially lower employee wages.
There are two dimensions to this objection.
The first is the practical, factual one: just how reasonable is the Debtor being in assuming that it will be operating on this reduced level, and for an extended period? The unions point to factors both historical and economic to challenge the Debtor on whether this will come to pass.
On the historical side, the unions point to the fact that the Debtor has not operated with as small a fleet in years, and simply should not be expected to do so given its past flourishing at a larger complement.
48
That much cannot be denied. But it is equally undeniable that the Debt- or is in a turn of events that is historically unprecedented. Northwest is well into the process of pulling the Avro RJs out of the Debtor’s fleet; all will be gone by the end of this year. When this motion was submitted, the Debtor had no guarantee of keeping the CRJs it then held at the de facto sufferance of Northwest, a paltry two in number. It was one of eight competitors for the CRJ flying that Northwest had baldly deigned to put back out for bids despite its recent entry into the Omnibus ASA with the Debtor.
49
The Debtor had no overt assurance of keeping even the Saab flying, and the circumstances going to that were a mixed bag.
50
*734
In the last instance, however, the “steady-state” fleet was both the one thing on which the Debtor could defensibly project a future operation, and the
only
thing on which it reasonably could. As tenuous as its continuing tie to the Saabs may be, as subject to Northwest’s swagger in the incipient threat of rejecting the Omnibus ASA outright, the steady-state fleet is all that the Debtor has any claim to count on. The Avro flying is simply not to be considered; for as long as it will last, the revenue from it is in a sense “found money.” The Debtor may not get any CRJ flying from Northwest or any other carrier; the world of competition for the work is densely-populated;
51
the Debtor is hampered in its competitiveness in this new crop of regionals;
52
and institutional allegiances between prior airlink partners have dwindled in a decade characterized by extremely intense competition in the industry, external and internal.
The Debtor was not out of line in envisioning this future; there was simply nothing else it had any claim to count on when it assembled its business plan and when it formulated its proposal to the unions.
53
It would have been irresponsible to have constructed a business plan premised in part on flying that had not been awarded to the Debtor from a broad field of competitors, or a business possibility that had not even been put before the Debtor via an RFP. The obligations of a debtor-in-possession required the Debtor to be realistic and to stick to what was right before it, to avoid wasting the bankruptcy estate’s resources by advancing and defending a restructuring that was not backed by an arguable projection of economic reality. So, because the assumed fleet size beneath the business plan was the only one that was not impermissibly speculative, it cannot be said that the modifications of employee compensation that the Debtor projected from that plan were not “necessary” to a possible reorganization of the Debtor.
The second dimension to the unions’ objection goes to whether factoring in a speculative alternate future for the Debtor could even be consequential. The uncon-troverted evidence on the actual income to
*735
be captured from a CRJ award under the current Northwest RFP bears out the Debtor’s argument, that doing this would have had no ameliorating effect on the need to cut labor costs anyway. This is due to a tectonic shift within the airline industry, the substantial transfer of bargaining power between network carriers and their regionals that has occurred in the last several years.
The testimony of expert witnesses from both sides was basically uniform on the historical backdrop to this. With the puncturing of the “NASDAQ bubble” in 1999, and heightened after the disaster of September 11, 2001, the traditional mainline carriers in the United States suffered through a sharp drop in business volume. Then they had to contend with meeting competition from new low-cost, long-distance carriers, and other impacts on their business volume.
54
In the process, they lost billions of dollars in the first half of this decade;
55
and they were lucky if they generated operating margins of 1 % to 2% in the few fiscal periods of profitability they experienced during those years. On the other hand, the smaller regional airlines that have provided airlink service to the legacy carriers did relatively well under the ASAs that were in place during the first half of that period; on average, they generated operating margins of 6.4% to 12.6% during 2002 and after.
As the mainlines’ financial distress became intractable after 2001, and in particular as many of them had to seek protection under Chapter 11, they turned to their relationships with their regionals as an avenue through which to reduce their own costs. From the mid-1990s, new regional airlines were established, prompted by the earlier profitability of this sector. The network carriers have taken to playing off the members of this larger pool against one another. They have done this by putting more “fee-for-departure” service provision out for competitive bidding, and by creating a more extended, involved, and intense process of evaluating and treating those bids toward extracting the lowest possible price from a winner.
The latter development has taken place in just the last several years. It plays its way out on the Debtor’s assumption on fleet size as follows.
One of the unions’ major complaints with the Debtor’s reliance on a “steady-state” scenario is that it projects a static profitability. This, they claim, is not realistic because it does not take into account potential “economies of scale” that could result from business expansion through awards of additional flying, under the current Northwest CRJ RFP or for other network carriers under future RFPs. As the unions would have it, such economies of scale would come about from spreading a current level of fixed costs, or one not materially larger than at present, over a larger revenue base. This would leave more unapplied income that could be used to ameliorate the reductions of wage and benefit outlays that the Debtor would otherwise have to obtain from union members to cope with the 5% revenue reduction.
56
However, the unrebutted evidence was that network carriers have so modified the
*736
length, complexity, and exactitude of their bid review process that regional carriers simply cannot expect to preserve any material benefit from economies of scale in an expansion of their flying, if they are to be the winner of the business. Whatever the mainlines’ practice was in the past, now they evaluate regionals’ bids in at least two stages.
The first is the garnering of bids in response to a public solicitation, submitted with detailed costing sheets to set forth all of the expenses that the bidders project and hope to recover via the anticipated revenues from their performance. The second stage begins with the mainline’s close review and vetting of every projected cost. The mainline examines every line-entry as to whether it should be built into the costing structure and charged back to the mainline for recovery via the rate. As the testimony shows, the network carriers have taken to this analysis with great parsimony, going back to the competing bidders with large aggressiveness. First, they identify fixed-cost charges that they think the regional already recovers in whole or in part via the rates for existing flying that the regional is doing already. They identify line-entries in some bidders’ submissions that are not even presented in the costing from other bidders. And they identify prospective costs that they believe are more properly chargeable as a fixed or general expense of doing business, to be offset against an operating margin rather than recovered directly from a mainline customer. Then they go back to the competing bidders, identify all such costing components to each, and inform each that it had best “sharpen the pencil” to delete these items for a revised bid or it will not remain for the final cut and a possible award of the flying.
There is no evidence of record that any of the major mainlines with which the Debtor could hope to do future business does not do this. More to the immediate point, Northwest unquestionably is doing this at present, and will do it, and relentlessly so.
The only possible conclusion from that, on an industry-wide basis, is that now and in the future the mainlines will demand that all “economies of scale” in a regional’s operation are upstreamed to them, via a forced deletion of any associated expenditure from the structure of a winning bid. Apparently they will condescend to allow a winner to build an operating margin into its costing — Northwest allowed for a range of 5% to 10% in the 2005 CRJ award to the Debtor, carried over into the Omnibus ASA — but they will not allow any ostensible enhancements of that to be embodied in costing entries that are not expressly labeled as profit. The corollary, of course, is that if such branded expenditures actually must be incurred, and are not to be recovered directly from a network carrier via revenues received, they will be charged as a general expense of business, to be funded via reduction of the operating margin or via third-party investment.
57
The clear and unmistakable implication for the unions’ argument here is that there simply will be no meaningful economies of scale to be factored into the Debtor’s fi
*737
nancial operations in the event of business expansion. The dynamics of the market for regional flying have changed that much, and so quickly. If there would be no such, expansion would not generate any larger margin, net of personnel costs; thus, it would not enable any amelioration of the cuts to wages and benefits that a steady-state fleet scenario would otherwise dictate. As a result, the Debtor has not failed the necessity test by projecting on a static fleet size alone,
c.
Targeting of 8% Operating Margin After Restructuring.
The third challenged assumption is one of those that are most inflammatory to the unions. After consultation with the Mercer professionals, the Debtor’s management decided to construct a business plan for operations that would generate an operating margin of
8%
per year. As the unions point out, when this is cumulated with the first two assumptions and the internally-oriented one as to employee attrition,
58
this assumed margin ultimately drove the target for labor cost reductions up to 19.4%.
59
The tone of argument, interrogation, and testimony on this issue got tweaked up to a high degree of emotion.
60
With that emotional edge blunted as it must be in any legal proceeding, the question comes back down to what the Debtor has framed: is the attainment of an 8% operating mar
*738
gin essential to the securing of the confirmation-related financing that the Debtor believes it will require to successfully emerge from Chapter 11?
61
This issue was presented via evidence in argument that got quite technical and down to fairly fine detail. When it was cast as whether the general market for exit financing would dictate attainment of the 8% operating margin, much time was spent on whether other airlines had been able to complete bankruptcy reorganization, using exit financing or not, with a like operating margin, or a lesser one.
However, the real issue is what target an operating margin will most promote
this debtor’s
survival through confirmation, setting it on a course “to complete the reorganization process successfully” and “to attain financial health,”
Carey Transp.,
816 F.2d at 89-90 , with the least invasion of employees’ entitlements under their collective bargaining agreements. With that longer-term frame of reference, the testimony of Peter Walsh, one of the Mercer consultants, bears much weight: in emerging from Chapter 11 into an intensely competitive market, a debtor should come forward close to the top of the heap in strength, rather than at the bottom. Otherwise, it will not have the flexibility to remain competitive, or present the general attraction of future stability to prospective
*739
airlink partners. And a lack of those qualities may well lead to a second financial failure.
Beyond that, the conclusion reached by Thomas Schmidt in conjunction with the Mercer professionals had both surface and deeper validity: a target for operating margin set somewhat higher than the prevailing experience of airlines emerging from bankruptcy, and in the mid-range for an economically-healthy airline was most appropriate. It was much more likely to offset the unavoidably negative characteristics in the Debtor’s profile for credit risk: it would have gone through a forced downsizing during the course of this case, and until Northwest emerged from its own reorganization the Debtor would have all the vulnerability inherent in having its only current customer in bankruptcy.
The record also disposes of two other arguments the unions raise on the matter of a target operating margin.
The first was that the goal of
8%
was excessively high, and that current experience in the industry, even in its distressed end, suggests that the Debtor could succeed with a lower one. The only example cited was Northwest. In its own bankruptcy case, Northwest has indicated that it believes it will obtain exit financing with its projection of a 6.5% operating margin. This is all very well and good, but the argument ignores the context, and the realities of the financing market.
The record contains a decent amount of evidence on the considerations that a likely exit lender or investor would bring to bear on the Debtor’s application. It well-estab-Jishes that the degree of risk, the likelihood of prompt recovery of the principal, will ultimately couch a prospective lender’s expectations for the Debtor’s post-confirmation performance. That risk, of course, is to be determined in the very first instance by the Debtor’s ability to generate enough net cash to reduce principal and to make debt service. For a higher-risk placement, a lender is likely to demand more accelerated payment terms.
62
The ability to satisfy such a requirement depends entirely on the generation of “profit,” the operating margin.
In that regard, the Debtor presents a greater risk to a prospective lender than Northwest does. Northwest is a freestanding network carrier. It can set its own customer pricing, subject to prevailing competition; it can enter new markets on its own accord; and it is limited in either regard by only the residuum of federal oversight that is left since the full effectuation of the Airline Deregulation Act of 1978. It has far more control over its own destiny than the Debtor. As a regional carrier, the Debtor is entirely subject to the good graces of the network carriers that would grant it airlink flying under contract. To land the business on which its survival depends, the Debtor must meet their demands for financial accommodation as they make them.
It is undeniable that being a regional is a riskier business than being a mainline. That conclusion is compelled by the recent upspike of competition in a much larger field of parties and the proliferation of means in which a regional may have to compromise its latitude in order to compete. As a result, there is no inconsistency at all in Northwest forecasting a successful reorganization on the prospect of a 6.5% operating margin, and the Debtor believing that it must project an 8% margin itself to get through.
*740
Corollary considerations put the unions’ other related theory to rest as well. That one is posited on an accusation that the Debtor “ignores the broad range of factors that allows a debtor to attract exit financing.” Apparently the thought here is that the Debtor presents enough other positive factors in “liquidity, leverage and coverage” to make it credit-worthy for exit financing, that it would not have to project as high an operating margin as it has used for its business plan.
Unfortunately for the unions, they did not develop this theory beyond an attempt to discredit the Debtor’s expert witnesses, on their testimony to the salience of the operating margin. The necessary avenue is simply not developed toward any material effect: what
is
there about the Debtor’s asset structure or fiscal dynamic that
would
induce a lender? And whatever that is, what would be the impact on the lender’s expectation as to operating margin?
With the initial shout being all there was, the point gets nowhere. In any event, in isolation it does not make sense. Lenders and investors look first and foremost to
recovery in cash,
the fungible form that is eminently suited to immediate enjoyment or reinvestment. Pledged collateral, “asset strength,” or net shareholder equity is desirable for lenders, but realization on it after failure of a going concern entails delay, cost,
and risk
As a vehicle of satisfaction, security is a second consideration for prospective lenders, an avenue of recourse and not their first wish. So, there is every bit of sense in the fundament of the Debtor’s experts’ opinions: in an industry as risky as air transportation is currently, operating margin is the most significant consideration any prospective lender or investor would apply.
Getting back to the impact of that fact here, there is no question that with each drop of a percentage point in a target operating margin, a lesser cut in labor costs would be indicated. If the target were reduced to the 2-3% margin that the Debtor was actually generating in the several years before its bankruptcy filing, when it was making handsome payments to MAIR, the overall reduction would be halved or more.
That, however, is only a matter of abstract mathematics.
The real issue is what, in the complex and dynamic world of the current market, will best promote the longer-term viability of the Debtor. Clearly, the Debtor must be able to project a future attractive enough to a lender or investor that it can have its emergence from bankruptcy underwritten. An enhanced showing of one of two things would greatly increase the likelihood that a third party would put funds into play in the Debtor’s operation, despite the other indicia of risk: the cushion of a reasonably-projected profit high enough to offset the other risk factors, and still make debt service on an extension of credit, or the reasonable assurance that prompt payment of dividends would cover the even greater risks of making an equity investment.
63
With the general ratcheting-up of risks in the regional sector of the airline industry, and those vulnerabilities specific to the Debtor, the judgment of the Debtor’s management, informed by the advice of Mercer’s consultants, that a target of 8% is necessary to meet those concerns,
*741
is sound enough to meet the necessity element.
64
The discussion thus far has assumed that the Debtor would have to meet its need for exit financing in the open market. The centerpiece of AFA’s evidentiary presentation on this issue, however, is summarized by a sentence in the unions’ post-hearing presentation: the Debtor “ignores MAIR as a likely source of exit financing.” The underlying thought is that MAIR would, or should, provide funding to the Debtor without demanding as high an operating margin as the Debtor has built into its proposal.
Of course, this argument feeds off the resentments against the Debtor’s parent company noted earlier at n. 60, pps. 737-738. It is another demand for a tapping of “the MAIR money,” but under a different legal guise. But, it was not inappropriate to raise the specific point in the context of this motion.
65
In the last instance, however, the evidence simply does not bear out the argument, which is then reduced to nothing more than rhetoric. On the status of the case and record at this point,
there is no legal or factual identity between MAIR and the Debtor.
As a holding company, MAIR functions as an investment vehicle for its shareholders. MAIR’s management is chargeable under law to those shareholders, for the decisions they make. The Debtor is not MAIR’s only holding or asset; MAIR has all that cash in its treasury as noted earlier, and it owns another airline, Big Sky Transportation Co. As a publicly-held company with a shareholder base of middling size, MAIR is vulnerable to claims under the securities and corporate laws, including accusations that management decisions inappropriately jeopardized the value of shareholders’ investment. MAIR’s management and board have every incentive to be very careful about risk before applying liquid assets to any external investment.
So the threshold point of whether MAIR
would
inject cash into the Debtor in the future is rather complex, setting aside the terms under which it would do so.
Via compulsion of subpoena, AFA called two executives of MAIR to testify to this matter. The specific content of their testimony need not be recapitulated. The endpoint of their evidence, directly and by inference, is unrebutted: MAIR’s management and board are sitting out the question of whether to make further infusions of cash into the Debtor’s operation in whatever form. They are awaiting the resolution of the labor issue at bar, as well as the conclusion of Northwest’s deliberations on the RFP and the continuation of Saab flying. Until those two processes have seen their end, and perhaps not until the Debtor is further stabilized, will
*742
MAIR’s officers and board undertake any-focused action to further support the Debt- or’s operations, pre- or post-confirmation.
In context, there is every bit of credibility to this statement of position. MAIR is cash-rich. If one thing may be said with utter certainty in all this, it is that MAIR’s shareholders (and the securities-law counsel who represent them or would like to do so) will watch very carefully what MAIR’s management does with that largess. There is evidence of record that the securities market does not put material value on MAIR’s shareholding in the Debtor: the aggregate market price of the outstanding shares in MAIR was not greater than the value of the raw cash that MAIR presently holds, when that evidence went into the record for this motion. So at present, absent a material change in the Debtor’s circumstances, there does not seem to be much of a choice for MAIR, insofar as extending credit on a long-term basis or making further equity investment in it.
66
And with that, it becomes academic whether MAIR would have some sort of undeniable and irresistible motivation to fund the Debtor’s exit from Chapter 11 on better-than-market terms.
67
Thus, it cannot be found on this record that MAIR presents an avenue of post-confirmation funding at a cost that would render the Debtor’s proposed labor cost reductions unnecessary to reorganization.
d. Imposition of Six-Year Duration for Reduced Labor Costs.
The fourth challenged aspect of the Debtor’s proposal has some of the nature of an “assumption” to underlie the business plan and some of the aspect of a functional term of the plan itself. The Debtor proposes to impose its labor cost reductions on the unions for a term of six years, without possibility of renegotiation during that time. For the height of emotion characterizing the unions’ opposition to it, this point ties with the target of operating margin. It is understandable that that is so; outside of bankruptcy, and under a mainstream application of the Railway Labor Act, it would be asking far too much of unionized employees to take deep cuts in in-hand receipt of wages, and to be bound by that for over half a decade.
But the matter at bar is in the context of bankruptcy, and the Debtor in this case has less direct control over its destiny than almost any other airline-debtor.
68
The Debtor must maximize its projection of fiscal stability in order to make its case on bidding for work from mainline carriers. There is sufficient proof in the record to support a finding that six years of anticipated predictability on the level of labor
*743
costs will most enable it to do that, and will best promote its long-term financial health by increasing its chances of winning such bids.
69
At this point, the unions’ insistence on “snap-back” provisions is best addressed. As described by several of the unions’ witnesses, such a term would provide for an automatic restoration of pre- § 1113 wage or benefit provisions if the Debtor’s operations returned to a state of solvency sufficient to fund them, or for a reopening of negotiations on these terms upon a designated level of improvement in the Debt- or’s financial condition.
Given the Debtor’s position as a regional airline on a “fee-for-departure” arrangement with its network carrier, however, such provisions would be futile with the way the mainlines are currently dealing with prospective regional airlink partners. For the foreseeable future, the circumstances for a traditional triggering of “snap-back” are very unlikely to come about as a matter of fact. Financially-pinched network carriers will extract economies of scale from those regionals with which they choose to contract. Further, with the possibility that “snap-back” provisions bring about substantial uncertainty over labor costs in the early stages of a new ASA, a term for the reopening of compensation issues in bargaining or “interest arbitration” could destabilize the Debtor’s performance under a secured air-link arrangement. Beyond that, with the prospect of interruption of service, it could even chill the interest of any mainline in contracting with the Debtor for such service.
Snap-back provisions clearly lessen the unpalatability of employee concessions. They even create an incentive to employees for more efficient production. However, the Debtor’s unions have not made a case that they would be fruitful in a larger sense, under the conditions that have taken over the regional airline industry. The Debtor has presented evidence just persuasive enough that their presence would hinder the regaining of business volume in the stabilization of the Debtor’s operations. All told, then, the Debtor’s management is not out of bounds in wanting to avoid any sort of snap-back provision. Their omission from the Debtor’s proposal does not render the included modifications unnecessary to permit the Debtor’s reorganization.
e. Reliance on Specific Pattern of Employee Attr

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1857202. Public record. Not legal advice.