Petition for Writ of Certiorari — O'Neill v. Continental Airlines, Inc., 125 S. Ct. 614 (2004) (No. 04-378)
Supreme Court brief2004
Ask Donna
What actually matters in this document.
Text
(2) Supreme Court, U.S.
FILED
O4 378SEP16 2008
ae OFFICE OF THE CLERK
Supreme Court of the United States
RAMON E. O’NEILL
JAMES BALDRIDGE; WILLIAM MANN; LARRY
DUNN, individually and as representative of a class of
persons similarly situated who are referred to as LPP
CLAIMANTS.
Respondent.
On Petition For A Writ of Certiorari
To The United States Court OF Appeals
For The Third Circuit
~ VOL il
PETITION FOR A WRIT OF CERTIORARI
Ramon E. O’Neill, Pro Se
7424 SW 129 Ct.
Miami, FL. 33183
(305) 386-4866
TABLE OF CONTENTS
APPENDIX
VOL il
Title and Description
In the Matter of the Pilot Seniority Integration
Arbitration among People Express Pilot
Merger Committee and Continental Pilot
Merger Committee and Frontier Pilot Merger
Committee and Continental Airlines, Inc ,.
Ross Arbitration Award,
August 13, 1991
United States of America
Dept. of Transportation, Docket 47390
Public Law 85-726 Title IV
Air Carrier Economic Regulation
Petition to National Mediation Board,
Request for Arbitrators selection panel.
January 29, 2002
Bankruptcy Code Rule 6006
Bankruptcy Code Rule 9014
Bankruptcy Court Ruling for the District of
Delaware, granting some Eastern pilots the
right to arbitrate. December 17, 2003
Bankruptcy Court Ruling for the Eastern
District of Virginia. March 7, 2003.
Pages
237 — 345
347 — 355
357 — 363
365 — 366
367 — 368
369 — 370
371 — 380
381 — 408
Title and Description
Protective Committee v. Anderson,
390 U.S. 414 (1968)
409 — 448
In the Matter of the
PILOT SENIORITY INTEGRATION ABRITRATION
among
PEOPLE EXPRESS PILOT MERGER COMMTTEE
and
OPINION
CONTINENTAL PILOT MERGER COMMITTEE AND
AWARD
and
FRONTIER PILOT MERGER COMMITTEE
and
CONTINENTAL AIRLINES, INC.
ee ue ee a a ee a ee ee ae es Se”
Appearances:
For the People Express Pilot Merger Committee
Daniel M. Katz, Esq.
Ellen Ranzman, Esq. -
(Katz & Ranzman)
For the Continental Pilot Merger Committee
Denis F. Gordon, Esq.
Frank Petromalo, Jr., Esq.
(Gordon & Barnett)
For the Frontier Pilot Merger Committee
John A. McGuinn, Esq.
(Schmeltzer, Aptaker & Shepard, P.C.)
For Continental Airlines, Inc.
7 Michael J. Madigan, Esq.
Michael J. Mueller, Esq.
Jonathan S. Spaeth, Esq.
H. Jonathan Redway, Esq.
(Akin, Gump, Strauss, Hauer & Feld)
l
238
Merger Committee Members
People Express Pilot Merger Committee
Jim Mackenzie, Chairman
Steve Abdu
Jim Brucia
Mark Cleppe
Michael Hynes
Spence Kershaw -
Jay Malloy
Continental Pilot Merger Committee
Neil Miller, Chairman
Joseph J. Birmingham
Carl Christensen
Charles Higdon
Tom Stephens
Jack Stice
Frontier Pilot Merger Committee
Robert L. Williams, Chairman
Douglas A. Bader
Roger Brooks
Dave P. Kaplan
Robert L. McCoy
Billy J. Watkins
Michael L. Waldron
Continental Airlines, Inc.
Robert P. Lemon
- Sam Peckham
James Cato, Esq.
|
239
Background
This matter is before the undersigned, Jerome H. Ross,
following a Federal District Court Order Compelling
Arbitration of the Integration of Pilot Seniority Lists of
Continental Airlines, People Express Airlines and Frontier
Airlines Pursuant to the Provisions of the Labor Protection
Agreement.* -
On September 15, 1986, the Texas Air Corporation
(Texas Air or TAC) and People Express, Inc. (PEI) entered
into a merger agreement.** On the same date, TAC and PEI
entered into a Labor Protection Agreement (LPA) in order
“to provide assurances to the employees of the air carrier
subsidiaries of PEI with regard to their seniority interests in
the event of any future merger of airline operations involving
any air carrier subsidiary of PEI.” The LPA further provides
for “fair and equitable seniority integration procedures” in
the event of any such future merger. It also provides for a
“final and binding decision by a Neutral Mediator”*** in the
absence of agreement of the parties. The LPA also requires
that a separate
* United States District Court for the District of New
Jersey, Civil Action No. 87-1155, Hon. Nicholas H. Politan,
August 7, 1989.
** People Express Airlines, Inc. became the operating
' subsidiary of a newly formed holding company, People
Express, Inc. on August 28, 1985.
*** The Court and the parties recognize that the
appropriate title is Neutral Arbitrator.
|
3
4
procedure be conducted by the seniority integration
committees for each craft or class of employees on each
carrier participating in the merger. It further provides for the
surviving merged carrier to participate as a party to the
selection of the neutral and as a party to the proceedings.
240
On December 30, 1986, Texas Air, the parent
corporation of Continental “Airlines (the Company,
Continental or CAL) formally acquired People Express
Airlines, Inc. (People Express or PEX) from PEI. PEI
became a wholly-owned subsidiary of Continental which
remained a wholly-owned subsidiary of Texas Air.*
On March 12, 1987, Continental issued a memorandum
proposing to unilaterally merge the seniority lists of the CAL
pilots and the PEX pilots in the event of a consolidation of
CAL and PEX operations. The list placed the top 295 PEX
captains below the junior CAL captain. The remaining 162
former PEX captains were integrated into the list below the
junior CAL first officer, and the remaining PEX pilots
followed these former captains. The bottom of the list was
composed of an estimated 1000 pilots who were to be hired
in 1987 and thereafter.
The PEX pilots, represented through the People
Express Pilot Merger Committee (PEX Committee),
challenged the Company’s list in Federal District Court. On
June 15, 1987,
* On July 11, 1989, PEI was merged with PEX and
CAL was then merged with PEX. The surviving entity was
renamed Continental Airlines, Inc.
4
the Court denied the PEX Committee’s application for a_
preliminary injunction.
When the PEX Committee moved to enjoin the
Company from implementing its lists, TAC was in the
process of merging the operations of CAL and Frontier
Airlines (Frontier or FAL). On June 15, 1987, Arbitrator
George Nicolau issued an Opinion and Award rendering an
integrated seniority list for the pilots of Continental and
Frontier.
On July 10, 1987, the Company announced a revised
seniority list integrating CA and FAL pilots pursuant to the
|
241
Nicolau award and integrating CAL and FAL pilots pursuant
to the Nicolau award and integrating the PEX pilots as
reflected under the current seniority list in the following
order: 1675 CAL captains; 162 FAL captains and 295 PEX
captains (integrated by date of hire, which places all FAL
captains ahead of PEX captains); 299 CAL first officers
(pursuant to the Nicolau award); 1262 additional CAL, FAL
and PEX first officers (pursuant to the Nicolau award ratio
for the first 1056 CAL and FAL pilots, and by date of hire
for the remaining FAL and PEX pilots,*); 162 PEX second
officers and Flight Manager Representatives (FMRs) and
508 CAL new hires. A more specific breakdown of the
Company’s seniority list is set forth under. the section on
Proposed Seniority Lists.
On October 14, 1987 the District Court ordered that the
CAL pilots were a necessary party to an arbitration pursuant
to the provisions of the LPA.
* The PEX Committee claims that the first 162 of these
former PEX pilots are downgraded captains.
5
System Bid 87-3, the first opportunity for PEX pilots to
bid under the integrated flight operations, was announced on
October 23, 1987.
On October 24, 1988, the Court certified the PEX
Committee as the plaintiff class representative for all pilots
: employed by PEX as of March 12, 1987. The Court, on
November 15, 1988, granted a motion for intervention filed
by the Frontier Pilots Litigation Steering Committee
(FPLSC) on behalf of the FAL pilots. The FAL pilots are
represented in this Arbitration by the Frontier Pilot Merger
Committee (FAL Committee). On April 24, 1989, the Court
also certified the FPLSC as a representative of all CAL
pilots, excluding PEX pilots. On the same date the Court
granted the PEX Committees motion to compel arbitration.
Pursuant to the Court’s Order Compelling Arbitration,
ee ee ee ee ide
242
dated August 7, 1989, the undersigned Arbitrator was
selected from a list provided by the American Arbitration
Association. The Order provides for the participation of the
-PEX Committee, the FAL Committee, the Continental Pilot
Merger Committee (CAL Committee) and Continental.
On February 1, 1990, at a prehearing conference,
Continental filed a Motion in Limine seeking enforcement of
Arbitrator Nicolau’s Award of June 15, 1987, which
rendered an integrated seniority list for the former FAL
pilots and the CAL pilots. The motion was granted by the
undersigned on February 26, 1990, thereby requiring that
6
the FAL pilots not argue for any change in their seniority
relative to other non-PEX pilots at Continental, as
determined in the award of June 15, 1987. By District Cowii
Order dated May 14, 1990, the FAL pilots’ motion to reverse
this decision was denied.
Hearings before the undersigned Arbitrator were held
in Washington, D.C. on the following dates in 1990: May 7-
11, 15-16 and 21-24; June 4-8 and 11-15; July 9-13, 16-19
and 30; August 1-3; September 12-15, 17-21 and 30;
October 1-6 and 15-19; November 5-6, 8, 10, 12, 14-15, and
27-30; and December 14-15. In 1991, hearings were held on
January 7, 14 and 26; February 7, and March 2. Post hearing
briefs were filed on April 2, 1991. Reply briefs were filed
on April 15, 1991.* Oral argument was held on April 29,
1991. Technical support committee sessions were convened
on June 14 and 27; July 11, 12 and 15 and August 7-8, 1991.
Historical Overview
This section highlights the facts and circumstances
under which four airlines relevant to this integration —
Continental, PEX, Frontier and New York Airlines (New
York Air or NYA) — came into existence and operated.**
ewe NI Aer need eae
OE EE EN EE OLE LEA AN ALO AN AP LALA AM
243
* Under the briefing procedures, the FAL Committee
filed its opening brief on April 15, 1991, and it incorporated
its reply arguments into its oral argument on April 29, 1991.
** The relevance of NYA, which is not specified in the
District Court Order, is addressed in the section on
Discussion and Findings.
People Express
A unique chapter in the history of the domestic airline
industry was written following passage of the Airline
Deregulation Act of 1978 when People Express introduced a
new concept in air travel.
People Express was incorporated on April 7, 1980. Its
application to the Civil Aeronautics Board for permission to
form a new airline listed the following objectives: (1)
provide a broad new choice of flights with high frequency
service; (2) keep costs low by extremely productive use of
assets; (3) offer unrestricted deep discount price savings
through productivity gains; (4) focus on several high density
markets in the eastern United States which had not benefited
from deregulation; and (5) center operations in the New
York/New Jersey metropolitan area with its highly
concentrated population and use the under-utilized,
uncongested and highly accessible Newark International
Airport as its main base.
These objectives vould initially result in People
Express providing frequent service to underserved cities,
especially those with industrial markets, primarily in the
northeast. In order to attain these objectives, management
concentrated on reducing costs to a bare minimum in every
aspect of the operation. All seats were sold for one deeply
discounted price, which PEX termed “unbundled service”
and which today is commonly known as “no frills.” A
difference in fares was charged for peak and
244
off peak hours. Fares were collected in flight, as opposed to
~ using ticket counters and agents. Customers were charged
for all in flight food and drink services and baggage
checking. There were no hot galleys in the planes.
PEX’s first flight service began on April 30, 1981, with
three planes flying between Newark, Buffalo, Columbus
(Ohio) and Norfolk. By 1982, People Express had over
1,200 employees, owned 17 aircraft and serviced 18 cities.
In addition to insuring the highly productive use of
employees and the fleet, management implemented a labor
relations philosophy which did not include union
representation for employees. Rather, management’s
objective was to motivate employees to be highly efficient
by making every employee a “manager” and an “owner” of
the company. As such, employees performed more than one
type of duty under the concept of cross utilization. For
example, pilots had the job title of Flight Manager.
Although their primary job was to fly planes, they were
assigned duties in other functional areas (such as scheduling,
air traffic, reservations or insurance) on an average of four
days monthly in addition to their regular flying duties of
from 80 to 86 hours each month. By 1986, many pilots were
not required to work outside their flying duties. Flight
attendants, with the job title of Customer Service Manager,
also were cross utilized to perform duties such as fare
collection on the aircraft. Employees responsible for
overseeing the maintenance of aircraft carried the
9
Maintenance Manager job title. The Company also hired
interns in six different functional areas of the operation.
Beyond the managerial concept, every new employee
was required to purchase 100 shares of PEX common stock
at greatly discounted prices, thus instilling the concept of
ownership in all employees. In 1985, People Express
employees controlled over 26 percent of the company’s
voting stock shares.
tt inthe
245
Employees were provided 100 percent medical and
dental coverage, a profit sharing plan and other stock option
bonuses and plans. The company did not offer an employee
pension plan. The company’s stated, although unwritten,
policy was to not furlough or involuntarily downgrade
employees.
In an effort to provide pilots their aircraft preferences,
the company established a system which offered selection
opportunities for pilots who had been hired in classes of
from two to 15 employees beginning in 1981 through August
1983. The system was geared to classes in which every class
member became a captain on the same date, as opposed to
individual dates of hire and strict individual seniority. The
System required consensus in a pilot group to resolve
conflicts where all pilots could not receive their aircraft
preferences. In 1983, the company implemented a new
computerized bidding system, Selective Lines Individually
Constructed (SLIC), which later was designed to customize
flight lines based on individual
10
pilot requests. By 1985, a lottery system, in which seniority
played no part, was implemented for bidding on flight lines.
The location of PEX’s corporate offices at Newark
International Airport also was consistent with the effort to
operate potentially productive assets at a minimum cost.
Although the airport is located in the New York City
: metropolitan area, it largely had been ignored. People
; Express inexpensively purchased a building on the airport
premises to house its corporate offices. The offices were
sparingly furnished and staffed. There were no secretaries,
and every employee performed clerical and secretarial duties.
A basis computer system was used to maintain passenger
seat reservations.
The concept of a Newark hub for passenger exchange
to the spokes in the People Express system proved very
efficient. As the number of PEX flights increased, the
246
company significantly contributed to the development of a
more efficient air traffic system and an improved air flow
control system in the congested New York City area.
The initial success and growth of PEX resulted in net
incomes of $1 million in 1982 and $10.4 million in 1983.
During 1983, PEX acquired 37 B-727-200 aircraft from
other airlines. It began service to London with a B-747-200
at fare prices which received wide public acceptance. The
company’s fleet, all previously owned, had increased to: 37
B-727-200s, five B-737-200s and one B-747-200. By the
spring of 1984, PEX had 150 daily departures form Newark
11
-- more than any other carrier in the New York City area. In
1985, PEX and the Port Authority of New York and New
Jersey (Port Authority) entered into an agreement to contruct
Terminal C which PEX agreed to lease for 25 years.
International service to Brussels and Montreal was added to
the system. On November 22, 1985, PEI acquired Frontier,
gaining a major hub in Denver, but also engaging in fierce
competition there against Continental and United Airlines.
In December 1985, PEI entered into an agreement to
purchase Britt Airways, at the time the nation’s third largest
regional commuter line which served 29 mid-western cities.
Within months it had completed the purchase of
Provincetown-Boston Airlines (PBA). In 1986, the company
joined the American Airlines Sabre reservation system,
announced a frequent flyer program and offered first class
airport lounges.
By January 1986, People Express was flying one
million passengers a month, the fifth largest domestic airline
by this measure. Its operating revenues had increased by
two-thirds from 1984 to 1985. Plans were being
implemented to construct Terminal C, which would become
the largest airline passenger facility in the northeast.
However, the company was experiencing problems
associated with its rapid growth. Overbooking, inadequate
a sleigh
Se ene eke ae oat ee ee ee oe ee xs
Prt
247
terminal facilities in Newark and erratic departure and arrival
times depressed profits in the last quarter of 1984
12
and the first quarter of 1985. There is also evidence that
during this period employee morale was dropping from its
previous high levels.
The Company experienced very substantial operating
and net losses in the last quarter of 1985 and the first two
quarters of 1986. With the increased decline in the
company’s financial condition, in June 1986 PEI retained an
investment banker to seek a buyer for PEX and concurrently
develop a new business plan to incorporate fundamental
changes in its policies and practices — a move which had
become necessary to the survival of the company. By the
summer of 1986, People Express had reversed its no frills
policy and had developed a plan to become a more
traditional multi-class service carrier in the face of severe
financial problems. After rejecting a TAC offer to buy PEX
and Frontier, PEI agreed to sell Frontier to Untied in June
1986, but the transaction was never completed.
On September 15, 1986, PEI and TAC entered into a
“merger agreement under which TAC ultimately acquired
PEX for $113.7 million, -- the figure having been lowered
twice from the initial $122.1 million purchase price. PEX
stockholders approved the action on December 29, 1986.
TAC also purchased Frontier in the same transaction.
Continental
In 1937, a small carrier from El] Paso to Pueblo,
Colorado began operating under new ownership as
Continental
13
Airlines. By 1961, Continental had added several cities in
248
Texas and New Mexico, as well as Wichita, Tulsa, Chicago,
and Los Angeles. The airline grew steadily between 1966
and 1977, and it added several Pacific routes. From 1977 to
1982, Continental’s financial situation increasingly worsened
as the Company had difficulty in adapting to the effects of
airline deregulation. Several merger attempts following
deregulation were unsuccessful. In 1979 Continental began
service in the northeast with flights to Newark from Denver
and Houston. The Company’s losses in 1979 through 1981
were significant.
In 1947, another carrier, Trans-Texas Airlines, began
service to eight cities in Texas and later expanded to cities in
Arkansas, Louisiana, Mississippi and Tennessee. In the late
1960s and early 1970s, Trans-Texas began service to
Monterrey (Mexico), Denver, Los Angeles, Salt Lake City
and Mexico City. In 1969 the Trans Texas name was
changed to Texas International Airlines (TI). In 1972, Jet
Capital Corporation, headed by Frank Lorenzo, gained
voting control of TI which had posted large losses since
1968. Under Jet Capital, TI evolved into a low cost, low fare
carrier and grew significantly during the 1970s and early
1980s. During 1978 and 1979, TI launched an unsuccessful
effort to acquire National Airlines, but realized a large profit
through the sale of the National stock it had acquired.
In 1980, TI created a holding company, Texas Air
Corporation. Texas Air, in turn formed New York Air,
14
which it operated as a separate, non-union subsidiary
offering a simple low fare structure and high frequency
service. |
In March 1982, Texas Air assumed control of
Continental, which was deep in financial difficulty, and
partially guaranteed Continental’s debt. Texas Air itself,
however, was incurring operating losses at the time of the
merger with Continental.
On October 31, 1982, Continental and TI merged as
249
Continental to become the sixth largest carrier in domestic
revenue and passenger miles. Texas Air, the holding
company which had been created in 1980, had two
subsidiaries, Continental Airline Corporation and NYA.
Continental continued to operate at a loss in 1982.
By summer 1983, Continental had suffered heavy
losses which TAC agreed to partially guarantee. Relations
between Continental and its unions were poor, and the
International Association of Machinists struck the Company.
On September 2, 1983, Continental suspended operations
and filed for bankruptcy. It resumed operations under
Chapter 11 on September 27, 1983, with a two-thirds
reduction in fleet, staff and number of cities it serviced.
Moreover, it unilaterally implemented “emergency work
rules” which cut wages and increased productivity,
notwithstanding an existing collective bargaining agreement
with its pilot union. In protest against the pay cuts, loss of
seniority rights and other work rules, Continental pilots
initiated a strike
15
which remained in effect for almost two years. In October
1985, Continental and the Air Line Pilots Association
(ALPA) negotiated a strike settlement which provided the
pilots a choice from the following three options: (1) waive
all claims against the Company and return to work as
vacancies occurred; (2) receive severance pay in lieu of
returning to work; and (3) not waive claims against the
Company and return to work after all option (1) pilots have
returned or be removed from the hiring lists on December
31, 1988.
While operating in bankruptcy, Continental began to
deeply reduce its fares. The move was very successful in
attracting passengers. During 1984, with financial backing
from Texas Air, Continental began to rebuild its system by
adding cities and increasing flights. In August 1985, Texas
Air launched a new carrier, Continental West Airlines, as a
250
full-service, low fare operation. Continental, still operating
under bankruptcy rules, attempted to acquire 30 jetliners, but
initially was able to sublease only four, with additional
leasing arrangements contingent on court review of its
financial and operating performance during the first half of
1985.
After February 1986, when Texas Air had bid
successfully for Eastern Airlines, several other airline
mergers were announced as companies were restructuring in
an effort to attain “supercarrier” status in order to
successfully compete in the market place. In acquiring
Eastern,
16
Texas Air was required to sell the shuttle service operated by
NYA. ;
On September 2, 1986, Continental emerged from
bankruptcy with two main hubs at Houston and Denver, 40
‘percent larger than in 1983 when it had entered bankruptcy,
and with plans to add to its fleet, as well as with a long term
debt service obligation of almost $2 billion.
With the acquisitions of People Express and Frontier
on September 15, 1986, Continental strengthened its
presence in the east coast markets, gained major hubs in
Newark and Denver, and achieved the critical mass required
to attain supercarrier status. On February 1, 1987, PEX and
NYA operations were merged into Continental.
Frontier
Monarch Airlines began serving Denver, Salt Lake
City and Albuquerque in 1946. A bankruptcy was averted in
1947 when the airline was sold. In 1949, Monarch acquired
Arizona Airlines and Challenger Airlines. The three carriers
combined to form Frontier Airlines. By 1956, Frontier
served 68 cities and had 700 employees. Controlling interest
in Frontier was sold in 1958 for $750,000 and again in 1964
i en
251
for $2.5 million when RKO General, Inc. (a subsidiary of
General Tire Co. of Akron, Ohio, later to become GenCorp)
bought 56 percent of Frontier for $6.5 million. RKO
General remained the majority stockholder until the airline
was sold to PEI in 1985.
17
During the 1960s, Frontier gained a reputation as an on
time airline providing a high standard of service to many
small and remote locations. In 1967, Frontier merged with
Central Airlines. By the end of the 1970s, 53 of Frontier’s
89 cities were government-subsidized. In 1979, Frontier
registered record profits and began preparing for operation
under deregulation by terminating service to several cities
and adding others. In 1981, Frontier again set new earnings
records and began serving larger cities such as Los Angeles,
Seattle, Atlanta and Detroit. In 1982, Frontier became a
subsidiary of Frontier Holdings, Inc. In 1983, as a result of a
fare war in Denver between United, Continental and
Frontier, Frontier Holdings posted a $13.8 million loss — its
first in 12 years. The Denver battle continued into 1984
| during which Frontier employees agreed to heavy wage
concessions and the airline posted a $31 million loss. In
1984, Frontier Horizon, a non-union carrier subsidiary of
Frontier Holdings, began service out of Denver.
The situation worsened in 1985. Atiempts at an
employee buyout plan failed as Texas Air tendered a share
offer in excess of the employee offer. However, PEI outbid
Texas Air and purchased Frontier in October 1985, using
$200 million in cash from Frontier to fund the $309 million
purchase. In a concurrent transaction, PEI and Frontier and
its unions entered into an agreement which provided in part
that: no further wage reductions or
18
furloughs would be implemented; Frontier would not be
252
merged with Continental, nor would it be sold to TAC/CAL;
PEI would not sell Frontier assets in excess of $25 million;
and PEI would provide sufficient working capitol to operate
Frontier as a viable entity.
Frontier’s losses increased under a new marketing
strategy of deeply discounted fares and no frills service led
by a new president selected by PEX Chairman Donald Burr.
By May 1986, the marketing strategy was reversed as
premium coach service was begun.
Following a $58.9 million loss in the first half of 1986,
PEI, after having rejected a prior TAC offer to buy PEX and
Frontier, announced tentative agreement to sell Frontier to
United for $146 million. The purchase required United and
its pilots to reach agreement on the wages and other terms
under which the Frontier pilots would be employed at
United. Their discussions continued until late August 1986.
Although agreement was not reached, PEI received
approximately $47 million from United for the sale of
various Frontier assets.
On August 24, 1986 Frontier ceased operations, and it
filed for bankruptcy on August 28, 1986.
On September 15, 1986, Texas Air agreed to purchase
Frontier for $176 million in conjunction with the People
Express acquisition.
i9
New York Air
In December 1980, New York Air began operations as
a subsidiary of Texas Air which owned 67 percent of NYA’s
common stock. NYA had leased six DC-9s from Texas Air
to begin service between New York and Washington, D.C.,
Baltimore, Buffalo, Cincinnati, Cleveland, Detroit and
Louisville, and between Boston and Washington, D.C. and
Baltimore, and between Baltimore and Orlando. Texas Air
initially provided NYA with $10 million of equity capital
and agreed to guarantee a $15 million line of credit.
253
The NYA and PEX operating plans were similar in that
both offered low fare, high frequency service based on high
productivity, efficiency and simplicity of operations.
New York Air incurred an $11.6 million loss during its
first year in operation. In January 1982, Texas Air
purchased an additional $8 million of NYA convertible
preferred stock. NYA’s net operating loss for 1982 was $23
million. During 1983, NYA’s fleet composition changed
under leasing and sub-leasing arrangements with Texas Air,
resulting in eight MD-80s moving from NYA to Continental.
Moreover, NYA used two of Continental’s Washington
National Airport slots during 1983. Although NYA showed
a $4.5 million net operating profit in 1983, it experienced a
$6.8 million net operating loss in 1984. In 1985, Texas Air
acquired the remaining shares of NYA’s common stock.
NYA’s 1985 net loss was $2.4 million.
20
In order to acquire Eastern in 1986, Texas Air was
required to sell the Eastern shuttle service to Pan Am. The
agreement between Texas Air and Pan Am was signed on
September 12, 1986. The NYA shuttle operation was moved
to Newark after Texas Air sold Pan Am 19 NYA arrival and
departure slots at Washington National, 56 NYA arrival and
departure slots at La Guardia and access to two NYA gates at
Logan for $62.8 million. NYA showed a net profit of $36
million in 1986. ;
NYA was merged into Continental in February 1987.
During its brief history, NYA started and ceased service
from Boston, New York or-Washington, D.C. to 82 cities.
TAC-PEI Merger Agreement
The TAC-PEI merger agreement, dated September 15,
1986, was one of the most complicated acquisitions in airline
history. It set forth numerous terms and conditions which
required PEI to use its best efforts to preserve People
254
Express operations and to refrain from attempting to sell the
operation to another party. The agreement further required
PEI to represent that PEX was a failing company for
purposes related to merger and anti-trust considerations. The
agreement established several conditions precedent to
effecting the merger, such as:- (1) approval by PEI
stockholders; (2) DOT approval of the merger; (3)
agreement of the Frontier unions; (4) acquisition by TAC of
Frontier assets through bankruptcy court
21
approval; (5) PEI. remaining out of bankruptcy and
continuing to pay its debts as they became due; (6) PEI not
ceasing or suspending any significant portion of its
operations or business; (7) PEI using its best efforts to
obtain waivers of default from its banks, and (8) TAC
receiving waivers of claims of Frontier pilots arising out of
the October 1985 agreement with PEI. It also required PEI
to refrain from soliciting any other offers of purchase. As
part of the agreement, PEI granted TAC an option to
purchase a new issue of People Express convertible preferred
stock, representing approximately 30 percent of the PEX
voting power, exercisable while the merger agreement was in
effect upon the occurrence of certain events.
The record further reflects that the merger agreement
was renegotiated by the parties twice after September 15,
1986. In October 1986, TAC initiated discussions to
renegotiate the terms of the agreement following PEX’s
heavy losses in September. As a result of the discussions,
the amount paid by TAC was reduced. The PEX board of
directors approved the renegotiated terms on November 2,
1986. Later in November, TAC again renegotiated lower
terms which were approved by the PEX board on November
28, 1986.
Events Following the Merger Agreement
Certain events involving seniority integrations at
-
4
:
,
i
8
i”
i
a
Lee eee a aie Rh a nde SCS eat
SW ee
255
Continental, which bear on the present proceedings,
22
occurred after the September 15, 1986 merger agreement.
On October 2, 1986, the Job Protection Agreement
(JPA), under which the FAL-CAL seniority integration was
conducted, was signed. In November 1986, Continental
hired the former Frontier pilots and merged CAL-FAL flight
operations after Texas Air, through NYA, took delivery of
Frontier’s 44 aircraft and airport properties.
Between October 1986 and January 1987, the PEX
pilots formed a research committee to prepare for their
seniority integration arbitration with CAL pilots. The
committee held its first meeting in December 1986. It
retained counsel in early 1987.
A CAL-NYA seniority integration award was issued by
Arbitrator Richard I. Bloch on December 18, 1986. It was
implemented on January 27, 1987 for System Bid 87-1
which was open to CAL and NYA pilots, but not to PEX and
FAL pilots.
_ The CAL-FAL seniority integration arbitration was
held in early 1987, and following the submission of post-
hearing briefs, the award issue on June 15, 1987.
On February 1, 1987, the Company began marketing
CAL, PEX and NYA as a single integrated airline. The
management of People Express operations, marketing and
administration functions was assumed by Continental.
Between January and March 1987, Continental and the
PEX Committee unsuccessfully attempted to reach -
agreement on a seniority integration procedure. On March
10, 1987,
23
the Company informed the PEX Committee that it would
unilaterally created a seniority list containing the CAL and
PEX pilots to be used in the event the operations were
256
merged. The list was announced on March 12, 1987.
On July 10, 1987, the Company issued another
seniority list which included the FAL pilots. System Bids
87-2 A and B — an alternative arrangement with one option
providing for PEX pilot participation in the event CAL and
PEX operations were merged — were never implemented.
On October 23, 1987, System Bid 87-3 was issued.
For the first time, a system bid was open to all CAL pilots
(including former FAL and NYA pilots) and former PEX
pilots. The bid was awarded on December 11, 1987 and
effective on July 1, 1988, when all CAL and PEX pilots first
were fully staffed together.
PEX’s Financial Condition
In April 1986, People Express had begun to implement
portions of a new marketing strategy in an effort to stem
heavy first quarter 1986 losses. In June 1986, PEX
announced that it was downsizing its operations due to an
excess of capacity, and all or part of the airline was for sale.
Although its boarding rate exceeded 2.1 million passengers
in August 1986 (30.7 percent more than August 1985 and a
new monthly record), the company’s heavy losses continued
in the second quarter. PEX’s net loss for the first six months
of 1986 was nearly $80 million. The
24
Company incurred modest net losses in July and August
1986.
A preliminary business plan for PEX, dated August 7,
1986, states that although “PEX’s cost structure is a very
powerful competitive advantage, . . . given the revenue
driven nature of the airline business, [PEX] must embark on
a strategy to enhance its revenues.” In addition to the new
marketing strategy aimed at raising revenues, the company
negotiated an 18-month lease to Pan Am of eight B-727-
200s, which were excess to its current needs, for $8.4
vate
ee
datiadd-ietitiatin
whe TR ea aane ad Gai eae Dek ee A ee 2 RA eae Te
257
million. It was also considering several possibilities for
three of its B-747s, including their sale or lease to another
carrier. The business plan projected an increase in operating
income of $40.7 million following its full implementation in
the second year, after losses during the first and third
quarters of the plan’s implementation. The plan required a
25 percent reduction in daily departures, a 14 percent
reduction in block hours, and a break even load factor
(BELF) of 70 percent. In addition, the company’s fleet
would be reduced from 79 to 69 aircraft (two less B-747s
and eight less B-727s) which would undergo extensive
modification in order to provide multiclass service. Fifty
eight of the 69 aircraft would be in service at any given point
in time.
A “preliminary draft” dated “September__, 1986” by
Morgan Stanley & Co., Inc., the investment banker retained
by the PEX Board of Directors to review the conditions of
25
the TAC-PEI merger prior to September 15, 1986, states in
part: “. . . without the prompt infusion of a significant
amount of cash from asset sales or sales of new equity, there
is grave doubt that the Company will be able to meet its
ongoing financial obligations in the near future.” It further
states: “Other than as described herein, no financially
responsible company as of this date has made a credible
proposal for the acquisition of PEI, and no other such
proposal appears immediately forthcoming.”
The TAC-PEI merger agreement and plan, dated
September 15, 1986, required that PEX “shall affirmatively
State and use its best efforts to demonstrate orally and in
writing that it is a failing company both for purposes of any
submission to [the U.S. Department of Transportation] and
for purposes of any filing with or notification to any federal
antitrust authority .. ...”
During the third quarter of 1986, which ended on
September 30, two weeks after the merger announcement,
258
PEX recorded an operating loss of nearly $24 million and a
net loss of $40 million. The company’s losses for the first
nine months of 1986 were $120 million. On September 30,
1986, People Express had a working capital deficit of $147.8
million, as compared to $10.7 million on December 31,
1985. Its debt service requirements as of September 30,
1986 were $34.5 million through December 31, 1986, of
which $15.6 million had been paid through November 14,
1986. An Internal Revenue Service assessment of $11.5
26
million against the company also was outstanding.
On October 15, 1986, the U.S. Department of
Transportation (DOT) issued a Show Cause Order
concerning the acquisition of PEX by TAC. Although the
DOT declined to render findings as to whether PEX was a
failing company because, it noted, such a determination was
relevant only if it had found the acquisition to be
anticompetitive, the order observed: “ .. . the applicants
themselves have made public facts suggesting that [PEX]
will not survive without the acquisition. People Express’
financial difficulties have become widely-known as a result.”
The order further stated: “... the imposition of LPPs is
likely to cause Texas Air’s withdrawal from the transaction
and thus the bankruptcy of People Express.”
The DOT’s Final Order in the above transaction, dated
October 24, 1986, noted:
... The record amply demonstrates that prompt
approval of the acquisition is necessary for
[PEX’s] survival. People Express in fact would
have run out of cash already but for the financial
assistance provided by Texas Air under the
merger agreement, and that agreement does not
require Texas Air to provide any additional
assistance after this month. Without the last
payment by Texas Air at the end of this month,
People Express would have little or no cash left,
thes AROMAT aE eat
259
and it appears unable to obtain cash from any
other source. App. October 9, 1986 letter at 3.
Its cash shortfall from operations appears to
exceed $500,000 each day, a rate of losses
which will rapidly exhaust the last cash advance
due from Texas Air.
27
The order also stated: “ . . . Given People Express’ critical
financial condition, it is unlikely that the carrier could
continue to operate at its present scale if it remained
independent.”
The minutes of a special PEX board of directors
meeting on September 14, 1986, state in part:
At this point in the meeting, Mr. Burr
asked Mr. Norris to review with the Board the
Company’s current cash position and projected
cash flows through the end of the year. Mr. de
Leeuw then reviewed with the Board the status
of the Company’s accounts payable. Mr. de
Leeuw stated that there could be no assurance
that vendors or other creditors of the Company
would continue indefinitely to allow the
Company to extend payment periods. Messrs.
Norris and de Leeuw reported to the Board that
they had developed day-to-day and week-to-
week cash flow forecasts based upon anticipated
revenues, scheduled lease and debt payments
and anticipated operating expenditures. Messrs.
Norris and de Leeuw reported that, without the
prompt substantial infusion of a significant
amount of cash, management’s projections
indicated that the Company would be in a
negative cash position by mid-October. Mr.
Norris and Mr. de Leeuw reviewed the status of
the Company’s ongoing efforts to raise cash by
260
disposing of aircraft. Messrs. Norris and de
Leeuw reported to the Board that it did not
appear that a partial liquidation of the
Company’s aircraft and other assets represented
an alternative method of both resolving the
Company’s cash flow deficit and placing its
operations on a profitable basis. The fact that
the Company’s aircraft were already heavily
financed and had little remaining equity value
and that the market for used aircraft, particularly
Boeing 747’s, was very weak made it very
remote that the Company-could raise enough to
continue operations as an independent entity
even under the protection of Chapter 11 of the
Bankruptcy Code. The Board also considered
the revenue impact that might result from a
public admission of the Company’s status as a
failing company. Mr. Fiedorek then reported to
the Board that the
28
cash flow forecasts presented by Messrs. Norris
and de Leeuw were corroborated by month-to-
month cash flow projections which had been
developed by Morgan Stanley. Mr. Fiedorek
also reported that representatives of the Palmieri ~
Company (“TPC”) had concluded, on a
preliminary basis, that management’s cash flow
analysis was essentially correct.
+ * *
Mr. Norris then reviewed the Company’s
projected cash flows in the context of a
bankruptcy proceeding. Mr. Norris reported
that management had concluded that, in a
bankruptcy proceeding, the Company might be
261
able to have a modest positive cash position at
year end, but that such analysis did not consider
any negative impact on revenues resulting from
a bankruptcy filing. It was noted that the
Company’s cash position was so critical that
any adverse revenue impact of a bankruptcy
proceeding would have a material adverse effect
on the Company’s cash position and _ its
viability. It was the conclusion of management
that a bankruptcy liquidation would result in
only a 50% realization for unsecured creditors
and no residual equity for the holders of the
Company’s Common Stock and Class B
Common Stock. In addition, it was
management’s view that the Company did not
have a realistic possibility of reorganizing in
bankruptcy for various reasons, including the
uncertainty as to the ability of People Express
Airlines to retain the rights to Terminal C in the
- event of a bankruptcy.
The record also contains a document dated September
17, 1986 and titled, Transcript of Discussion with People
Express Board of Directors. The discussion reflects that a
financial consulting firm, The Palmieri Company, was
commissioned by PEX to undertake an intensive review of
the company’s financial position. The group, which was
composed of experienced consultants, spent two and a half
days examining: (1) the company’s “status quo cash flow”;
(2) the underlying assumptions in the company’s forecasts;
(3) adjustment in
29
the forecasts for the effects of a bankruptcy proceeding; (4)
other potential cash sources and risk issues, and potential
responses to routing and fleet deployment and pricing and
labor issues; and (5) whether the company could hope to
262
exist as a viable business. The group found that “the cash
flow could not be more critical” and the “near term cash
crises . . . leaves very little room to maneuver outside of a
[bankruptcy] proceeding or outside of a sale such as the one
that has been negotiated.” The group further found that “it
would be difficult to find anyone who . . . would be willing
to testify to a judge that there was over the period of six
months to a year an opportunity to make a business out of
this airline.” The group concluded: Therefore, we think that
it is more than likely based on the observations of our study,
that a Chapter 11 proceeding does not present an alternative
to the company and would likely lead to a liquidation in a
relatively short period of time.”
The record is unclear concerning PEX’s assets at the
time of the merger. A letter of October 9, 1986 from counsel
for TAC and PEX to a DOT official stated:
People Express also has no unencumbered
assets that have any significant equity that
would provide an opportunity for raising
additional capital. The majority of People
Express’ aircraft fleet (53 aircraft) are covered
under publicly-held secured equipment trust
certificates the trust indenture which contains a
provision which prohibits People Express
30 .
from creating any additional liens on those
secured aircraft. The remaining 26 aircraft are
covered under capitalized leases or operating
leases which would provide no financing
opportunities since People Express does not
own the assets.
The record also reflects that the company held about
$60 million in spare parts, $35 million in slots and gates, an
undetermined amount of collateralized equity in its aircraft
im Zh ahi Raed ahold dd
SS de Lt USD
263
and international routes, including Newark to London.
On September 15 and October 3, 1986, TAC
respectively infused $10 million and $20 million into PEX.
By December 18, 1986 TAC had provided PEX $107 million
through 11 separate cash infusions. PEX’s net loss for 1986
was $198.5 million. (200 million from Eastern)
Compensation Comparisons
This section reviews the major items in the
compensation packages at People Express and Continental in
September 1986.
PEX employees received 100 percent paid medical and
dental insurance through a self insured company plan.
Disability insurance was fully paid for the first six months of
incapacitation, with 50 percent of base salary up to $3,000
per month thereafter, also through a self insured company
plan. Stock ownership in the company was available at
significantly discounted prices. Employees also participated
in the Ownership Income Plan based on the number of shares
they held. After 1984, the profit sharing plan
31
for pilots changed to a return on revenue plan. Although the
company did not offer a retirement plan, employees could
participate in a 401(k) stock purchase plan. A $50,000 death
benefit policy for each pilot was provided by the company.
Vacation was accrued at the rate of 14 days per year on
completion of one year of employment. Employees received
unlimited paid sick leave days and seven paid holidays each
year. They also received credit for training days. The
company’s unwritten no-furlough policy was to provide
employees with a “job for life.” Employees received
unlimited flight pass privileges.
Continental’s medical and dental plans contained
deductibles and provisions for co-insurance. The Company
today offers employees the opportunity to enroll in a dental
264
plan with no deductible. Although no paid disability
insurance was offered in 1986, the Company today pays one-
half of the cost for this item, and it offers a long term
disability plan. In 1988, Continental established a retirement
plan which is a 100 percent company funded, defined benefit
plan. It also offers a 401(k) plan and matches 25 percent of
an employee’s contribution up to three percent of salary. In
addition, the Company provides a flex-benefit program
which entitles employees to contribute up to two percent of
salary to purchase certain benefits and up to another two
percent of salary in lieu of one week of vacation. The life
insurance benefit is equivalent to a pilot’s annual base salary.
The profit sharing
32
plan provides for payment to employees for the years in
which the Company realizes a net profit. Continental, at the
time of the merger, provided for pilots to accrue sick leave
on a monthly basis. Today, the Company provides up to five
months of paid sick leave. Vacation is accrued at the rate of
seven days per year after one year of service. There are no
paid holidays, and no credit is given for training days. After
six months of service, an employee has unlimited flight
The PEX salary structure for pilots after four years of
‘service, effective August 1, 1985, was as_ follows:
Captain/Team Manager - $75,500; Captain - $68,300; First
Officer/Team Manager - $60,500; First Officer/Team Leader
$54,500; First Officer - $48,500; and Second Officer -
$48,500. Captain’s pay for new hires through four years of
service successively was: $42,000, $48,000, $53,800 and
$60,500 (with overrides for team manager duties ranging
from $4,000 in the second year to $7,200 in the fifth year of
service). First officers’ pay ranged from $22,000 for a new
hire to $41,800 for four years of service (with $12,000
overrides for team managers and $6,000 overrides for team
leaders). Second officers’ pay ranged from $12,000 for a
265
new hire to $41,800 for four years of service (with the same
$12,000 and $6,000 overrides paid to first officers in
leadership positions). An incentive program based on the
sharing of revenues from in-flight commissary sales, with the
potential for a $6,000 average
33
annual incentive payout, was implemented in 1986. A
question remains regarding whether a $12,000 pay cut was
effective in November 1986, or prior, for captains not
working in a support function.
Continental salaries for captains ranged from $48,750
for the first four years of service to $50,000 for five to ten
years of service, and amounts ranging from $52,500 $64,000
for from ten to 30 or more years of service. First officer pay
for a new hire increased from $15,000 to $24,000 after six
months and from $33,000 in the second year incrementally
to a maximum of $40,000 in the sixth year of service.
Second officers were paid the same rates as first officers
during the first year and earned from $29,000 in the second
year to a maximum of $35,000 in the sixth year. In addition
to these salary. scales, all pilots were paid a portion of the
savings realized from fuel efficient flying practices which
amounted to 27 percent of their pay. Over 90 percent of all
pilots received a training incentive of $3,000, paid to all
employees who do not change equipment on a bid. Pilots
also received additional pay for flying in excess of the 83
hour per month guarantee.
PEX Facilities
PEX’s facilities may be divided into three components:
(1) Terminal C at Newark International Airport; (2) other
structures in and around Newark International Airport and
(3) outstations and slots.
34
266
Newark International experienced phenomenal growth
in the 1980s. It now handles about 40 percent of the total
revenue passenger traffic in the three major airports serving
the greater New York City area. Seventeen million people
reside within 50 miles of Newark International. An
expansion of the airport’s capacity is estimated to double its
passenger traffic to 50 million by the year 2000.
In 1984, People Express and the Port Authority agreed
to reconstruct Terminal C which had been built in 1971. On
January 11, 1985, the parties entered into a contract for the
construction and lease of the facility. PEX received the
rights to 41 gates; Eastern, nine gates; U.S. Air, seven; NYA,
five, and Delta, four. The International facility in Terminal
C was not restricted to PEX use. Although PEX contributed
no money toward the construction of Terminal C, it worked
on the design and construction schedule of the 860,000
square foot facility. The Port Authority agreed to fund the
construction project up to a cost of $150 million, and up to
$175 million on subsequent approval. The opening date of
the facility, which originally was scheduled for February
1986, was extended to the summer of 1987 due to
construction delays. The Port Authority took control of the
construction project from PEX. In September 1986, the
construction schedule was more than 50 percent completed,
with the foundations laid, major structural steel in place,
exterior skin
35
affixed, ramps largely finished and some interior mechanical
work accomplished. PEX’s rental payments on Terminal C
were to commence on January 1, 1987. PEX’s 25 year lease
was converted to a month-to-month tenancy on September
30, 1986, when it failed to meet certain financial conditions
under the agreement with the Port Authority. On August 15,
1987, with the Port Authority’s consent, PEX assigned its
rights under the lease to Texas Air. The Port Authority and
Texas Air reached agreement on a new 25-year lease, an
267
increase to $225 million of Port Authority funding and a
reduction in the rental to be paid by Texas Air. When
Continental assumed control of the construction project, it
was 84 percent complete at a cost of $165 million.
Continental undertook extensive redesign of the facility
which opened on May 22, 1988. Construction work on
Terminal C continued into 1990. From August 15, 1987,
when $152 million had been spent on the facility, the Port
Authority has funded increases to a total cost of $232
million. Continental ultimately will reimburse the Port
Authority through rental payments. Continental additionally
has contributed $56 million to the project. The total cost of
Terminal C as of April 1990 was $291 million.
PEX released several other facilities in and around
Newark International, including the North Terminal which
housed 23 PEX gates, the North Terminal Annex, the hangar
55 complex and the cargo building which houses other
tenants. Offsite facilities included the Haynes Avenue
36
building, the International Plaza building and a simulator
facility 30 miles from Newark International in Totowa, New
Jersey. Continental assumed the leases on all of these
properties.
PEX held leases on more than two dozen outstations at
various airports which included terminal space, landing
rights, gates and slots. It also owned or leased a variety of
ground equipment at these stations. PEX held 200 slots at
high density controlled airports, most of which were
commuter slots.
Flight Manager Representatives
In 1984, PEX began investigating other sources for the
recruitment of pilots. The approach selected in November
1985 involved the hiring of pilots who could qualify with a
minimum number of flight hours, and who would be trained
268
“from the ground up” using simulators for instruction as
opposed to aircraft. Candidates for this Flight Manager
Representative (FMR) program were selected from young
aggressive recent aviation school graduates who would
require a longer period to upgrade from second officer
through first officer to captain positions. These candidates
were ranked in the top third of their class with a minimum
3.0 grade point average, and a recommendation from the
dean of their school. They held a commercial instrument
multi-engine rating and had completed the flight engineer
dispatcher written examinations.
37
The first employees to qualify for the program were ten
in-house PEX employees who met the majority of these
qualifications. In August 1985, they were placed in a Flight
Manager Development (FMD) program developed by the
company. The program was flexible, and it was changed as
the company itself was changing in 1985. Additional new
hires for the same program, known as FMRs, were recruited
with the aim of quickly attaining captain positions. They
were generally about 35 years old. Recruiting efforts for
succeeding FMR classes focused on younger people in an
effort to avoid future problems arising out of mass
retirements. These FMRs were brought on board in a type of
probationary status in a training program from which they
would graduate as second officers qualified on the B-727.
Following the requisite simulator training, they would
become first officers. After PEX acquired Britt, FMRs were
trained on commuter aircraft. The time frames for FMR
progression to the first officer position are in dispute
between the parties. The starting salary for FMRs was
$12,000, and they were eligible for the incentive program
with a potential payout of $6,000.
PEX hired approximately 180 FMRs and immediately
placed them on the pilot seniority list. Approximately 30
resigned before completing the program. Of those 30, 17
269
were hired by other airlines. Twenty nine FMRs who had
over 1,500 flight hours attempted, and all successfully
completed, an optional “up or out” program at
38
Continental under which they became qualified as first
officers prior to completing the Company’s training schedule
at its commuter operation for the remaining FMRs. Of the
remaining FMRs at Continental in June 1990, 112 were
qualified to fly as first officers and the balance were second
officers.
Fleets
On September 30, 1986, CAL operated 149 aircraft
with 116 on order or option (58 on order and an additional
58 on option.* CAL’s fleet consisted of: 50-B-727-200s, 24
B-737-300s, 16 DC-9-30s, 14 B-727-100s, 14 DC-9-80s, 11
DC-9-10s, eight DC-10-10s, six DC-10-30s and six A-300s.
Between September 4 and 15, 1986, PEX had leased seven
B-727s to Pan Am (and an additional B-727 on October 1,
1986) for use on its shuttle. Moreover, under the September
15, 1986 merger agreement, PEX had agreed to lease back
from NYA six B-727-200s which ultimately passed to CAL
through NYA. The record reflects that both PEX and CAL
pilots flew these aircraft in December 1986.
By December 31, 1986, CAL was operating 244
aircraft with 104 on order or option. On December 30, 1986,
PEX had taken delivery of an additional B-747
* Arbitrator Nicolau had identified 104 CAL aircraft on
order or option as of September 12, 1986. The difference
between 112 and 104, 12 B-727s, was placed on option from
PEX to TAC pursuant to the September 15, 1986 merger
agreement in return for the cash payments of $49.5 million to
PEX.
39
270
which was paid for by TAC and flown by both PEX and
CAL pilots in 1987.
In a March 12, 1987 announcement to pilots, CAL
management stated that PEX pilots would receive credit for
66 aircraft — 22 B-737s, 36 B-727s and eight B-747s (one of
which was paid for by TAC and did not fly for PEX in
1986).
On September 15, 1986, FAL’s fleet contained 25 B-
737-200s and 16 DC-9-80s, for a total of 41 two-pilot
narrow-body aircraft. |
On September 15, 1986, NYA’s fleet contained eight
_ B-737-300s, 20 DC-9-30s and six DC-9-80s, totaling 34
two-pilot narrow body aircraft.
The Company’s Staffing Analysis
The Company’s staffing determination for PEX pilots
is based on its analysis, in late February or early March
1987, of PEX operations using Continental’s pilot utilization.
The monthly block hours assigned to PEX operated aircraft
were: 11,408 for the B-727s, 5,332 for the B-737s and 1,829
for the B-747s. These figures were based on the maximum
number of hours on a daily basis projected in 1987 for the
PEX aircraft in operation at Continental. The monthly block
hours per pilot used in the staffing analysis was: captains,
64.6; first officers, 64.25 and second officers, 66.52. These
figures yielded a total of 289 captains (177 for the B-727s,
83 for the B-737s
40
and 29 for B-747s). In order to accommodate a PEX
management request to include a specific PEX pilot who had
performed significant non-revenue flying duties, six
additional captains were added to reach the 295 figures. The
number of first officers was calculated at 290 (178 for the B-
727s, 83 for the B-737s and 29 for the B-747s). The number
of second officers was 200 (172 for the B-727s and 28 for
RP SRE Ma POMEL Ts eA SERS
271
the B-747s). The total number of pilots required under the
Company’s staffing analysis was 785.
Overview of the Proposed Seniority Lists
The Company
The Company’s proposal, as reflected in Bid 87-3,
establishes the following seniority list: numbers one through
-1,675 were awarded to CAL (including NYA) captains;
numbers 1,676 to 2,119 were awarded to FAL and PEX
captains by date of hire; numbers 2,120 to 2,418 were
awarded to CAL first officers pursuant to the Nicolau Award
under which 299 pilots (285 CAL first officers and 15
former NYA pilots) were placed for captain expectancies
based on CAL’s order and option aircraft; numbers 2,419 to
3,680 were awarded to CAL, FAL and PEX first officers, of
which the first 756 pilots (579 CAL and 177 FAL) were
integrated by ratio under the Nicolau Award and the
remaining FAL and PEX pilots were integrated by date of
hire; numbers 3,681 to 3,842 were awarded to the PEX
FMRs as second officer positions; numbers below 3,842
41
were awarded to CAL _ hired in February 1987 and
thereafter.
Under the — s proposal, as of September 1,
1990,* the pilot seniority list was as follows: numbers one
to 1450 were held by CAL pilots; numbers 1451 to 1575
were held by FAL pilots; numbers 1576 to 1794 were held
by PEX pilots; numbers 1795 to 2084 were held by CAL
pilots; numbers 2085 to 2725 were held in a ratio of CAL
and FAL pilots; numbers 2726 to 3019 were held by PEX
pilots (except for four numbers held by FAL pilots); numbers
3020 to 3070 were held by FAL pilots; numbers 3071 to
3210 were held by PEX pilots (FMRs). The remaining
numbers were held by CAL pilots or reserved for CAL
commuter pilots.
PEX Committee
The PEX Committee’s proposal is based on the concept
that each pilot group (not including FAL which was not
operating on September 15, 1986) is entitled to the jobs it
brought to the merged carrier on September 15, 1986. The
job entitlements, as viewed by the PEX Committee, are
wide-body captain, narrow-body captain, wide-body first
officer, narrow-body first officer, wide-body second officer
and narrow-body second officer. The PEX Committee
* This date is used as opposed to, for example,
September 1, 1991, because the record does not reflect the
effect of the four parties’ proposals on a date in 1991.
42
maintains that it brought 1061 entitlements to the merged
Carrier.
The PEX Committee’s status-ratio proposal, if in effect
on September 1, 1990, would have produced the following
breakdown of the pilot seniority list: numbers one to 1635
would have been held by 457 PEX pilots in a ratio with CAL
pilots; numbers 1636 to 2112 would have been held by 162
PEX pilots (FMRs) integrated with CAL and FAL pilots;
numbers 2113 to 2223 would have been held by FAL pilots;
numbers 2224 to 2513 would have been held by CAL pilots;
numbers 2514 to 3154 would have been a ratio of FAL and
CAL pilots; numbers 3155 to 3209 would have been held by
FAL pilots; the remaining numbers would have been held by
CAL pilots or reserved for CAL commuter pilots.
CAL Committee
The CAL Committee’s proposed list is premised on the
allocation of 631 positions to PEX pilots on the property on
H
;
*
j
273
October 23, 1987, when Bid 87-3 was announced. Based on
the list used under that bid, the proposal awards Numbers
one to 1660 to CAL (including NYA and FAL) pilots;
numbers 1661 to 2018 are a ratio of 230 PEX pilots and 128
CAL (including FAL) pilots; numbers 2019 to 2463 are a
ratio of 18 PEX pilots and 427 CAL pilots; numbers 2464 to
2514 are awarded to CAL pilots; numbers 2515 to 3723 are
merged in a ratio of 393 PEX to 816 CAL; numbers 3724 to
3769 are awarded to PEX pilots; the 153
43
FMRs are slotted below those CAL pilots placed on the CAL
seniority list prior to February 10, 1988, and they are merged
in a ratio with 136 Continental Express pilots.
The CAL Committee’s proposal, if in effect on
September 1, 1990, would have tracked the Company’s list
as implemented from numbers one to 1575; numbers 1576 to
1893 would have reflected a ratio of CAL and PEX pilots;
numbers 1894 to 2710 would have interspersed 13 PEX
pilots with CAL (including FAL) pilots; numbers 2711 to
3623 would have been a ratio of CAL and PEX pilots;
numbers 3624 to 3661 would have been held by PEX pilots;
numbers 3662 to 3801 would have been held by CAL pilots;
numbers 3802 to 4069 would have been a ratio of PEX pilots
(FMRs) and Continental Express pilots.
~n
FAL Committee
The FAL Committee’s list, if effective on September
15, 1986, would have placed 609 PEX pilots below 557 FAL
pilots. These pilots would have been followed by 119 FAL
pilots, then 420 PEX pilots (including the FMRs).
This proposal, if in effect on September 1, 1990, would
have resulted in: CAL plots holding the first 1450 numbers;
FAL pilots holding numbers 1451 to 1575; CAL pilots
holding 1576 to 1865: a ratio of FAL and CAL pilots from
1866 to 2506; PEX pilots from 2507 to 2877 (except for
274
2862 held by a FAL pilot); 2878 to 2931 held
as
by FAL pilots; 2932 to 3070 held by PEX pilots; 3071 to
3115 held by CAL pilots; and FMRs interspersed with CAL
pilots from 3116 to 3941.
Positions of the Parties
PEX Committee
The PEX Committee’s proposal is premised on the
facts that in September 1986, the three carriers - CAL, NYA,
and FAL, which compromise the list into which PEX pilots
will be integrated — paid and staffed as captains 940 pilots
(102 on international wide-body aircraft and 838 on other
aircraft) while PEX paid and staffed 457 captains (52 on B-
747s and 405 on narrow-bodies). Based on the combined
total of 154 wide-body captaincies, the list should be merged
so that the top 154 names include the 52 PEX pilots and the
102 most senior pilots on the CAL-NYA-FAL list, regardless
of the carrier of ancestry of those 102 pilots. A date of hire
list which included the PEX pilots would fail to deliver to
PEX pilots the 52 wide-body captaincies and the 405
narrow-body captaincies they brought to the merger.
Therefore, a status ratio is used to preserve the jobs and
relative bidding power on each of the two lists, with the 52
PEX and 104 CAL wide-body captains comprising the most
senior positions on the list. The next 1,243 most senior
places combine the 405 PEX and 838 CAL other captain
entitlement holders in an arithmetical ratio. This will
preserve the precise access to
45
wide-body flying each pilot in this group had before the
merger and distribute ratably as between the CAL and PEX
275
pilots the opportunities for bidding and other benefit
selections based on seniority.
Continental decided not to buck the 1985-87
consolidation trend in the industry to achieve nationwide
route systems and “critical mass.” Texas Air gained a “turn-
key” expansion into the dense New York City travel market
which PEX already dominated through its Newark hub. It
also gained the Newark-London and other PEX international
routes, Terminal C, PEX’s standardized fleet and the 1,061
pilots already trained on the aircraft in the fleet.
This was a merger of equals. While PEX had
experienced some financial problems in the year preceding
the merger announcement, it recorded net profits in three of
the four years of its independent operations after its start-up
year. Its operations were profitable on a net and operating
basis in the second and third quarters of 1985, and it earned
net and operating profits of $5 million and $11 million,
respectively, in August 1986, the month before the merger
announcement. Cash was stable from August 25 to
September 15, at $13.3 million. The reality is that PEX
never ceased operating and never filed for Chapter 11
protection.
Predicting the future course of any airline in the
turmoil of this volatile industry is a very difficult
46
undertaking. The record reflects that PEX would have
pursued two realistic alternatives other than liquidation if the
TAC merger would not have been consummated. One was a
merger with America West. The other was a “turnaround”
plan. On the other hand, in predicting Continental’s future
without PEX, there are questions as to how it would have
fared without the Newark hub, the PEX fleet and the
dedicated PEX employees.
There is no seniority integration arbitration decision
which discounts what the pilots from a carrier should receive
in terms of a fair and equitable award on account of their
276
carrier’s poor financial performance. Any such decision in
this case would have no factual support in the record, no case
precedent and no basis in logic or fairness.
The Company’s claim that the imposed list must be fair
because all four pilot groups oppose it certainly is no test of
fairness. In fact, the other three pilot groups were pleased
with the list after the PEX operation brought enhanced job
opportunities and job security for them through, for example,
the B-747s to which CAL pilots quickly gained access on
former PEX routes. The 288 PEX pilots inserted at numbers
1678 to 1966 had no chance to fly the regular captain
positions in Continental’s other domiciles at Houston, Los
Angeles, Denver or Honolulu. And not one of the PEX
pilots other than these 288 is ahead of any CAL or NYA
pilot hired before February 23,
47
1987.
On September 15, 1986, TAC promised the PEX pilots
that the PEX and CAL seniority lists would be merged in a
“fair and equitable” way. The promised seniority integration
arbitration took place only after the PEX pilots commenced
litigation, and the arbitration started three and one-half years
after the promise.
TAC’s control of PEX effective September 15, 1986
enabled it to renegotiate the purchase price for PEX. The
September 15, 1986 Agreement and Plan of Merger gave |
TAC effective control of PEX. The lock-up provision of the
merger Agreement itself prohibited PEX from soliciting
other offers and required PEX to portray itself as a failing
carrier. PEX’s alternatives were, therefore, limited by the
merger Agreement. Upon announcement of the merger on
September 15, 1986, TAC took immediate control of PEX
and utilized its assets to benefit TAC’s other interests. In
October 1986, TAC adopted a schedule for consolidation of
operations at the outstations and immediately began
consolidating those operations. TAC was also able to
277
eliminate competition by discontinuing PEX service to cities
where PEX and Eastern competed. Continental also sent its
representatives to meet with the Port Authority regarding
Terminal C in July and October 1986, and on ten to 15
occasions between October 1986 and February 1987.
There can be no doubt that the operational changes
48
reflected an intent by TAC in the fall of 1986 to merge its
airline subsidiaries as soon as possible. In October 1986
Continental announced that TAC would fold NYA, PEX and
FAL into Continental. Steps were also taken to implement a
merger of operations as soon as possible. TAC received
certificates in the names of PEX and CAL to serve PEX
routes from Newark to London and from the United States to
Brussels, Luxembourg, The Netherlands, Shannon,
Switzerland and West Germany. TAC also received the
PEX exemption to serve Montreal from Newark. Effective
November 15, 1986, TAC integrated the PEX Frequent Flyer
program into the Eastern, CAL and NYA programs. In
short, senior management at Continental was making
preparations for the merger of operations with PEX aimost
immediately after September 15, 1986.
Every pilot seniority integration in the airline industry,
except two, has been conducted under the fair and equitable
standard. The two exceptions were NYA-CAL and FAL-
CAL. This arbitration is the only arbitration at Texas Air
conducted under the fair and equitable standard since the
1983 strike. During our/these bankruptcy proceedings.
In January and February 1987 the PEX pilots were
being assured by PEX management representatives that TAC
and CAL management were saying that the merger process
was to be a “traditional” arbitration. In March 1987, a CAL
management representative handed the PEX Committee the
memorandum describing the imposed list.
49
278
The PEX Committee was not consulted about the imposed
list. All but one of the people who determined how the
imposed list would go together have numbers on the CAL
pilot seniority list. The CAL Pilot Operations Group was
given the opportunity to have input into the imposed list.
The FAL pilots were integrated under a JPA which, as
Arbitrator Nicolau commented, did not provide a “level
playing field” with “a considerable and obvious tilt in favor
of the CO [CAL] pilots.” Nicolau refused to include the
PEX pilots despite attempts by the Company and the CAL
pilots to do so in the PEX pilots’ absence.
Continental should not now be permitted to take
advantage of its strategy of delay in denying the PEX pilots
an arbitration by urging that the imposed list should remain
in effect because it will be a nuisance or an expense to
change now.
As Arbitrator Bloch observed in the CAL-NYA
decision: “There can be no question . . . that, both legally
and by any other reasonable measure, [Continental] had
started anew in 1983.” Continental and Frontier had
comparable hiring cycles, both in the percentage and number
of pilots that they hired. People Express and New York Air
also had very similar hiring patterns as start up carriers in the
early 1980s with rapid advancement in the industry. CAL is
similar, however, in that its hiring pattern peaked during the
1983-85 time frame which
50
also was the period of the bankruptcy and strike at
Continental. —
The industry-wide pilot preference for wide-body
flying and the PEX contribution to the merged carrier of its
London route, its B-747 fleet and its other vital assets are
factors which strongly support the choice of a status-and-
category ratio method of seniority integration. In the 1983
TI-CAL pilot integration arbitration, the 66 senior CAL
pilots were placed at the top of the merged list because they
279
were international wide-body captains and because TI did
not fly any international wide-body aircraft at the time of the
merger. Pilot preference for wide-body aircraft pervades the
industry for reasons including improved working conditions
and higher pay, status or prestige and a “mystique factor”.
This preference also occurs at Continental, as confirmed by
the CAL seniority list of June 1, 1989, on which 30 of the
top 35 captains are staffed on wide-body equipment.
The fact that PEX contributed all eight B-747s to the
merger makes doubly inequitable the Continental imposed
seniority list which denies B-747 flying to PEX pilots
accustomed to the acknowledged prestige and other benefits
associated with B-747 flying. Conversely, CAL pilots
achieved windfall gains and unfairly profited at the expense
of PEX pilots. Seven of these B-747s which PEX operated
in September 1986 comprise one-third of the wide-body
aircraft then flown by the four merging carriers,
51
and produce 90 percent of the seats and 85 percent of the
total capacity of the 14 DC-10s which Continental operated
on September 15, 1986. The eight B-747s, together with
existing PEX routes and its Newark hub, enabled Continental
to expand into profitable markets which otherwise would
have been unavailable to the Company.
In addition to the PEX fleet, Continental assessed the
spare parts in the PEX inventory at more than $60 million.
A major contribution that People Express brought to
the merged carrier was its Newark hub facility together with
the market presence and power that PEX had built up at
Newark. Terminal C, as planned and engineered by PEX,
was a major asset in and of itself in promoting Continental’s
public image. Scandinavian Airlines System (SAS) joined
with Continental because the SAS hub in Newark dovetailed
so well with the extraordinary Terminal C facility.
Continental also gained lease rights to significant hangar and
storage space at Newark, sufficient ground equipment to
280
service the extensive fleet at PEX’s hubs and out-stations,
valuable take-off and landing rights at various slot-restricted
airports, and gate space at London’s Gatwick Airport.
A carrier’s abilities to generate traffic, keep costs low
enough to permit effective competition, and maintain a
dominant hub to protect or expand its market share were
critical to survival and growth in the
52
deregulated era for new entrants and established carriers
alike. PEX was the only one of the four carriers to
experience substantial, uninterrupted growth over the full
five year period ending September 30, 1986, whether that
growth is measured in terms of traffic, capacity or block
hours flown by pilots. In five years, PEX reached a level of
operations that permitted the DOT to place it in the category
which the government defines as a “major carrier” — a level
never approached by Frontier or New York Air. PEX
produced an operating profit in four of its five years
beginning with the fourth quarter of 1981 and ending with
the third quarter of 1986. CAL and NYA produced
operating profits in three of the five years, while FAL posted
an operating profit in only one of the five years. Moreover,
PEX showed a positive spread between its actual load factor
and BELF in four of the five full years of its operations — the
best performance among the four carriers. In sum, PEX was
better able than the other three carriers to generate traffic and
keep costs low enough to permit effective price competition
during this five year period. PEX achieved this operational
success largely in the context of stable finances, as indicated
by its relatively low debt-to-equity ratio. While PEX may
not have had the financial strength of some carriers in the
industry, it was not as highly leveraged as Continental.
Additionally, PEX brought crew costs to the merged carrier
that were substantially lower than the industry average as a
proportion
53
281
of transportation revenues, due to PEX’s relatively greater
efficiency and productivity. Similarly, aircraft utilization
was also higher at PEX than at CAL or NYA. Finally, the
importance of a dominant position at Newark, and by
implication, in the New York market cannot be overstated in
helping Continental to serve eastern markets in order to
achieve sufficient mass to survive both in the national and
international markets. International route authority was
crucial for the near term future with respect to Atlantic
markets, as well as having the ability to enter into
cooperative marketing agreements with European carriers. It
is true that PEX had problems in the year ending September
30, 1986, but that period coincides with its ill-fated
acquisition of Frontier. The PEX-CAL merger relieved the
PEX system of the burden of hemorrhaging attributable to
the FAL operation and, at the same time, relieved
Continental of a low-price competitor at its Denver hub.
Claims that PEX was poised for imminent demise and that
the valuable assets brought by PEX to this merger would
have just disappeared are not plausible in light of airline
industry history. Generalizing about a carrier’s long term
prospects from the financial situation faced by that carrier
over a period of months ignores the basic strengths of the
carrier built over a period of years. PEX did not have
problems that were different from the other three carriers
and, indeed, showed characteristics and assets in terms of
performance over .
54
a long-term, five-year period that were superior to those
other three carriers.
When PEX and CAL merged, the PEX employees lost
ground in the pay and benefits area as well as under
Continental’s personnel policies. PEX recognized that its
most important asset was its employees, and it revolutionized
traditional views of employee relations. The actual earnings
of the PEX pilots, which were higher than those of the CAL
282
pilots prior to their merger, dropped as a result of the merger
and the imposed seniority lists. The pay rates and other
compensation plans of the PEX pilots were superior to those
of the CAL pilots prior to the merger and dropped as a result
of the merger. The base rate of PEX fifth year captains was
$68,300, which includes the team leader override received
by all PEX captains. The base rate for CAL fifth year
captains was $50,000. After the merger was announced,
PEX pilots took a pay cut to $56,250 in order to bring them
closer in pay to the CAL pilots, and to $50,000 in 1987 to
conform to the CAL pay rate. PEX fifth year first officer
base pay was $48,500, (with a team leader override,
$54,500) as compared to $40,000 for their CAL counterparts.
Fifth year second officers at PEX had a base pay rate of
$48,500 ($54,500 with a team leader override), while the
CAL fifth year second officers received $35,000. Entry level
pay for new hire pilots at CAL was $15,000 for the first three
months, $18,000 for months four through six and $24,000
for months
55
seven through 12, and PEX paid $12,000 plus incentive pay
for the first year. Although PEX pay rates rose consistently
from 1983 to the merger, CAL pay rates dropped
dramatically since the strike and bankruptcy in 1983, with
barely any increase in the ensuing years. Moreover, CAL
pay rates are substantially lower than the pay rates at other
carriers, and Continental does not differentiate between
wide-body and narrow-body pay rates as is common in the
industry. PEX also had a variety of income incentive
programs, while CAL has a profit sharing plan that is more
restrictive than the PEX plan. PEX had a no furlough policy ;
and a no downgrade policy, whereas CAL has had numerous
pilot furloughs. PEX provided medical, life and disability
insurance benefits that far surpassed those at CAL. THE
SLIC bidding system enabled PEX pilots to prioritize their
desires for the upcoming month through the use of a
—— i
283
computer syntax by which the lines of flying were build. A
Custom Bidding feature permitted a pilot to work with a
scheduler to build the best schedule based on the pilot’s
desires. On the other hand, CAL pilots bid for
preconstructed lines, and improving one’s schedule is based
on a first come, first served basis through the “open window”
period. Continental has unilaterally changed the work rules
regarding seniority when it suited the Company to do so.
The vacation, holiday and sick leave benefits at PEX were
far superior to those benefits at PEX were far superior to
those benefits at Continental. There was a _ unique
relationship
56
relationship between PEX management and employees
which resulted in cooperative labor management relations in
a high quality work environment with significant
opportunities for self-actualization — none of which were
present at Continental.
On September 15, 1986, the FMRs were fully qualified
pilots who met or exceeded Continental’s real hiring
requirements for second officers, and thus should be treated
just like other second officers for purposes of seniority. At
PEX, they were fully qualified commercial pilots with high
expectations and excellent career opportunities. Immediately
upon their arrival at PEX they were placed on the seniority
list and began an intensive training program to prepare them
to upgrade to first officer within approximately one year.
Twelve FMRs became continental check airmen, several of
whom gave line check instruction during the transition to
CAL procedures. Others trained and gave final line checks
to CAL 1987 and 1988 new hires being staffed as second
officers. Continental did not distinguish the FMRs when it
proposed to the Federal Aviation Administration reduced
training for the PEX pilots for the changeover to CAL
procedures. FMRs flew as second officers on the
Continental side in January 1987 when they were needed to
284
staff the PEX B-747s and B-727s that TAC had given to
Continental and which were being bid for the flown by the
CAL pilots. Nonetheless, CAL management appended the
FMRs to the bottom of the
57
seniority list and forced them to fly in a commuter operation
before upgrading to first officer. The FMRs as a group were
placed in a less senior position than an entire group of, at
best, equally qualified CAL and FAL first and second
officers hired prior to the merger. Because the CAL pilots
hired after April 1987 were hired for the benefit of Eastern
and not Continental, it would be unfair to place them ahead
of the FMRs. Aside from the constructive notice these CAL
new hires had in 1987, these pilots remain at Continental
solely due t attrition and voluntary leaves. No arbitrator has
ever looked behind an airline’s hiring to assess the
qualifications involved in merging pilot seniority lists.
A comparison of staffing at PEX and CAL on
September 15, 1986 shows that the two airlines were staffed
at virtually identical levels for their relative size. During the
planning process, PEX used ratios to calculate flight hour
utilization rates for line pilot staffing levels, with
management flight crew members added separately. While
People Express staffing levels reflected policies and
characteristics specific to PEX, the resulting measurements
were almost identical to CAL’s. At CAL, the pilot system
bids and the Pilot Employment Policy (PEP) Manual reflect
an average ratio of flight crewmembers per aircraft of 5.27 to
5.29 counting all pilots. CAL’s block hour utilization rate is
indicated in several documents to be 64 flight hours per line
flight crewmember.
58
In creating the imposed list, which credits PEX with 288
captaincies and FAL with 1677, the Company failed to
4
h
4
285
consider this parity of staffing between PEX and CAL. This
resulted insignificant loss to the PEX pilots and a significant
gain to the CAL pilots, as can be seen from computing the
respective crew ratios of 3.60 and 9.16 (based on 80 PEX
and 183 CAL aircraft), and average flight hours per captain
at 81.32 for PEX and 27.42 for CAL. A CAL crew ratio of
9.16 would require 605 PEX pilots to fly even the 66 planes
Continental allows us. Applying CAL pilots’ 27.42 flight
hour average to the number of hours flown at PEX in
September 1986 (23,421) would require 854 PEX captains.
Moreover, CAL’s forecast of flight hours to be flown by a
portion of the original PEX fleet in 1987 and 1988 reveals
that the shortage of PEX captains for this purpose grew from
103 in June 1987 to 191 in September 1988. At PEX, the
daily block hours to be flown by each narrow-body aircraft
type was utilized to determine monthly block hours, and B-
747 staffing used a total number of man days to be worked.
A monthly flight crewmembers utilization rate was applied
to the monthly block hour value to determine the number of
line flight crewmembers, and the number of management
flight crewmembers was then added to determine the total
staffing required. The CAL methodo/mgy uses the forecast
flight hours over a given time period and applies a flight
crewmember utilization rate to determine the required
number of line flight crewmembers. CAL staffs at a level
_ 59
sufficient to cover the peak flying periods, and the
management flight crewmembers are then considered
separately. In the specific calculation of the imposed PEX
staffing level, none of the 75 PEX Captains utilized in
management function by Continental in March 1987 appears
to be included. Additionally, the Company did not use its
flight crewmember utilization rate in determining the number
of PEX captains necessary to operate in the CAL system.
Finally, PEX was given credit for only 66 of the 80 aircraft,
the Company says, to account for aircraft transferred to NYA
286
and leased short term to Pan Am. Yet PEX captains flew
some of these aircraft after their supposed transfer to NYA,
and it appears that the leased aircraft were returned to
Continental after a further extension of the leases. In the
same way, the Company distorted the block hours projected
for PEX pilots by using a 1987 timeframe which is not
justified. Based on these considerations, and in the interest
of fairness, the Company should have used the ratio method
and the actual number of flight crewmembers paid and
staffed at PEX and CAL (1061 PEX pilots and 2175 CAL
pilots), with no need for any recalculation of the required or
projected staffing levels.
Based on the foregoing considerations and analysis, the
PEX Committee contends that its status and category
proposal is fair and equitable because it preserves the relative
positions of the pilots from each
60
group and avoids any windfalls to one pilot group at the
expense of the other. The six categories in its proposal are:
wide-body captain, narrow-body captain, wide-body first
officer, narrow-body first officer, wide-body second officer
and narrow-body second officer. Places on the merged list
are given out to pilots from the two unmerged lists on an
entitlement basis. That is, each pilot is assumed to bid the
best job he can hold, in accordance with the established job
rankings, and the array of names on the consolidated list
derives from the principle that each pilot’s unmerged relative
percentile in his unmerged job will be preserved, as closely
as is mathematically achievable, when the two unmerged
lists are combined. Under the proposal, each pilot group can
take advantage of its own attrition. The number of jobs used
to create the ratios for the merged list are based on the jobs
that existed before the merger announcement, as opposed to
a prediction or projection of the future. The proposal is fair
because it preserves each group’s pre-merger access to
preferred wide-body flying. A date of hire based integration
287
is unfair and inequitable to the PEX pilots who would be
barred from access to the very aircraft they brought to the
combined carrier, thus permitting the CAL pilots to reap
windfall gains at the expense of the PEX pilots. Given the
disparate origins and histories of PEX and CAL -— one, a
deregulation airline; the other, dating back more than 50
years — the more significant fact is
61
that a new airline began with Texas Air’s acquisition of
PEX, and its merger of PEX, CAL, NYA and FAL.
Beginning on February 1, 1987, at the latest, pilots on both
lists began accruing tenure and service with a new entity,
whose pilot seniority list will be created through these
proceedings. By preserving each pilot’s relative standing in
his status and category, the PEX proposal will distribute
bidding power and jobs in precisely the same way the two
separate lists did. We reject the other parties’ proposals to
integrate seniority lists on the basis of unreliable predictions
about the economic futures of PEX and CAL absent the
merger. It is not only unwise but unfair and inequitable to
construct an integrated pilot seniority list based on the
uncertainty of speculations about the future of PEX and CAL
as unmerged carriers. Arbitral. precedent supports the
adoption of the status and category ratio list and counsels
against the use of unreliable predictions about the unmerged
economic prospects of merging carriers.
The constructive notice date for the merged seniority
list should be September 15, 1986. All pilots hired after that
date should be placed on the integrated lists, in date-of-hire
order, below all pre-merger pilots. Because CAL did not
hire any pilots between the TAC-PEX acquisition date and
February 23, 1987, September 15, 1986 is functionally
equivalent for constructive notice purposes to any later date
up to February 23, 1987. As
62
288
of that date, any pilot applicant knew or should have known
that his/her seniority rights would be subject to the superior
rights of other pilots already employed by the merging
airlines. Arbitrators have uniformly accepted the
constructive notice doctrine and have ordinarily determined
the merger announcement date as the constructive notice
date. In this case, pilot applicants would have been placed
on constructive notice through a series of events including:
the TAC announcement, on September 15, 1986, of the PEX
acquisition and merger with CAL upon consummation of the
TAC-PE]I merger agreement; the TAC-PEX joint application,
filed on September 19, 1986 with the DOT, seeking approval
of the acquisition; the DOT’s tentative and final approvals
respectively on October 14 and 24, 1986; the consolidation
of facilities of CAL, NYA and PEX during the fourth quarter
of 1986; the diverting of PEX aircraft via NYA to CAL;
CAL pilots bidding on B-747s previously flown by PEX
pilots; the merging of the PEX frequent flyer program with
the CAL program in November 1986; and the PEX
shareholder approval of the acquisition on December 29,
1986. After issuance of the March 12, 1987 list,
management would have expected the Company’s
interviewers to advise all job applicants who asked that every
pilot hired after February 1, 1987 would be placed below all
PEX pilots and FMRs. The contingencies contained in the
merger agreement were the normal contingencies and
conditions that would take place in any financial transaction
63
of this size and complexity and which, at most, added time,
but not uncertainty, to the final outcome which was resolved
on December 29, 1986 by the PEX shareholder approval.
An objective pilot applicant at Continental on September 15,
1986, or as late as February 22, 1987, should have
reasonably believed that the likely outcome of the TAC-PEI
merger agreement would result in the integration of the
operations and pilots of PEX and CAL. Therefore, it would
ee See ee
p
289
have been unreasonable for an applicant to wait until
October 1987 before realizing that his/her seniority nghts
might well be subject to the superior, pre-existing seniority
rights of another pilot group. In this regard, it would be
particularly inequitable to elevate the CAL pilots hired after
April 1987 as potential strike replacements for Eastern, as
they were surplus to Continental’s operational needs.
The Company’s list is unfair and inequitable. It was
not compiled as a result of mutual negotiations and
mediation or arbitration. Instead, it was unilaterally created
by CAL management — specifically, by four CAL pilots
whose names appear on the list — and imposed upon the PEX
pilots despite their opposition. The use of such a list created
by self-interested decision makers is unfair and denies the
PEX pilots their right to due process. Thus, there is an
unavoidable inference that CAL’s decision-makers were not
acting in the interests of PEX pilots. Accordingly, the list
should be summarily rejected.
64
The Company’s list should also be rejected because it was
created in breach of the LPA and in violation of the industry
standard of a fair and equitable integration procedure. There
is absolutely no precedent for the unilateral manner in which
Continental constructed the list. The PEX pilots had no
meaningful input into its formulation. Continental’s reliance
on the allegation that PEX would have gone bankrupt and
ceased operating but for the merger as a purported
justification for its derogation of the PEX pilots’ seniority
rights is unsupported by the facts for the case precedent. A
carrier’s financial condition deserves little or no weight
when merging pilot seniority lists. Continental desperately
needed PEX to survive in the deregulated environment, and
the merger of PEX and CAL should be viewed as the joining
of equals. Continental cannot show that PEX would have
gone into bankruptcy and ceased operating but for the
merger, even if it were appropriate for CAL to take into
\ . 4) A I
Te OE SPY SOTERA NT
290
account its supposedly superior financial condition to PEX,
which it is not. Continental has had a planned strategy for
delay in this case, and therefore the fact that its unlawful list
has been in effect for four years should be given no weight.
Indeed, the Company should be stopped from arguing that its
imposed list should be upheld on the ground that it has been
in use for four years.
The Company’s list should also be rejected because it
arbitrarily places CAL pilots ahead of PEX pilots with
65
the same or higher status, seniority and experience,
substantially decreases the PEX pilots’ relative position and
permits CAL pilots to reap windfall gains at the expense of
PEX pilots. In compiling the imposed list, the CAL
decision-makers focused almost exclusively on the allegedly
disparate economic conditions of the two airlines to the
exclusion of other relevant factors such as length of service,
relative position on the unmerged lists, and status achieved at
the pre-merger carriers. Under the imposed lists every PEX
pilot loses relative position. Despite the wide-body jobs that
PEX pilots brought to the merger, for example, the lists
denies any of them from achieving any of their entitlements
to the more desirable positions. The Company downgraded
approximately 150 PEX captains and placed them junior to
all CAL and NYA pilots hired before the merger
announcement. In so doing, the Company split the PEX
April 25, 1983 training class of pilots, with the anomalous
result that one class member (number 300 on the PEX
seniority list) is now number 1977, and another (number 301
on the PEX list) is now number 2857 on the integrated lists.
The Company’s list also artificially enlarged the CAL
captain class and artificially reduced the PEX captain class.
The former was increased from 857 pilots actually trained
and flying as captain on September 15, 986 to the
66
291
top 1677 positions on the imposed list.* The latter was
reduced from 457 to 288. According to the PEX
Committee’s analysis, 1299 captain slots, including
management, were awarded based on present and future
captaincies on Bid 87-1, effective December 1987.
Therefore, since the number one PEX seniority holder does
not appear on the merged list until number 1678, at least 378
pilots who did not even hold a future captain bid were placed
ahead of him. CAL pilots were allotted 1677 captain
positions based in part on the planned delivery of aircraft in
1987, which did not arrive, and the additional transfer of
aircraft (five B-747s and six B-727s) from PEX. The
reduction of the PEX captain class was accomplished
without talking to a single PEX line pilot and was fraught
with inaccuracies and inconsistencies — not the least of which
were the reliance on, and a misunderstanding of, only one
month’s statistics, and a misunderstanding of PEX’s
manning and staffing calculations.
: Under the Company’s list which resulted in the PEX
pilots’ loss of relative position, they enjoy few benefits from
working for the merged airline — especially with regard to
bidding different types of equipment and holding different
domiciles.
* CAL bid 85-5 projected 857 captains at Continental on
November 1, 1986. As of September 1986, Continental paid and
staffed only 772 captains. According to the Block Award, NYA
had 168 captains on that date. Since the PEX merger, however,
Continental has needed “to promote CAL pilots to fill the
downgraded PEX captains’ positions.
67
The Company’s list is unsupported by any precedent,
including the cases it has cited. In the CAL-FAL pilot case,
Arbitrator Nicolau observed that the JPA and its Sideletter
imposed restrictions not found in other proceedings,
resulting in a considerable and obvious tilt in favor of the
292
CAL pilots. For example, he was required to take special
notice of the non-operating status of Frontier and the limited
employment prospects for FAL employees resulting there
from; and as a result, give this fact greater weight than the
expectation that Continental’s competitive position would be
enhanced. Even more damaging to the FAL pilots was the
requirement to ensure no dilution or adverse impact on the
promotional expectations of CAL (including NYA) captains
and first officers based on all aircraft in service or on firm
order or option to Continental. The CAL-PEX flight
attendant case is not a useful precedent because, like the
FAL pilots, their arbitrator’s mandate required him to
consider factors beyond the fair and equitable standard.
Moreover, the PEX flight attendants were grouped in a
single job description (Customer Service Manager) and were
subject to different economic and non-economic benefits
from those of the captains, first officers and second officers
whose progression in status and careers are more
significantly determined by seniority. A third distinction
was the PEX practice of cross-utilization whereby 15 to 20
percent of the Customer Service Managers worked in jobs
which did
68
not involve flying. Finally, the CAL-PEX flight attendant
hearing lasted only six days, whereas the record of the
instant case is far more complete with respect to the financial
condition of the two airlines involved in the merger, among
many other things, and the many economic benefits brought
to the merged carrier by PEX and its employees.
The CAL Committee’s proposal is even more unfair
and inequitable than the Company’s proposal, and therefore
should be rejected. The primary factor which the CAL
Committee used in constructing its proposal was the
contention that PEX as an airline had failed, and that
therefore the PEX pilots had no career expectations and were
entitled to nothing by way of seniority integration. Although
293
PEX experienced some financial difficulty during the year
preceding the announcement of the TAC merger, the fact is
that PEX was a going business at the time of the merger,
which, unlike CAL and FAL, never sought Chapter 11
protection. Continental’s financial history (and current
status) hardly places it in a position to assert that its financial
condition was superior to that of PEX. Nor are FAL and
NYA pilots entitled to seniority preference over PEX pilots.
FAL had already filed for bankruptcy protection at the time
of its operational merger with CAL. NYA as well was
having servous financial problems at the time its operations
were merged into Continental’s in early 1987. The CAL
Committee’s
69
proposal uses a variety of methodologies, manning levels
and different system bids for determining the number of
CAL pilots and the number of PEX pilots. System Bid 87-3
(October 1987) was used for determining CAL pilot
utilization, but the month of December 1986 (the industry’s
seasonal low point month) was used for PEX. System Bid
88-1R (a reduction bid) was used to determine the number of
PEX pilots eligible for captain positions. The CAL
commuter staffing levels were used in determining the FMR
placement. Neither date of hire nor length of service nor
position achieved was given any significant consideration
under the CAL Committee’s proposal. It would have been
better for a pilot hired by PEX in 1983 to have quit PEX as a
captain after the acquisition and then gone to work at
Continental in 1987, because he is ranked beneath CAL
pilots hired by Continental in March 1987. The CAL
Committee’s list is totally unfair to the FMRs in view of
their hire dates, qualifications or experience, as well as under
the constructive notice doctrine.
The FAL Committee’s proposal improperly tries to
reverse the impact of the CAL-FAL award which was not a
product of the PEX pilots’ proposal in this case, nor of any
294
PEX actions. This Arbitration was intended by the Court to
be a two-list integration involving CAL and PEX. The FAL
pilots’ participation is solely as a component of the CAL list.
The FAL Committee’s proposal imposes inexcusable and
irresolvable equities on the PEX pilots who
70
would lose 1,000 seniority slots and be covered under a
useless ‘fence” which creates additional inequities and will
spawn future arbitrations. The FAL Committee’s proposal
simply ignores all FMRs under its “date of commitment”
method which recognizes FMRs on the date they completed
their training, as opposed to the date they entered training.
CAL Committee
The CAL Committee determines that 641 PEX pilots
(248 captains, 230 first officers and 163 second officers)
were entitled to placement on an integrated list. Its figures
are based on the actual block hours flown by PEX in
December 1986, as opposed to the Company’s approach
which used 1987 projected monthly block hours. The CAL
Committee also uses the actual CAL pilot utilization rates, as
opposed to the Company’s use of the PEX monthly
utilization rates. It adds a five percent factor for
management pilots, which approximates the number at
Continental. This reflects the fact that the PEX pilots would
be employed under Continental work rules and subject to this
management structure.
The CAL Committee premises its list on the date of
October 23, 1987 — the date of Bid 87-3 which was the first
combined seniority event involving CAL, former FAL and
former PEX pilots.
The former PEX pilots are integrated by status to
71
295
the extent that 230 of the 248 captains are ratioed with 128
CAL captains in the group of captains immediately below
the last former FAL captain. Those 128 CAL pilots had held
captaincies as a result of Bid 87-3. The remaining 18 PEX
captains are then ratioed with 427 CAL pilots who had held
captain seats as a result of Bid 87-3, but lost them in an
overall seven percent decrease on reduction Bid 88-1R. The
393 PEX first officers and second officers are ratioed with
816 CAL first officers and second officers — ending with the
last pilot Continental hired prior to Bid 87-3. The remaining
51 former PEX pilots employed on October 23, 1987 follow
in a block. The FMRs are placed on the merged list,
effective February 10, 1988 — 58 weeks after TAC acquired
PEX and the earliest time at which the FMRs could achieve
full commercial pilot qualification under Continental’s
training program. They are ratioed with 136 CAL commuter
pilots
Arbitral authority establishes that to be “fair and
equitable”, the integrated seniority list must recognize and
protect the career expectations which each competing group
might reasonably have anticipated had the merger not
occurred. The application of this common sense principle is
not simply a matter of mechanically counting airplanes and
pilots. Rather, some assessment must be made of the
probability that those airplanes would continue to provide
work and promotions for those pilots if no merger
ee
had occurred. While such an assessment cannot be based on
an exact science, the evidence in this case is overwhelming
and largely uncontroverted that the PEX pilots had virtually
no realistic expectation of being able to continue their
Careers as airline pilots with People Express after December
1986. In other cases, each partner has brought different
strengths and different weaknesses, and the resulting
combination was likely to be stronger than either of the pre-
merger components. Moreover, none of the contending
296
pilots were saved from unemployment by the merger in
question and all had reasonable expectations of continuing
their careers.
The proposed seniority list offered by the CAL
Committee will afford each of the affected pilot groups the
opportunity to realize the career expectations each might
reasonably have expected had the merger not occurred.
A fair and equitable list must equitably apportion the
opportunities for advancement and the consequences of
retrenchment. The CAL Pilot Committee proposal places
230 PEX pilots on the combined list in the top 2,000
positions — within the lower 20 percent of the hard
captaincies at Continental. These PEX captains, however,
ought not be permitted to outbid any CAL captain whose
captaincy predated the award of Bid 87-3 — when the pilot
forces were combined. To allow otherwise would constitute
a classic windfall to PEX pilots who would never have had
an opportunity to claim any of Continental’s eight bases
73
or equipment. Because slightly different considerations apply
to those CAL pilots who first attained captaincies on Bid 87-
3, they are ratioed with the 230 PEX captains so that career
progressions are shared. The corollary premise — sharing of
downside risk — underlies the separate ratio of the 18 PEX
captains and the CAL captains who were unable to hold their
Bid 87-3 captaincies through Bid 88-1R, so that any future
reduction in that “fringe captain” area will be borne ratably
by CAL and PEX pilots. A similar approach to assure no
windfalls is used in the integration of the first and second
officers, with all PEX pilots lower than all CAL pilots who
had become first officers prior to the award of Bid 87-3,
followed by a ratio of PEX and other CAL pilots in first and
second officer positions. As of September 1, 1990, every
PEX pilot in this last ratio would have had sufficient
seniority to hold a first officer position. The final group of
PEX airmen includes those individuals who would certainly
297
have lost their jobs absent the merger. Therefore, these
“constructively furloughed” pilots are placed at the bottom
of the Continental list in October 1987, at the time of Bid 87-
3. This last group includes the FMRs who, even under the
People Express plan for them, would have been sent to
commuter subsidiaries to accumulate piloting experience
prior to becoming first officers. In 1987 and 1988, the FMRs
were not qualified, by CAL’s standards, to occupy any pilot
position on the airline; yet they were given seniority
74
position which allowed them to accrue competitive pilot
seniority, thus producing a clear windfall, while they were
gaining experience at CAL commuter lines. For this reason,
they are assigned a seniority date of February 10, 1988,
which was the earliest date on which any FMR could
theoretically have completed the CAL commuter training if,
indeed, CAL had begun the program in 1987.
Concerning exposure to retrenchment in an industry
where careers are not as stable and secure as they once were,
the CAL Committee’s proposal places the PEX pilots in far
safer positions — with a cushion of more than 1,100 pilots
junior to the last hired PEX pilot — than they occupied at
PEX prior to the acquisition. The FMRs will senior to nearly
750 CAL pilots.
The principle of “constructive notice” does not prohibit
implementation of an otherwise fair and equitable integrated
list in this case. The notice underlying this principle is that
pilots hired by an airline after that airline has publicly made-
Clear its intention to acquire — and merge with — another
airline, ma fairly be charged with notice that their seniority
interests may be subject to the seniority claims of the pilots
already employed by the to-be-acquired airline. That
doctrine, however, does not arise until such time as an
objective observer, having access to the publicly - available
information a pilot applicant might have, ought reasonably to
have concluded that an operational merger of the affected
298
pilot work forces
75
would occur. Throughout most of 1987, the operational
merger of PEX and CAL was in doubt. The PEX fleet was
“fenced” from the combined CAL/NYA/FAL fleet, and
staffed and flown exclusively by PEX pilots until October
1987. At that time, the operational merger became a
reasonable certainty. Secondly, the doctrine simply imputes
notice of the pendency of a merger, as opposed to
establishing the seniority equities of the to-be-acquired pilots
as superior to those of the “on-notice” pilots at the acquiring
airline. In this case, the PEX pilots had neither secure jobs
nor reasonable expectations for career advancement, and
nothing in the constructive notice doctrine relieves the
Arbitrator from giving those facts determinative weight.
Finally, the claim of constructive notice has no applicability
to issues raised by the presence of the FMRs who were not
pilots at People Express.
- The proposal of the PEX Committee fails to satisfy any
of the recognized criteria of fairness and equity. The
proposal, attrited for currency to September 1, 1990, includes
every PEX pilot and all but 33 of the FMRs (hired after June
29, 1986) in the top 2,000 hard captain positions. It bumps
out of captain seniority hundreds of CAL pilots who held
that status long before People Express was acquired b TAC.
The Company imposed list does not fully satisfy the
fair and equitable standard. It credited the PEX pilots with
more captains than People Express legitimately
76
required in December 1986. The Company’s calculation was
based on a projection of the flying planned for the former
PEX fleet in the summer peak period of 1987. By that time,
however, PEX planes and pilots were flying routes they had
never flown before, where they replaced flying formerly
ee emma
Del rea
299
done by CAL planes and pilots. Additionally, the Company
accommodated a PEX request to protect a PEX pilot in
captain seniority, resulting in further inflation of the PEX
captain entitlements. The Company also failed to consider
the CAL captain reductions required by Bid 88-1R, which
did not reach any PEX captain protected by the Company’s
list. As a result, the CAL pilots absorbed all of the adversity,
and the CAL Pilot Committee’s proposal attempts to remedy
this defect through its ratio method. Finally, the Company’s
list gives an unwarranted windfall to the FMRs, who were
placed in a block senior to hundreds of fully qualified pilots
hired by Continental in 1987 and 1988.
The FAL Committee, operating under the constraints
imposed by the Court’s Order, has made a persuasive case
for its proposal, particularly in the way it has structured the
relationship between the former FAL and PEX pilots.
FAL Committee
The District Court saw the need for construction of a
list that was not only fair to the PEX pilots in relation
77
to the CAL pilots, but a list that was also fair and equitable
to the FAL pilots in relation to the PEX pilots. The FAL
Committee is a full party to this proceeding, with the sole
caveat that it would be bound by the Nicolau award.
The relevant histories of PEX and FAL and the
transactions between themselves and CAL demonstrate the
superior equities of the FAL pilots. Since its inception in
1946, FAL had enjoyed a long and profitable history, while
PEX was a risky start up operation in 1981 and began a
course toward financial oblivion after some brief successes.
The FAL pilots hired prior to 1983 believed they were
employed by a stable, mature and historically profitable
enterprise, while every PEX pilot knew the uncertainty of the
airline under deregulation with an unorthodox management
300
style. The trade off for becoming “instant” captains was the
risk inherent in an operation with no history of profitability.
The FAL pilots absorbed a series of wage reductions and
working condition modifications prior to the PEI buyout.
The FAL pilots and other FAL employee groups negotiated
an agreement wit PEI in October 1985. The agreement
provided that: (1) FAL pilots would continue to receive the
pay rates, benefits and terms and conditions of employment
contained in the ALPA agreement at Frontier; (2) FAL pilots
would be covered by a “no furlough” agreement absent
- unusual specified conditions; (3) PEI would not sell FAL
assets over $25 million and would maintain a minimum
aircraft fleet at FAL; (4) PEI would operate FAL as a
separate
78
entity until at least February 1, 1990; (5) PEI would not, in
effect, sell stock of FAL to TAC-CAL; (6) PEI would
provide FAL with operating funds and enhance FAL as a
viable carrier; and (7) In the event of a merger of PEX and
FAL operations, the seniority lists would be integrated in a
fair and equitable manner by arbitration if necessary. These
provisions extended better rates of pay, benefits and terms
and conditions of employment to the FAL pilots than the
PEX pilots enjoyed.
PEI violated ever term of the October 1985 agreement.
When PEX took over FAL, FAL lost all control over
its own destiny, and PEX, largely employee and pilot owned,
ran FAL in to the ground and ultimately shut it down in a
misguided bargaining tactic during the negotiations for its
sale to United. While FAL had an operating loss of $40.7
million in the first three quarters of 1986, PEX had operating
losses in the same period of $120.1 million. Thus, the FAL
losses were more than offset by just the $46 million PEX
took from the sale of FAL assets to UAL, and there is no
basis for the claim that the FAL operation was bleeding
PEX’s cash position. Indeed, in June and July 1986, FAL
301
was actually transferring money back to PEX.
Texas Air’s proposal on September 15, 1986 required
that the purchase of People Express could only go forward
after the sale of Frontier, the signing of the JPA and a
79
waiver of claims by the FAL employee unions. The terms of
those documents included: (1) termination of the FAL-
ALPA agreement and agreement to CAL wages and working
conditions, including no longevity pay for FAL pilots; (2)
termination of the pilot retirement funds; (3) termination of
the October 1985 agreement with PEI, including the no
furlough agreement; (4) waiver of all soft claims against
TAC/CAL/PEI valued at $145.6 million for the pilots; and
(5) a seniority integration arbitration procedure requiring the
arbitrator to recognize the non-operating status of FAL and
the entitlement of the CAL pilots to certain aircraft on order
to CAL as of September 15, 1986.
As a matter of equity, there is no way that the FAL
pilots as a group can be placed junior to the PEX pilots
whose very jobs and “fair and equitable” seniority
integration depended entirely on the FAL pilots execution of
the JPA. PEX negotiated away the seniority rights of the
FAL pilots when it violated (without PEX pilot protest)
every provision of the October 1985 agreement and by
October 1986 had no cash or other assets to pay the FAL
pilots for those violations. _
A comparison of the assets brought to the merger by
FAL and PEX demonstrate the superior equities of the FAL
pilots to the PEX pilots. FAL brought to the merger a much
newer and homogeneous fleet than did PEX, and the
Company erroneously gave PEX credit for five B-747s.
FAL
80
contributed its modern terminal and facilities at Denver,
302
while PEX never operated out of Terminal C or paid for any
of its construction. Frontier’s turnkey operation enhanced its
value to CAL, in contrast to the serious serve problems
encountered in the integration of PEX. Continental’s
exercise of the option to buy Frontier stock added significant
value to the deal when TAC changed the nature of the
transaction from a purchase of assets to a true merger. As a
result, TAC/CAL became the debtor-in-possession of the
Frontier estate of $112.6 million. TAC/CAL gained a total
$8 million from the over-funding of the pilots pension plan
and related actions — more than CAL paid out to the PEX
pilots in debt forgiveness. The values of People Express and
Frontier viewed by themselves and interested third parties
have been consistently higher for FAL than PEX, even after
FAL was placed in bankruptcy.
The pilot equities of the FAL pilots are vastly superior
to those of the PEX pilots when measured by the primary
factor of date of hire/length of service. There is no
fundamental inequity in this case that should obviate the use
of this factor in constructing a seniority list. People Express
was, like Frontier, a carrier with an uncertain future. If FAL
brought no real jobs to the merger because it was shut down,
then certainly neither did PEX, which would have liquidated
within weeks, if not days, after the failed attempt to sell
Frontier to United.
81
Also, the evidence is overwhelming that PEX would not
have been purchased by CAL had not PEI also owned FAL
and had no the FAL pilots agreed in the JPA to have FAL
assets transferred to CAL.
The promotional expectations of the FAL captains
were to remain captains and retire at age 60 as captains, and
those of the FAL first officers were to promote to captain
due to the normal age 60 attrition within the captain ranks.
This natural expectation was not the case among the younger
PEX group in their overstaffed system. The FAL proposal
303
enables the FAL pilots to live out their careers with some
minimal dignity rather than stripping from them what little
remains in the aftermath of the CAL-FAL award. The PEX
first officers should be satisfied with the promotional
expectation they currently have — a promotion to captain
which they would have been unlikely to achieve at PEX for
another 20 years if the airline had survived.
The vastly superior pay and benefits of the FAL pilots
coupled with their length of service were factors in
Continental’s decision to give the PEX pilots full longevity
for purposes of pay and benefits and to deny the FAL pilots
this longevity. Arbitrator Nicolau found that any
consideration of longevity pay based on general notions of
equity and fairness was foreclosed by the language of the
JPA. In the present Arbitration, where the only standard is
the notion of fairness and equity, there is no such
82
preclusion. The District Court’s Order does not preclude the
FAL pilots from seeking a longevity pay level comparable to
their counterparts at CAL and PEX. This request harms
neither of these groups, and would have no back pay
consequences to the Company if implemented on a
prospective basis.
There is also a great disparity between PEX and FAL
with regard to working conditions, including retirement and
contractual benefits. FAL’s benefits were consistent with the
benefit packages extended by other major airlines operating
under a union contract. Beyond that, the FAL pilots were
contractually protected under the October 1985 agreement.
The FAL retirement plan was spectacular, with most senior
of FAL pilots receiving over $500,000 in vested retirement
benefits, and a pilot at the top third has received between
$165,000 and $204,000 upon retirement. This is in stark
contrast to the PEX pilots who had no retirement plan.
The “sweat equities” contributed by the FAL pilots far
exceed those of the PEX pilots when considering: the series
304
of wage reductions and work rule modifications totaling
$47.8 million for the pilots; the damage resulting from PEI’s
violations of the October 1985 agreement; and agreement to
the JPA. With respect to the PEX pilots, there is no showing
of any willingness to make wage and work rule concessions
until a wage cut was instituted in late 1986 when it was too
late. Indeed, instead of .
83 |
giving up sweat equity, the PEX pilots were personally
awarded $8.2 million in debt forgiveness and $3.2 million in
related taxes as well as full longevity for pay and benefit
purposes.
Although domicile is not controlling issue, it is relevant
to the extent that the FAL pilots were based in Denver and
the PEX pilots were based in Newark. The FAL Committee
has proposed a fence (with restrictions) for the benefit of
PEX pilots who shall be entitled to be awarded a maximum
of 295 captain vacancies in the Newark base regardless of
their system seniority in relation to all other CAL pilots,
including FAL pilots.
A staffing comparison reflects that Frontier was lean
and understaffed while People Express was_ greatly
overstaffed and required 232 captains based on actual
staffing requirement at PEX in December 1986. For a
virtually defunct airline, the actual December 1986 staffing
is an appropriate yardstick.
The FAL Committee used the following criteria in
structuring its proposed integrated lists: (1) The integration
proposal must be fair and equitable to each pilot group. (2)
It must primarily recognize length of service as a pilot. (3) It
should seek to: preserve jobs; avoid windfalls to any group
at the expense of the others; maintain or improve pre-merger
pay, standard of living and pre-merger pilot status; and
minimize detrimental changes to career expectations. (4) It
should accomplish the above
84
305
by reference to the economic condition of the airlines
involved (and the reasons therefore), the equities that each
airline and pilot group brought to the merger, and the nature
of the transaction that resulted in the merged airline. (5) All
attrition occurring within each pilot group after the effective
date of the transaction resulting in the merger should be
regarded as a benefit to be shared equally by all pilot sand
not by any single pilot group. (6) The resulting integrated
list should continue to be fair and equitable during the entire
careers of all the pilots on it.
Even under a finding that FAL and PEX were “in the
same boat” in terms of financial strength, a date of hire or
length of service proposal would be favored because both
carriers would be regarded as similarly situated.
The quid pro quo sought for the fence protection is that
the named FAL pilots from the March 12, 1987 list between
numbers 163 and 202 who remain on the list as of the date of
this Award be pay protected as captains until the pilot either
receives a captaincy or is entitled t a captaincy and declines
such vacancy. At present, there are 25 such pilots who not
only were flying as captains on FAL before the shutdown,
but who were entitled, using the PEX staffing ratio (295
captains divided by 60 aircraft equals 4.92 ratio), to captain
positions at FAL (41 aircraft multiplied by 4.92 equais 202).
In other words, if 295 (now 219) captain jobs are to be
85
protected, at least 25 more FAL pilots should be pay
protected as captains.
The Company’s list is unfair and inequitable t the FAL
pilots. It fails to give appropriate deference to date of
hire/length of service. It gives B-747 positions to PEX pilots
after previously allocating them to CAL pilots. It improperly
integrates PEX flight engineers with FAL pilots. It
erroneously placed all FMRs in a block after the last FAL
pilot when they were not industry-qualified pilots and lacked
the experience and qualifications that Continental required of
306
its own 1987 new hire pilots.
The Company
As in all prior airline arbitrations, the Arbitrator’s duty
here is to fashion an integrated seniority list that preserves
the pre-merger career expectations of the respective pilot
groups. The primary considerations in making this
assessment is the economic viability of the carriers at the
time of the acquisition and in the few years immediately
preceding. This clearly is the standard because an airline
pilot’s career expectations are tied (for better or worse) to the
economic health and future viability of his or her airline.
The PEX pilots have the burden of proving that they had
good promotional expectations. In the summer of 1986, the
career expectations of the CAL pilots were strong and
86
growing, and Continental did not need to acquire PEX or any
other carrier to survive and reach its present size. PEX and
FAL pilots are now largely first officers and captains in the
nation’s fifth largest airline. Newark is only a part of
Continental’s system, which includes major hubs and
facilities at Houston, Denver and Cleveland and major
international operations in Mexico, Japan, the South Pacific,
Latin America and Europe. By year-end 1985, Continental
had developed a worldwide network of operations, without
any help from PEX, including 52 domestic and 28 foreign
cities. In particular, CAL also commenced service from
London to Houston. During 1986, Continental added 30 new
destinations. On September 5, 1986, the DOT granted
Continental a Denver to London route. By year-end 1986,
CAL was about double the size of PEX. It could have
simply sat back and waited to pick up PEX’s aircraft and
facilities after liquidation, which was assured. Neither TAC
nor CAL had the power to, nor did they, exert control over
PEX’s operations before the acquisition was consummated.
307
In fact, the merger announcement actually helped PEX’s
situation, as did Texas Air’s $107 million in cash infusions
between September 15 and December 18, 1986. In
September 1986 and thereafter, PEX had no alternatives to
liquidation other than TAC.
On February 1, 1987, PEX began operations under the
Continental name, and the problems of PEX were thrust
upon Continental, including an operational nightmare in
Newark
87
that severely damaged Continental’s reputation and caused it
hundreds of millions of dollars in lost revenue, as well as
onerous operational contracts and facilities leases that were
inherited. By early March 1987, the PEX Committee had
rejected the NYA-type integration structure. After
discussions and meetings with the pilot group
representatives, the Company made a _ good faith
determination that it was in the best interest of the airline for
management to itself construct an integrated list rather than
go through yet another divisive arbitration, which would
indefinitely delay the promulgation of a combined list and
the benefits to all pilot groups that such a list would provide.
The first step in the Company’s list was the
determination that Continental could utilize 295 PEX pilots
as captains and 779 pilots in total, according to CAL’s
utilization of the PEX fleet. The Company also adopted
PEX Captain Fred Abbott’s input as to the number of
captaincies the PEX pilots should receive.* The staffing
determination was made using the method by which CAL’s
own staffing requirements were determined. The number of
block hours used produced the same number of captain
positions to which the PEX pilots would otherwise have been
entitled had PEX been able to survive independently.
* Captain Abbott was the number 12 pilot on the PEX
seniority list and Chief Operating Official for PEX at the
308
time. He was also the founder of the PEX Committee.
88
The pilot utilization rate applied in the staffing determination
was also fair and equitable because it was consistent with
CAL’s utilization rate for its own pilot work force. The 295
PEX captains were to be placed junior to the last CAL
captain on Bid 87-1; the PEX non-captains hired before the
acquisition; and the FMRs were to be placed after all the
integrated non-captains but before any 1987 hires. None of
the 950 PEX pilots remaining on March 12, 1987 was
furloughed, despite CAL’s need for only 779 PEX pilots.
The CAL-FAL award placed 162 former FAL captains after
the last CAL captain awarded a captaincy on Bid 87-1. The
award then reserved a block for CAL first officers based on
new equipment coming to Continental, followed by a ratio of
remaining CAL and FAL first officers, and concluded with
recent FAL hires at the bottom but before the 1987 CAL new
hires. The Company believed that Arbitrator Nicolau’s
approach ratified the fairness of its proposed CAL-PEX list.
On June 30, 1987, Continental held a meeting of the pilot
groups in Houston and removed itself from_the process,
hoping that the CAL and PEX Committees could work out a
list. When they were unable to reach any agreement, the
Company was faced with the decision of how to integrate its
March list with the CAL-FAL award.
The Company tried to look at all of the respective
equities existing between the PEX and FAL pilot groups.
89
Frontier and PEX were not that far apart in value, as
established by the fair market prices of $158.1 million for
Frontier and $122.1 million for PEX (including Britt and
PBA). Both were national airlines, as opposed to majors.
Both carriers had failed. Neither pilot group had
employment prospects. They both moved from a one-hub
309
carrier to a multi-hub carrier with more equipment. FAL
pilots waived claims allegedly worth up to $141 million,
whereas Continental forgave PEX pilot stock debt of $8.2
million and paid $3.2 million in taxes on the debt. FAL
pilots lost their retirement, and PEX had no such fund. The
FAL pilots had traditional job duties, and the PEX pilots
were no longer cross-utilized. The PEX pilots gained
traditional seniority which the FAL pilots already had. The
PEX bid trips by lottery, whereas the FAL pilots used
seniority. The top FAL captains were hired in 1955-56 and
the top PEX captains in 1980-81. The bottom FAL captains
were hired in 1968, and the bottom PEX captains in 1983.
FAL was a long-term carrier with status earned over time,
and PEX was a “start-up” carrier with “instant” captains.
The FAL pilots had overall superior longevity as compared
to the PEX pilots. In short, the PEX pilots obtained more
than the FAL pilots from the acquisition by virtually every
measure.
The Company decided that a fair solution was to
integrate the FAL and PEX captains and non-captains by
date of hire and place the FMRs below all other pre-
acquisition
90
pilots but ahead of the 1987 CAL new hires. This list, in
force on the property for more than three years, is very fair.
It places the PEX captains in the “hard” captain seniority
range without encroaching on the superior career
expectations of the CAL captains. The fairness of the list is
affirmed b the subsequent integrations of the PEX flight
attendants and ground agents, both of which groups received
considerably less favorable treatment than the PEX pilots.
Of equal importance, the Company’s list also properly
balances the equities of the pilots from the two failed
carriers, PEX and FAL, relative to each other. It also
properly places the FMRs giving due account to their
unfinished training and most junior status at PEX, while
ee ee
310
placing them ahead of pilots who were hired by the
Company at a later date.
Since the Company’s list is fair, it should not be
changed to one of the pilot proposals even if any one of them
were also fair (which none of them is). Arbitral precedent
defines the Arbitrator’s charter not to devise a perfect list, if
such a thing exists, but one that is fair and equitable on the .
whole. The District Court’s standard of “fair and equitable,”
an undefined term common to all prior arbitrations, requires
the outcome to be “fair and equitable” in its totality; it is not
limited to the effect on the pilots. Under the Order, the
Company is an equal party to this Arbitration. Under the fair
and equitable standard, there is no rationale for
91
saddling the Company with the operational and financial
costs that would be associated with moving from one list to
another, even assuming that one of the pilot committee
proposals were also fair.
The three pilot committee’s proposals are flawed in a
variety of ways. The PEX Committee ignores: (1) the
economic condition of the carriers and the relative
promotional expectations of their pilot groups; (2) longevity,
especially with regard to the FAL pilots; and (3) the benefits
that they received from the acquisition. Furthermore, there is
no factual basis for the PEX Committee’s distinguishing
between wide-bodies and narrow-bodies (while at the same
time excluding A-300s from the wide-body category),
particularly at Continental where no base pay differential
exists for flying wide-bodies and where pilots do not “chase
equipment”. In addition, the use of post-merger attrition in
the manner utilized by the PEX Committee’s proposal has
been rejected by arbitral precedent and is on its face, unfair
to CAL and FAL pilots. Nor is there any validity in the PEX
Committee’s use of 1,061 PEX pilots employed in
September 1986, when the Court has determined that the
Committee only lawfully represents the 950 pilots who were
311
employed at Continental on March 12, 1987.
The Company’s list is fair and equitable because it
fairly balances the expectations of pilots from a failed carrier
with those from a growing carrier, and it fairly
92
balances the equities of pilots from two failed carriers.
The Company’s list also fairly places the FMRs behind
the other PEX pilots but ahead of new hires, and it does not
integrate the FMRs with the FAL pilots by date of hire. At
the time the FMRs joined Continental, they were not
qualified to fly as first officers under CAL’s flight time
requirement of 2,500 hours in 1987. Therefore, Continental
sent them to its commuter operations in order to gain
additional flight experience, just as PEX intended to do in
1986. In addition, the FMRs joined PEX during the period
when it was experiencing its financial downfall. Thus, by
virtue of their hire dates, the FMRs did not bring the same
equities as the more senior PEX pilots. Contrary to the CAL
and FAL Committees’ proposals, the FMRs’ seniority should
be determined by when they were hired by their ancestral
carrier, as was the case with all the other pre-integration
pilots. They were part of the same package of pilots and
equipment that Continental began holding out to the public
as its own on February 1, 1987.
The financial condition -of the carriers shows that the
CAL pilots had positive promotional expectations at the time
of the acquisition, while the PEX pilots had no objective
promotional expectations. Continental was setting traffic
and financial records from 1984 until the PEX acquisition.
CAL’s 1983 bankruptcy was merely done to reorganize its
financial position, and it was a
93
highly successful endeavor. Continental did not need PEX
to survive or to attain its present size. It was on a strong
312
growth trend from 1984 to 1986 in a market with no shortage
of aircraft in 1986, especially B-727s, B-737s and B-747s —
the types of planes used by PEX. Continental was already
developing its Newark hub at that time and, even without
PEX, probably would have done so. There was no shortage
of pilots in 1986. The Company’s current bankruptcy, filed
for on December 3, 1990 to gain relief from the interest
expense inherited largely from PEX in 1987, is irrelevant to
these proceedings. PEX was a failed airline by September
1986, and it had been “dying” for at least a year prior. Its
failure was due to several causes. The “no frills” concept
was no longer viable. Over-cxpansion had pushed PEX into
the wrong cities and .into competition with major carriers that
had superior technology. Its rapid expansion in late 1984
and 1985 increased operating and interest expense costs and
operational problems. The most pervasive reason why PEX
could not compete with the major carriers was its lack of a
sophisticated computer reservation system, which the majors
used to underprice PEX. In addition to internal expansion,
PEX mistakenly tried to grow by acquisitions. PEX lacked a
traditional management and support infrastructure. Finally,
it antagonized travel agents through low commissions,
telephone delays and unanswered calls.
94
The proof of PEX’s failure takes several forms. At the
time of the acquisition, PEX had neither the equity nor the
cash to operate. Its cash balances fell steadily and
dramatically from late 1934 on. By June 23, 1986, when
PEX announced it was for sale, the company was
“technically insolvent” because it was out of cash and had an
inability pay bills. PEX’s cash flow is not a meaningful
indicator, and even if it were, the trend at PEX as very
negative in all four quarters of 1986. Although PEX grew
from 1981 to 1985, it did not put in a good financial
performance, as properly measured by net income. Over its
six-year existence, it lost $214.8 million. The Company
313
never obtained net cash from operations, but rather from
financings. By July 1986, the financial markets were
completely shut to PEX. By September 1986, there was n
remaining significant equity in its collateral on which
additional financing could or would be based. Another
indication of PEX’s poor financial shape was its general
retrenchment, including downsizing of its fleet. The B-747s
were high cost, money-losing planes for PEX, and the
market for them was soft in mid 1986. The August 1986
Business Plan also contemplated downsizing the B-727 fleet
by eight planes. The result of the fleet downsizing was a
corollary cancellation of service at five cities, with five more
on the immediate “watch” list and an overall 14 percent
fewer block hours. On October 16, 1986, PEX sold all of its
interest in another six B-727s
95
to NYA, and the planes left PEX’s property on November
15, 1986. In sum, on September 15, 1986, PEX could only
count 71 planes in its fleet, and on November 15, it had only
65 planes left, and one B-747 on order that it could not
afford to take delivery of, but which the Company credited to
the PEX pilots in its proposal. Because of PEX’s low fare
strategy, to be profitable it needed exceedingly high load
factors, which it could not come close to meeting in
September 1986. Long before the announcement of the
TAC-PEI deal, PEX had experienced a steady decline in
traffic and consumer loyalty. It also was too dependent upon
leisure travelers, and it did not have a business traveler
following which it belatedly attempted to pursue. PEX was
ready for liquidation in September 1986, because its
operating philosophy and industry changes had foreclosed
the possibility of reorganization. At the time of its failure,
PEX had already pushed its operating cost to an industry low
level.
The September 15 agreement did not give TAC control
over PEX before December 30, 1986, and as a result the
314
PEX pilots must take responsibility for the events at PEX
from September 15 until December 30, 1986. There was
never any assurance that the deal would be consummated,
and even if consummated, whether TAC would leave PEX as
a stand-alone subsidiary or merge it with Eastern or
Continental. During the period from September 15 to
December 30, TAC and CAL avoided even the appearance
of control over PEX.
96
With regard to the six B-727s that were transferred to NYA
(and later CAL), the planes were clearly TAC’s, and any
flying done on them by PEX pilots is irrelevant. The
September 15, 1986 Acquisition Agreement permitted TAC
to have its designee purchase 12 B-727s, an aspect of the
deal that was not conditioned on consummation of the rest of
the deal. The first six planes were sold to NYA, and because
PEX needed them to fly its fall schedule and survive, NYA
allowed them to stay at PEX until November 15, after which
they became part of Continental. TAC never took delivery
of the other six B-727s, because PEX had so few
uncollateralized assets by October 1986 that it could not give
TAC the sufficient security, and further because their loss
would adversely affect PEX’s system.
The September 15 announcement of TAC’s acquisition
helped PEX’s traffic and boosted consumer, shareholder and
employee confidence. The announcements that really hurt
PEX in 1986 were its announced decision on June 23 to
search for a buyer and the announcement on August 28 that
it had put Frontier into bankruptcy.
PEX had no alternatives other than Texas Air. Massive
efforts to find another buyer had failed. No one else was
ever interested enough to make an offer. None of the
unionized carriers wanted to acquire PEX, since it was in
their economic best interest to see it disappear. America
West never made an offer to acquire PEX, and it was not
315
interested in doing so. A “turnaround plan” would
97
not have saved PEX, and no such plan had actually been
formulated.
Continental’s determination that the PEX pilots were
entitled to 295 captain positions was fair and equitable.
Contrary to the claim by the PEX Committee, Continental
does not staff at the levels required in the peak flying
months. Rather, it determines the number of crews required
to meet its flight schedule on each of the months expected to
be covered by a system bid, examines the high and low
points, and picks a staffing level in between. The PEX
staffing determination was strictly a business decision, made
in the ordinary course of business by the management
official responsible for making such decisions. Because
Continental was the acquiring carrier, its business judgment,
rather than that of PEX, governed the determination of the
variables in the staffing equation (block hours and pilot
utilization rate). Continental made the PEX staffing
determination in late February or early March 1987, using
the method by which its own staffing requirements are
determined. The Company had no obligation, legal or
otherwise, to use the peak month flying hours in 1987 for
PEX aircraft. Additionally, operating forecasts and the
resulting staffing projections are constantly revised, and the
Company’s PEX staffing determination in March 1987 was
fair and equitable under the circumstances existing at the
time. The block hours used were fair and equitable, and they
produced the same number
98
of captain positions that PEX would have needed under its
Business Plan had it been able to survive. Moreover, the
Official Airline Guide for the period October 1986 through
January 1987 shows that PEX had projected a significant
316
reduction in block hours either consistent with or below
those contained in the Business Plan. In this regard, the
unequivocal testimony of the CAL manager in charge of
staffing was that CAL had no control over PEX’s staffing
during the fall of 1986. The pilot utilization rate applied in
the PEX staffing determination was fair and equitable. The
figures were obtained from the PEX head of manpower
planning in order to confirm consistency with the
Company’s figures for the entire pilot population including
management pilots. Because the utilization rates were
essentially the same at both airlines, the PEX rate was used.
Block hour utilization always contains management pilots.
Even assuming that the PEX utilization rate did not account
for management, Continental was under no obligation to
adopt PEX’s management structure; and CAL’s own figure
for pilot managers was only five percent, thus yielding only
13 more captain positions than were credited for the PEX
pilots.
The respective pilot committees’ staffing analyses only |
reinforce the conclusion that the staffing determination with |
regard to PEX was fair and equitable. The CAL
Committee’s staffing analysis is flawed because it is not, on
balance, a true staffing analysis based on a
99
forecast of requirements during a future month or bid period.
The FAL Committee’s staffing analysis, like the CAL
Committee’s theory, is based on the actual PEX
requirements during December 1986. Moreover, it is based
on the number of captains PEX required under PEX’s
schedule, as opposed to the essence of the PEX staffing
determination — the number of captains CAL required under
CAL’s schedule. The FAL proposal is further flawed with
respect to the B-747s, because it proceeded from the false
premise that by including the flying time generated by five
747s in System Bid 87-1, CAL was excluding those aircraft
from the PEX operation. The effective date of System Bid
317
87-1 was December 15, 1987. Thus, the fact that the bid
included B-747 flying time in the Pacific did not mean that
CAL was intending, at the time the PEX staffing
determination was made, not to utilize those aircraft in the
CAL-PEX operation during 1987. The PEX Committee’s
staffing analysis is based on a “crews per aircraft ratio”
method that is an imprecise and unreliable staffing method.
It is in fact a fiction because the crews per aircraft ratio is the
result of the block hours analysis, not its functional
equivalent. By definition, the ratio changes any time the
variables in the staffing equation — block hour sand pilot
utilization — change.
System Bid 87-1 was not issued in anticipation of the
Company list at issue. It was posted on January 27, 1987,
approximately six weeks before the Company decided
100
to construct it’s own integrated list. The bid was necessary
to accommodate the projected growth of CAL throughout the
remainder of 1987. On September 12, 1986, the CAL pilots
were anticipating the arrival of 104 aircraft on order and
option. The timing of Bid 87-1 was a business decision
designed to accomplish the training required by the influx of
new aircraft, not to upgrade CAL pilots to captain positions
at the expense of PEX pilots.
The Company properly determined the PEX captain
cut-off on the integrated list from the only available PEX list.
That the Company’s list “split” a class of PEX captains does
not demonstrate unfairness. The 295" PEX pilot had moved
up to number 288 by March 12, 1987, due to nominal
attrition among the PEX pilots. The 288 number is only one
number less than was produced under the Company’s
staffing analysis of PEX’s requirements. The six additional
PEX captaincies were given at the request of PEX
management and not on the basis of staffing. Therefore,
PEX is not entitled to any additional captaincies based on the
Company’s analysis and construction of the seniority list.
318
Promotional expectations of the pilot groups should be
considered as a September 15, 1986. However, there is no
basis for using that date for all other purposes. Texas Air
had no control over PEX before the acquisition was
consummated on December 30, 1986. Thus, the equities of
any aircraft or other assets attributable to PEX should
101
be measured as of that-date, if they become a factor in
constructing the integrated list. Indeed, the Company gave
PEX credit for all 66 aircraft in the PEX fleet as of
December 30, 1986, even though TAC had paid for the 66"
plan — the B-747 that PEX could not afford. As for the
number of pilots used in constructing the list, that is to be
measured as of March 12, 1987, which is the date used by
the Company in constructing its list. Moreover, the District
Court ruled that only those pilots still working for PEX on
March 12, 1987 are part of the class.
The PEX pilots are not entitled to special consideration
because of the Newark hub, Terminal C or other non-fleet
assets. Those assets, even if they are considered within the
context of career expectations, do not justify giving the PEX
pilots any special consideration that will counterbalance their
extremely negative job prospects before the acquisition.
This is so because any consideration of the benefits to
Continental from the assets must also weigh the harm. The
evidence is overwhelming that PEX saddled with enormous
costs in terms of loss of customer goodwill and soaring
consumer complaint rates resulting from the difficulties
incurred in trying to absorb the chaotic PEX operation.
There were also other unexpected surprises, such as onerous
contracts that Continental had to assume. There were
increased debt expenses, capital improvements to PEX’s
fleet and facilities, and lease payments on unproductive
space. In
102
319
contrast, the merger of Frontier’s operations went extremely
well, because of the experience of the FAL employees and a
traditional management structure in operating a full service
airline. Many of the operational and financial burdens thrust
upon Continental were attributable to PEX’s practice of
contracting out traditional or core services, and under cross-
utilization, assigning inexperienced employees to handle the
contracting out function.
Continental was successfully building a Newark hub
even before the acquisition of PEX, and any airline was
permitted to use the international arrivals gate at Terminal C.
There also were no high density airport slot constraints at
Newark, and CAL and NYA had existing market presence in
the New York City area. Newark is not CAL’s largest hub,
and is only part of a large, worldwide operation.
The PEX pilots should not receive special credit for
Terminal C. TAC did not acquire Terminal C through PEX.
Indeed, PEX would have lost its lease to Terminal C. The
lease held by PEX for most of 1986 and 1987 was
commercially worthless. PEX did not bring a 25-year lease
to the merger negotiations with CAL. The merger was not
motivated by Terminal C, and TAC obtained the lease on its
own. There was an absolute prohibition against PEX
subleasing Terminal C without the Port Authority’s written
consent. Even after PEX had been combined with CAL for
marketing purposes on February 1, 1987, the Port Authority
refused
103
to guarantee that CAL would be allowed to take over PEX’s
lease. In fact, the Port Authority could have assigned the
lease to any other airline on 30 days notice to PEX. The
assignment was effective August 15, 1987, the first time that
Continental had a contractual interest in Terminal C and
control of the lease. PEX should not get credit for designing
the terminal. Only two-thirds of the building, domestic
concourses C-1 and C-2, was actually covered by the lease,
320
and the structural shell of the departures level main building
was erected by the Port Authority in 1971. Nor was the
international arrivals gate part of the lease. EX never
completed its design for the terminal. The work that it did
complete was not designed for the efficient functioning of a
traditional carrier. Numerous functional aspects of the
terminal had to be corrected before CAL could occupy it.
Indeed, since PEX itself was aspiring to become more
traditional, it too would have had to alter Terminal C had it
been able to survive. The largest design deficiency in
Terminal C was the baggage system and the concomitant
design problems it dictated for the rest of the tterminal. As a
non-traditional carrier, PEX did not have the same need as
most normal carriers for baggage drop-off at curbside and at
the departures level ticketing counters. Consequently, PEX’s
system could not handle the volume of baggage attendant to
a major airline like Continental. The addition of the
necessary 50 additional ticket counters
104
along the front of the “window wall” also had the
unfortunate side effect of practically eliminating the value of
the passenger display flight system, because it is now very
difficult to read the information on those sigms; but moving
them would be cost-prohibitive and would eliminate their
intended value of providing flight information near the ticket
counters. The baggage claims carousells were only
marginally adequate for CAL. The baggage system was not
fast enough to handle traffic during CAL’s peak departure
times, and it could not handle oversized bags and skis, which
have to be either driven or carried by hand to the planes.
CAL paid $577,619 just to install an oversized baggage
system and $5 million in total changes to the main baggage
system. In installing a direct feed from the apron level to the
baggage claims carousels, Gate 70 (a prime, close-in gate)
has been lost until 1993 or 1994, at which time it will cost
CAL $12 to $15 million to fix the problem. P'EX’s design of
EPR NR IC
321
Terminal C also posed problems for CAL with respect to the
number of wide-body gates and jetways. Another significant
design deficiency, which cost CAL about $4 million to
remedy, was the failure of PEX to provide office space for a
traditional airline operation. These design deficiencies must
be taken into account because Terminal C was not adequate
for any traditional carrier. CAL paid for the construction of
the terminal, and PEX had no investment in it. PEX’s design
was no more than 50 to 60 percent constructed
105
by October 1986. Terminal C and the North Terminal
Annex project were finally closed out in October 1990 at a
cost of about $280 million, of which the Port Authority had
financed $225 million and CAL had financed $55 million.
In addition, CAL’s lease required that it invest $25 million in
Terminal C for required items which would have been
required by any traditional airline. CAL also will repay the
Port Authority for the $225 million financing over the 25
year term of the new lease. In August 1986, PEX had built
only 30 percent of the current terminal, and by August 1987,
when CAL assumed the lease, only about 56 percent of the
current terminal had been constructed. In short, Terminal C
as it stands today owes its existence to Continental;
especially the interior seen by the traveling public and the
functional elements of the building that serve the public.
The PEX pilots should not receive special credit for
other assets acquired along with PEX. These facilities were
not “turnkey” in nature, as demonstrated by the large amount
of work that was required for CAL to absorb them.
Moreover, other items were not useful to CAL, and others
still were not even assets of PEX. When compared to the
rest of CAL’s facilities throughout its vast system, the
facilities contributed by PEX are not the key to Continental’s
future growth. The other Newark facilities, as well as
Terminal C, were inadequate. These included: the flight
322
kitchen and food operations; the
106
Hangar 55 aircraft maintenance facility which has cost CAL
$10 million and will require further expenditures; the cargo
facility, a number of infrastructure deficiencies at Newark
Airport, such as inadequate road frontage and parking; the
unproductive North Terminal which CAL assumed under
PEX’s lease with the Port Authority; and two administrative
buildings across from Newark Airport — the Haynes Avenue
Building and International Plaza — which CAL assumed
under PEX leases and which have imposed significant costs
on CAL from unproductive space. Continental also inherited
PEX’s lease obligations on facilities at other airports, despite
the fact that CAL did not have a use for all of them. Space at
seven such airports has been unproductive for CAL at a
combined cost of over $1.8 million through the end of the
respective lease terms. Most of the PEX outstations were
closed and PEX operations relocated to the better facilities of
TAC subsidiaries. | PEX’s ground handling facilities
throughout the country were in poor physical repair, a
problem that cost CAL over $15 million to rectify at the
outstations, not including Newark. One hundred and sixty
four of the high density airport slots for which PEX claims
credit were commuter slots and could not be used by regular
air carriers. PEX held only 35 slots, 14 at Washington
National
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.