Bankruptcy Q&A For IAM Members at US Airways

Bankruptcy Q&A For IAM Members at US Airways September 13, 2004 The IAM, in conjunction with our bankruptcy attorneys, have prepared this document to explain how bankruptcy laws apply to the current US Airways situation. This document is not intended to answer every individual question members may have about bankruptcy, but we will try to answer as many as we can. Please contact your local union representatives with any additional questions so they can forward them to the appropriate district representative for an answer. We will add to this document as necessary. Q: Why didn t IAM members have an opportunity to vote on a pre-bankruptcy contract proposal? A: US Airways did not provide the IAM with a proposal. Q: What is the goal of a Chapter 11 bankruptcy? A: The main purpose of a Chapter 11 bankruptcy is to relieve a debtor (in this case, US Airways) of debts, thereby providing an opportunity for a fresh start. This is different from a Chapter 7 bankruptcy, which involves the company shutting down its operations and the company s assets being sold off. In each of the following questions, when the term bankruptcy is used, we are referring to a Chapter 11 bankruptcy. A Chapter 11 bankruptcy could also include selling off some or all of the Company s assets. Q: Do we continue to get paid when the airline is in bankruptcy? A: Yes. Items such as wages, salaries, and sick leave are considered as normal administrative expenses while in bankruptcy. The bankruptcy laws assure that employees will continue to be paid for their services during the reorganization. In addition, certain pre-petition claims, for items like unpaid medical expenses and other benefits are given priority status in bankruptcy, meaning that they are paid before any other general 1

unsecured claims. However, under the law, the maximum amount of such claims that can be give priority status is limited to $4,650 per employee. Q: Do we still have collective bargaining agreements in effect in bankruptcy? A: Yes, the IAM continues to represent you for collective bargaining purposes and our contract remains in effect. However, the company may ask the court for permission to reject our collective bargaining agreements. Section 1113 of the bankruptcy code lays out the rules an employer must follow if it decides to seek to reject labor contracts. It ensures that negotiations between a Chapter 11 employer and a union occur before the company asks the court to allow it to reject a collective bargaining agreement. It lays out the stringent standard by which a bankruptcy court must evaluate an application to reject an agreement, and it establishes a time frame in which the court may make its determination. A collective bargaining agreement remains in effect, and the collective bargaining process continues, after the filing of a bankruptcy petition unless and until the company complies with the provisions of Section 1113. Accordingly, before the court may authorize the rejection of a collective bargaining agreement the company must prove to the court that the following nine (9) requirements have been met: 1. The company must have made a proposal to the union. 2. The proposal must be based upon the most complete and reliable information available at the time of the proposal. 3. The modifications must be necessary to permit reorganization. 4. The modifications must provide that all affected parties are treated fairly and equitably. 5. The company must provide the union with such relevant information as is necessary to evaluate the proposal. 6. The company must have met with the collective bargaining representative at reasonable times subsequent to making the proposal. 7. The debtor must have negotiated with the union concerning the proposal in good faith. 8. The union must have refused to accept the proposal without good cause. 9. The balance of the equities must clearly favor rejection of the agreement. If the court agrees that the company has met these conditions, it may authorize the rejection of the collective bargaining agreement. 2

Overview of the 1113 Process An explanation of the sections of the bankruptcy code that allows temporary modifications and permanent rejection of collective bargaining agreements is outlined below. 1113 (c) Total Rejection Section 1113 (c), Chapter 11, of the U.S. Bankruptcy Code. Section 1113 (c) allows a company to ask a judge to reject, terminate, labor contracts. Section 1113 (c) states: The court shall approve an application for rejection of a collective bargaining agreement only if the court finds that (1) the trustee has, prior to the hearing, made a proposal that fulfills the requirements of subsection (b)(1); (2) the authorized representative of the employees has refused to accept such proposal without good cause; and (3) the balance of the equities clearly favors rejection of such agreement. By law, a hearing on the 1113(c) petition is to be held within fourteen days from the date of the filing of the application. However, the court may extend the time for the commencement of such hearing for a period not exceeding seven days. The court is required to rule on the application for rejection within thirty days after the date of the commencement of the hearing. However, the court may extend the time for making a ruling for an additional period as the company and the Union may agree to. If the court does not rule on the application within thirty days after the date of the commencement of the hearing, or within such additional time as the company and union may agree to, the company may terminate or alter any provisions of the collective bargaining agreement pending the ruling of the court. In 1113 (c) applications the judge has only two options when making a ruling; reject the company s application and leave the labor contract intact, or approve the application and terminate the labor agreement completely. US Airways would then be free to impose wages, work rules an benefits as they see fit. The judge cannot impose permanent contract terms on the parties. 1113 (e) Temporary Modifications Section 1113 (e) of the Bankruptcy Code states: If during a period when the collective bargaining agreement continues in effect, 3

and if essential to the continuation of the debtor's business, or in order to avoid irreparable damage to the estate, the court, after notice and a hearing, may authorize the trustee to implement temporary changes in the terms, conditions, wages, benefits, or work rules provided by a collective bargaining agreement. Any hearing under this paragraph shall be scheduled in accordance with the needs of the trustee. The implementation of such interim changes shall not render the application for rejection moot. Essentially, 1113 (e) allows a company in bankruptcy to ask a judge to impose temporary wages, work rules and benefits if the continuation of a company s business is at risk without immediate relief. If a judge imposes temporary modifications, they are not a matter for negotiations with the Union and are not subject to member ratification. The negotiations required under section 1113 (c) to achieve a permanent solution would continue even if temporary modifications are imposed. The 1113 (c) process, and the application for a complete rejection of the contracts, would still go forward. The temporary modification would only be in effect until the judge rules on the application to reject the agreements, or permanent modifications to the agreement are negotiated, ratified by the membership and approved by the bankruptcy judge. Q: What happens to our defined benefit retirement plans in bankruptcy? A: The filing of a bankruptcy petition typically does not have an immediate effect on a defined benefit pension plan. Active employees will not lose currently vested pension benefits as a result of bankruptcy and retirees currently receiving funded benefits will continue to do so. There is no advantage to be gained by rushing to file for retirement prior to a bankruptcy filing. As part of a restructuring under bankruptcy, the company could elect to terminate the defined benefit pension plans. If this happened, the plan would still be obligated to pay all vested and funded benefits for current and future retirees. However, if the plan did not have sufficient assets to pay for vested benefits (a distress termination ), the Pension Benefit Guarantee Corporation (PBGC), a government agency, would guarantee payment of vested pension benefits, subject to certain regulations and maximums. Q: What happens to the IAM National Pension Plan benefits for Fleet Service Members? A: The IAM National Pension Plan is secure and will not be affected by US Airways bankruptcy filing. As long as the Fleet Service collective bargaining agreement remains in force, US Airways is obligated to contribute to the plans. All vested benefits are secure, but a change in the collective bargaining agreement could affect future benefit accrual. Q: Are our Defined Contribution Pension Plans (e.g 401-k plans) affected by bankruptcy? 4

A: The filing of a bankruptcy petition typically does not have an immediate effect on a defined contribution pension plan. Like the defined benefit plans, the assets in the defined contribution plans are separate from US Airways and would not be up for grabs in bankruptcy proceedings. What is in your account today will remain. The company is prohibited by law from taking funds out of the defined contribution pension plans to meet other obligations or to pay its debts. Furthermore, employer contributions to the plans are treated as normal administrative expenses after a bankruptcy filing. Such contributions to the plan would not be affected by the filing, but could be affected if changes are made to the collective bargaining agreements. As part of a restructuring under bankruptcy, the company could elect to terminate the defined contribution pension plans. If this were to occur, prior contributions made by the employee would be protected. Prior, vested contributions made by the employer would also be protected. Q: Would retiree benefits such as medical and life insurance be affected? A: Just as with pension benefits, a bankruptcy filing does not have an immediate or automatic impact on medical and life insurance benefits for retirees. Unfortunately, because retiree medical and life insurance benefits are not vested benefits in the same sense as pension benefits, they are more vulnerable during a bankruptcy. However, Section 1114 of the bankruptcy code says that a company may not modify retiree benefits unless the retirees representative (the IAM) agrees to such modification or unless the court specifically authorizes modification. Like the requirements that must be met to modify collective bargaining agreements, Section 1114 sets certain procedures to obtain permanent modifications to retirement benefits. Q: Can someone make an offer for US Airways in bankruptcy? A: Yes. If US Airways decides to sell its assets, another airline or interested party can make an offer for the airline as a whole or only for certain assets it deems valuable. The judge would have to approve any asset sale. Q: What happens to US Airways stock in bankruptcy? A: While it is impossible to predict what might happen to the value of the company s stock in any circumstance, a bankruptcy filing often results in stock losing much or all of its value. If the company is able to restructure successfully in bankruptcy, the shares could regain some of their lost value in the future, but may also be cancelled as part of a reorganization plan. 5