Analysis of Interim Relief Letter of Agreement

Page updated: December 27, 2002

Paragraph 1. If ratified on January 8, 2003, the reductions in wages and premiums will be effective for work beginning December 31, 2002.

a. the Wage Arbitration process and the Lump Sum payment scheduled for March 1 will be forgone until either: the Court issues an order under §1113 [c] or AFA and the Company reach an agreement after negotiations on the larger issues and broader package of cuts proposed by the Company on December 13. If the Company and the Union do not reach agreement the Company will seek a court order under §1113 [c] of the Bankruptcy Code to impose the cuts proposed earlier. This paragraph will also preserve credit for Flight Attendant participation in these cuts until the negotiations over the larger package of cuts can be completed.

b. The cuts contained in the Interim Agreement total 9% of Flight Attendant compensation, consisting of:

• the elimination of COLA ( Section 5.K.) payments for the duration of the Interim Agreement
• reduction of base wage rates (Section 5.A.1. and 2.) by 8.16%, and
• reduction of premiums by 8.16% (see list)

Paragraph 2. The Company has agreed to withdraw its §1113 [c] motion and not refile it prior to March 15, 2003. This buys important time for the parties to attempt to negotiate the details of the larger package of cuts proposed by the Company. And, it puts off the date when the Company will seek, in bankruptcy court, to impose such cuts from approximately January 15 to March 15. During that period we will have saved the value of the larger cuts the company is seeking by delaying them until at least approximately May.

For this to happen several things must take place, otherwise we would be back on the track of defending against the larger cuts in court in January. Paragraph 2 is subject to the following conditions:

a. flight attendant ratification no later than January 8

AND

b. membership ratification by the other Unions OR a Court order of emergency relief in line with these cuts by January 10.

Paragraph 3. If the conditions in paragraph 2 are not met (for example, either some of the groups do not ratify the Interim Agreement, or the Court fails to impose emergency relief) then the Company may (and will) proceed immediately with its §1113 [c] motion to seek an order rejecting the Union Contracts. In other words, ratification of these agreements is important because it will delay action by the Company to impose the larger cuts until at least a March 15 filing with an approximate May 1 Court decision.

Under paragraph 3., AFA will not object to the timing when the company files its brief (it normally would be filed earlier but is being delayed in light of the Interim Agreement in the hope that it will not be necessary in January). AFA, of course, retains the right to object to the Motion itself and to vigorously dispute in court the Company’s attempt to reject our Contract and impose its propose cuts. If it comes to such a hearing because this Interim Agreement does not go into effect, AFA’s attorneys will make every effort to defeat or limit the impact of the motion.

Paragraph 4. This Interim Agreement cannot be referred to by either the Company or the Union in arguing to the Bankruptcy Court over the merits of the Company’s demand for larger cuts under §1113 [c]. This will preserve AFA’s right, for example, to argue to the Court that a smaller pay cut is appropriate to our package, while the Company will no doubt seek a larger pay cut.

Paragraph 5. This Interim Agreement is intended to give the Company at least a $100 Million cushion over the EBITDAR covenants contained in the “DIP” loans the Company obtained in order to continue flight operations during the bankruptcy process. “EBITDAR” is an accounting term – it stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Rents – that measures earnings from a company’s operations. The loan covenants require United to meet strict earnings and cost targets. Because failing to meet these requirements could result in the loss of the funding, jeopardize our continued operation, and greatly increase the risk that United will be forced to liquidate. Because these risks are so great it is important to maintain a substantial financial cushion to prevent a default.

If the financial cushion exceeds $100 Million that fact will be given full consideration in the negotiations, and in Court, when the parties seek to resolve the Company’s proposal for larger cuts. In other words, if the Company is doing better than projected it will be easier for us to argue that fewer additional cuts are needed.

Paragraph 6. This provision details bankruptcy procedural matters, essentially stating that the Union will not try to claim that these cuts should be treated as “administrative claims” in the bankruptcy proceedings. While we do not believe that these concessions would qualify as administrative claims in any event, this language gives a measure of certainty to the cost savings we are negotiating. No one would expect to get the entire value of the concessions back through a claim in the bankruptcy process. Instead, our concessions will be treated like all other unsecured claims.

Paragraph 7. This paragraph protects our pensions by maintaining our current Contractual pay rates as “book rates” for purposes of calculating our pensions. Other benefits will be calculated based on the new, reduced actual wage rates (reduced 8.16% from the current rates) if this Interim Agreement is ratified. Without this provision our pensions would also be reduced by the effect of the 8.16% cut in wages.

Paragraph 8. This Interim Agreement will go into effect once it is signed by the Parties and once the conditions in paragraph 2., above, are met. There are several conditions that can render this Agreement null and void:

• failure to meet the conditions in paragraph 2
• a ruling from the Bankruptcy Court on the larger cuts the Company seeks from Flight Attendants under its §1113 [c] motion
• the Company and the Union reach a new agreement in the negotiations over the Company’s proposal for larger cuts
• or May 31, 2003 if the delay in a Court ruling on the Company’s §1113 [c] motion is not caused by the Company’s own delay in filing it’s motion later than March 15, 2003. [This last provision is meant to leave the smaller cuts contained in the Interim Agreement in place if the Court or the Company determines that the urgency of the larger cuts is diminished and can wait beyond May, 2003. Put another way, this provision encourages the Company not to seek the additional cuts any sooner than necessary.

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