UPDATE 2-Merger, union talks to help AMR cut costs-AMR CEO

* AMR CEO: UAL/Continental labor costs will rise

* AMR CEO: labor a $600 mln drag on costs

* AMR shares down 1.4 percent
(New throughout; adds quotes, shares, background, details on
meeting, byline)

By Deepa Seetharaman

NEW YORK, May 19 (BestGrowthStock) – A merger between two rivals
and a spurt of union negotiations next year should allow AMR
Corp’s (AMR.N: ) American Airlines to narrow the gap in labor
costs between the airline and its peers, AMR’s chief executive
said on Wednesday.

The merger between UAL Corp’s (UAUA.O: ) United Airlines and
Continental Airlines (CAL.N: ), if approved, would surpass
American in size, but CEO Gerard Arpey said the industry could
benefit from less competition and potential capacity cuts.

“A combined United/Continental would mean one fewer choice
in the marketplace, and may result in a better balance between
industry supply and demand, potentially resulting in a more
rational competitive environment,” Arpey said during the
company’s annual shareholder meeting in New York.

Arpey added that in the process of merging, the labor costs
of the combined company would rise and “move toward ours.”

United parent UAL said this month it would buy Continental
to form the world’s largest airline.

Another factor that can help cut the industry’s costs is
the fact that most industry labor contracts are amendable by
the end of 2011, Arpey said.

These negotiations will create “more opportunity for cost
convergence,” he said.

“In an industry where price, and therefore cost, is king,
it is challenging to compete when there is a wide gap between
the pay and benefits you provide your people versus your
competitors,” Arpey told shareholders.

AMR has long maintained that its labor costs were above
industry average partly because it restructured outside of
bankruptcy while some rivals used Chapter 11 protection to
slash costs in recent years.

The airline said it has a labor cost disadvantage of $600
million, compared with other major airlines.

“I think American has lower absolute wage rates but not so
attractive productivity. The others might have higher wage
rates but better productivity,” Jesup & Lamont analyst Helane
Becker said.

Earlier on Wednesday, AMR said in a regulatory filing that
focusing its network on New York, Los Angeles, Chicago,
Dallas-Fort Worth, and Miami would deliver revenue and cost
savings.

That strategy and proposed links with foreign partners would
result in incremental revenues and cost savings of more than
$500 million per year, it said. AMR expects to see the majority
of those improvements in 2011.

AMR, which usually holds its annual meeting near its
headquarters in Texas, said it staged the meeting in New York
to emphasize the importance of New York to American Airlines.

AMR shares were down 1.4 percent at $6.99 on the New York
Stock Exchange, alongside the Arca airline index (.XAL: ), which
was down 0.44 percent.

Shares of Southwest Airlines (LUV.N: ), which also had its
annual meeting on Wednesday, were down 2.8 percent.
[ID:nN19238681]

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(Reporting by Deepa Seetharaman and Kyle Peterson, editing
by Gerald E. McCormick, Robert MacMillan and Bernard Orr)

UPDATE 2-Merger, union talks to help AMR cut costs-AMR CEO