Thursday, May 25, 2006

Thursday, May 25, 2006
Delphi exec: Firm might force cuts

Restructuring chief says supplier could consider 'drastic' measures, but says there is no timetable.

David Shepardson / The Detroit News

NEW YORK -- The standoff between Delphi Corp. and its labor unions heated up Wednesday after a federal bankruptcy judge declined to postpone hearings on Delphi's request for permission to void labor agreements with its unions.

Following Judge Robert Drain's denial of a request by General Motors Corp. for a 60-day delay in the hearing to allow the sides to negotiate, Delphi's chief restructuring officer John Sheehan was pointedly asked by union lawyers whether the supplier planned to unilaterally cut the wages and benefits of its U.S. hourly work force.

Sheehan said Delphi preferred to negotiate an agreement with the unions representing its 33,000 U.S. hourly workers, but said its hand eventually may be forced.

"If we get to a point in time in the future where the company can find no solution where its liquidity is evaporating or is being used up, we'd have to consider drastic circumstances," Sheehan said. "There would be a point where we would seek to enforce (a new labor agreement)."

Such a move would almost certainly provoke a strike that could devastate Delphi and GM, its largest customer.

But Sheehan said the company has no plans to set a deadline to reach an agreement and wants to avoid imposing cuts because a strike would lead to a massive disruption of the auto industry and likely "destroy more value than it would create."

He said a strike would cause serious problems at GM for at least six months. Sheehan said Troy-based Delphi, the nation's largest auto parts maker, hopes to save $9.2 billion in labor costs by 2010 by cutting jobs and reducing pay and benefits for remaining workers.

At that point, the company expects to generate profit margins of 6 to 8 percent in the United States -- about the same as its foreign operations, where workers make far less.

Drain said he declined GM's request because Delphi wanted the hearing to go forward.

Delphi, Sheehan said, is expected to post an operating loss of $2 billion and a net loss of $2.5 billion for all of 2006.

Lawyers for five unions that represent most of Delphi's hourly employees suggested Delphi is overstating its finance problems to win more concessions from the court and the unions.

Under questioning by Tom Kennedy, a lawyer for the IUE-CWA union, Sheehan acknowledged that the company was seeking identical concessions from workers at profitable and unprofitable U.S. plants. Delphi also wants all workers to accept higher medical co-payments -- even if they work at some plants where they make as little as $8 an hour.

Union lawyers pointed out that Delphi told the Securities and Exchange Commission that its estimated post-retirement health care liabilities were about $800 million a year through 2010. But in some court filings, it estimated the liability at $1.16 billion a year.

Kennedy suggested that Delphi had already decided to file Chapter 11 bankruptcy and then created a business case to support the decision.

Kennedy asked if it was "just coincidental" that Delphi began work on its worst-case scenario soon after Robert S. "Steve" Miller joined the company as CEO on July 1, 2005.

Sheehan insisted that was a standard business practice and had nothing to do with Miller's arrival. Sheehan largely avoided answering most specific questions about the state of the company's finances.

He said Delphi has $3.6 billion in available cash, and has used $300 million of a $2 billion line of credit it obtained after seeking bankruptcy protection.

Delphi was spun off from GM in 1999 has seen its hourly work force drop from 63,000 then to about half that number today.

Without relief from federal regulators, Sheehan said Delphi will not be able to meet its pension obligations, but has resisted suggestions that it will transfer the obligation to the Pension Benefit Guaranty Corp., which partially covers pension payments for workers when companies default.

The lead attorney for the United Auto Workers, Bruce Simon, sharply questioned Sheehan why Delphi would rather "slash wages" than save at least $3.1 billion in pension obligations due by 2008 by defaulting.

"The workers would suffer no loss and you would save $3.1 billion," Simon said. "What do you accomplish (by not defaulting)?"

Sheehan said the company had considered the idea, but didn't believe it had met the legal requirements necessary to do so.

He said Delphi had no plans to freeze the pensions of its 600 top executives, as it has proposed doing for hourly and salaried workers next year.

Delphi has also sought approval to create a $300 million supplemental retirement fund for those top executives -- which could top, on average, $500,000 per executive if Delphi decides to exclude its 150 executives located abroad.

Delphi filed for bankruptcy in October after failing to secure wage and benefit concessions from the UAW, and to speed a restructuring as a result of mounting losses from production cuts at GM. It said it couldn't afford its $27-an-hour labor costs for most of its U.S. work force and complained it couldn't close unprofitable American plants. It has sought court approval to cancel its collective bargaining agreements and close all but one plant in Michigan.

You can reach David Shepardson at (202) 662-8735 or


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