XJT Expressjet Holdings Inc.

HOUSTON (Dow Jones)-Pilots at Continental Airlines Inc. (CAL) and UAL Corp.'s (UAUA) United Airlines want to end outsourcing of flying to regional partners following their planned merger, a move likely to shake up the industry's already turbulent labor relations.

The companies' pilots aim to finalize a new joint contract by the end of the year, and this week proposed bringing all flying in-house over a period of years following a merger that would create the world's largest airline by revenue.

U.S. network airlines have outsourced large parts of their domestic networks to an array of regional airlines over the past 20 years in a bid to cut costs, though the amount is capped by "scope" clauses in their pilots' collective bargaining agreements.

Jay Pierce, head of Continental's pilots' union, expects the proposal to receive a cool reception from management, but said mainline company pilots can fly regional jets just as cheaply following years of contract concessions.

"We put it on the table [on Wednesday]," said Pierce in an interview at the union's Houston office. "It's a proposition we believe will not be readily acceptable [to management]."

Continental Airlines has one of the industry's most restrictive scope clauses. Only mainline pilots can fly jets with more than 50 seats, and the airline contracts ExpressJet Holdings Inc. (XJT) to fly more than 200 smaller Embraer aircraft on its behalf.

United has more flexible work practices that enable it to fly more than 150 70-seat regional jets. Rising fuel costs have made 50-seat jets less economic, while the emergence of new aircraft in the 70 to 130-seat range have made airlines look to loosen the restrictions of existing scope clauses.

The proposal from the Continental and United pilots includes an initial cap on outsourcing, then a move away from the practice over what Pierce described as "multiple years".

Continental declined comment.

Management throughout the industry has become stuck in a mindset where they feel they have to subcontract more flying, said Pierce.

U.S. network airlines have already carved out almost all of their regional flying units. AMR Corp. (AMR) is working on plans that could lead to a sale or spin-off of its American Eagle business, and Delta Air Lines Inc. (DAL) recently sold two of its three remaining regional operations.

Pierce said he is confident a new pilots' deal can be hammered out with Continental and United by year-end, in line with the airlines' merger schedule, though a decision will be taken Oct. 12 whether enough progress has been made to continue the current fast pace of negotiations.

The airlines and the pilots have learned lessons from previous mergers, especially the combination of America West to form an enlarged US Airways Group Inc. (LCC), where labor issues remain unresolved after five years. Pilots at Delta and Northwest Airlines forged a joint deal before the two carriers merged in 2008.

"Being third is good," said Pierce. He said one of the thorniest issues - merging the airlines' pilot seniority lists - won't be tackled until a new contract is agreed.

Other areas include furloughs. United has more than 1,400 pilots on furlough while Continental has 147, all of whom Pierce expects to be called back by year-end. The transition deal calls for furloughed United pilots to be called back to whichever airline requires them before any fresh hiring.

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