Threat of strike at GM appears to ease

(CNN) -- The United Auto Workers union and General Motors failed to reach a new labor contract despite marathon negotiating sessions over the weekend, but both sides did agree to take a break early Monday, according to GM spokeswoman Katie McBride.

All workers will remain on the job as talks are set to resume later Monday morning, McBride said.

GM's contract with the UAW expired after midnight Friday, but the union told its nearly 75,000 GM workers to continue working while negotiations were under way.

If union members were to walk, it could cripple the efforts of the nation's No. 1 to turn around troubled North American operations that have been losing money for nearly three years. Negotiations are aimed at reaching a new contract seen as crucial to the company's efforts to stem losses and improve its competitiveness with nonunion rivals from Asia and Europe. But analysts said that the automaker could probably weather a short strike.

It could also lead to a change in who has responsibility for health-coverage for retired workers, whose medical bills are now being paid by their former employers. The automakers would like to shift $100 billion of those costs to a union-controlled trust fund they would fund.

Despite the challenges of crafting such a radical change, most industry experts expect a deal to be reached without a strike.

Late Thursday afternoon, the United Auto Workers said it tapped GM (Charts, Fortune 500) as its negotiating target, a position that gives the nation's No. 1 automaker a strategic advantage over its rivals but also raised the risk it could be hit with a strike.

After that decision to focus on GM, the union's talks with Ford Motor and Chrysler Group took a back seat to the GM talks, even though those companies' contracts also had been due to expire Friday night. The union and those two automakers agreed to an indefinite extension.

GM has 73,454 UAW members still on the job after buyouts over the last two years that cut more than 30,000 jobs and closed several GM plants.

Ford (Charts, Fortune 500) has 58,300 UAW members after its own round of buyouts, and Chrysler has about 49,000, although it is starting plans to cut union jobs there as well. Chrysler was sold last month by German automaker DaimlerChrysler to private equity group Cerberus Capital Management.

But the key to these talks isn't the active employees as much as it is the 419,621 retired union members, along with an additional 120,723 surviving spouses who have been promised health-care benefits by the U.S. automakers.

The estimated costs for the companies exceed money they have set aside to make those payments by nearly $100 billion, according to an estimate from rating agency Standard & Poor's.

The companies have proposed putting a combination of cash, stock and debt into trust funds to cover the costs, although the funds would likely start out with a discount to the estimated $100 billion liability.

Goodyear Tire & Rubber Co. (Charts, Fortune 500) reached an agreement last December with the United Steelworkers union on such a union-controlled trust fund for retiree health care. That deal ended a nearly three-month strike, but it was much smaller than would be needed at any of the automakers. Payments by Goodyear of $1 billion in cash should take care of an estimated $1.2 billion in liabilities.

The liability for retirees' health care is weighing down the U.S. automakers with costs not borne by nonunion rivals, such as Toyota Motor (Charts) and Honda Motor (Charts), making it difficult for them to make the profit necessary to invest in the next generation of cars and trucks.

If the GM workers go on strike, it would be the nation's largest strike since 87,000 workers at Verizon (Charts, Fortune 500) walked off the job in August 2000, but that action did not shut down the company.

GM was last hit by a strike at its Flint, Mich., locals in 1998, a work stoppage by only 9,200 workers that was felt across most of GM's North American operations since they couldn't get the parts they needed to keep making cars and trucks.

The last strike by more than 70,000 workers that shut down a company's operations was the 1997 strike by 185,000 Teamsters at United Parcel Service.