Crucial UAW, Big 3 talks may go to overtime

NEW YORK (CNNMoney.com) -- The most important labor talks in the history of the U.S. auto industry face a Friday deadline, but those hoping for a deal to let automakers shed about $100 billion in health-care liabilities and become more competitive with Japanese rivals may have to wait, as talks are now expected to go into overtime.

The current pacts between the United Auto Workers union and General Motors (Charts, Fortune 500), Ford Motor (Charts, Fortune 500) and Chrysler Group all expire at 11:59 p.m. Friday. The companies and union aren't talking on the record, but sources confirm that negotiators talked through the weekend and continue to meet.

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But even though the key issues have been talked about between the two sides for far longer than the formal two months of negotiations, indications are that they have not progressed far enough to produce a new deal by Friday.

"At this point in time, there's no way of telling when we'll have a deal," said an official with one automaker, who spoke on a not-for-attribution basis. "They haven't dug into the steak yet; they're still on the salad. That said, it can move very fast."

Still the deadline is likely to pass relatively quietly, without any disruption at the companies' assembly lines.

"I don't think Friday, all things considered, is a particularly significant deadline this year," said Harley Shaiken, a professor at the University of California-Berkeley, who specializes in labor issues. "The atmosphere is constructive, and both sides want an agreement. Both sides understand the critical nature, both sides have a lot at stake. For the automakers, they need to make sure they get what they need to be competitive. For the union, this is a moment of maximum leverage, however grim the situation is."

The union does not want to do something that would damage the long-term viability of one of the Big Three automakers, who are all expected to post losses on their North American operations this year. And the rank and file union members don't have any problem working under the terms of the current contract, knowing that there could be sacrifices coming in the next deal.

Similarly automakers aren't about to shut their plants and cut-off much needed revenue in a soft market for autos, since most of the cost disadvantages they now face with non-union rivals, such as Toyota Motor (Charts), Honda Motor (Charts) and Nissan, come from promises they've made to cover future health-care costs for their retirees, rather than the basic wages paid to UAW members.

The auto industry official agreed that the automakers can accept a delay as long as they can get the agreement they need.

"Time isn't the most important thing. The most important thing is working together to close these competitive gaps," said the official. "If we don't make some fundamental changes, there may be one or more of these companies not here to get another kick at the can in the next round of talks in 2011."

David Cole, chairman of the Center for Automotive Research, said that both sides have an incentive to take their time to make sure the deal is one that can address the competitive problems that the U.S. automakers face.

"My guess is we're likely to see a few weeks delay because this is so precedent-setting," said Cole. "There's a 50 percent chance it could take more than a few weeks."

But Cole said the weak auto sales this summer will put pressure on both sides to reach a deal sooner rather than later if possible.

"The market [for cars] is deteriorating and that is definitely impacting this. The unions are trying to get the best deal they can, but the conditions are only getting worse and worse and worse."

The talks are widely expected to produce a radical new structure of how to pay for health-care coverage promised to the three companies' 419,621 retired hourly workers and their families, along with another 120,723 surviving spouses.

Estimates are that the automakers between them face close to $100 billion in unfunded liability from the promises made to cover the health-care costs for those more than half-million people, as well as 180,681 remaining active UAW members when they retire.

The automakers and unions are apparently discussing setting up union-controlled trust funds that would assume responsibility for retirees' health-care costs.

"It probably makes sense for the union side, if it helps put the automakers on firmer footing," said Bob Shulz, the chief credit analyst for the auto industry at Standard & Poor's.

The union might also be able to sell the idea of the funds to the rank-and-file by saying it's a protection of promised coverage in case one of the automakers goes out of business in the future.

The automakers are likely to put less than the current estimates of their future costs into the new union-controlled funds, but what percentage that discount will be - along with the question of the mix of cash, stock and debt that will be used - are two of the more complicated questions that will have to be hammered out at the negotiating table.

GM and Ford, which both have credit ratings deep into junk bond territory, would like to make at least some of their contribution in their own stock rather than borrowing to come up with the cash that would be needed. The union might be willing to accept some stock in the hopes that the labor deal and a recovery at the companies would raise the value of the stock and their holdings.

Goodyear Tire & Rubber (Charts, Fortune 500) used just cash rather than cash and stock to fund a much smaller union-controlled health- care fund that was agreed to by the United Steelworkers union in December that ended a strike at that company. If stock had been used, both the company and the union may have been better off since Goodyear could have kept more of its cash, while the union would have seen a greater value of its assets.

But in the case of the automakers, the value of all GM shares is only about $17 billion, or roughly a third of its unfunded liability, while Ford's market value is only $15.5 billion, less than the estimated $26 billion in liability it faces.

Chrysler, since it was sold by DaimlerChrysler (Charts) to private equity group Cerberus Capital Management, has no publicly traded stock to put into a fund.

So the automakers would likely have to turn to the battered capital markets to help raise the cash they need to put money into the trust funds.

S&P's Shulz said that such borrowing wouldn't necessarily hurt the companies' already hard-hit credit ratings, but the current turmoil in the credit markets is one more factor making a quick agreement difficult, especially since it is likely going to be well into 2008 before the automakers will need to come up with the cash, stock or debt needed for the funds.

"If you use Goodyear as an example, six to nine months is probably a reasonable estimate when they would have to fund something they agreed on today," said Shulz.