American Airlines Group Inc. (AAL:US) flight attendants narrowly rejected a contract that would have made them the best paid in the U.S. industry, an early labor defeat less than a year after the merger with US Airways.

The proposed five-year accord now moves to arbitration, after being rejected yesterday by 16 votes out of more than 16,000 cast, according to a count by the Association of Professional Flight Attendants. About 78 percent of eligible attendants voted, the union said.

An approved contract would have boosted Chief Executive Officer Doug Parker’s efforts to integrate the two airlines after the deal completed in December. The agreement would have been the first at Fort Worth, Texas-based American to cover workers from both companies, helping the world’s largest carrier boost efficiency by standardizing pay and work rules.

“In the sense that any arbitration outcome will be less expensive in contract terms, it saves the company cash over time,” said Bob Mann, president of aviation consultant R.W. Mann & Co. “But labor-management relationship damage typically costs the company and brand in other ways,” Mann said, adding he was “as surprised as anybody” by the vote.

The rejection will cost each flight attendant almost $17,000 in pay and benefits over the five-year accord under arbitration terms set by a prior agreement with American, based on a union estimate.

Arbitration Sessions

The union declined to immediately comment on the rejection. APFA represents 24,000 workers at American and US Airways. The agreement was turned down 8,196 to 8,180.

Instead of resuming negotiations, the airline and union must take part in arbitration, where the value of annual contract improvements over existing agreements is capped at $111 million. That compares with $193 million in yearly increases under the rejected accord. Arbitration sessions begin Dec. 3, APFA said.

American said in an e-mailed statement it is “disappointed” with the vote.

“This tentative agreement included industry-leading pay and benefits, and would have provided considerably more economic value and much better work rules than the contract that will be determined by arbitration,” American said. Contract terms reached in arbitration “will be imposed without ratification -- meaning flight attendants won’t have any say in the process.”

American increased less than 1 percent to close at $43.20 on Nov. 7, giving the shares a 71 percent gain so far this year.

‘As Soon As We Can’

The company and union agreed to the arbitration terms in advance, in part to avoid prolonged operations with different contracts at each airline.

“I don’t think we consider it a defeat,” said Paul Flaningan, a spokesman for American. “That’s why we have an arbitration process -- to reach an agreement that’s fair and equitable to all as soon as we can.”

Pilots continue to hold contract talks with American, and negotiations haven’t begun with unions representing mechanics and airport ground workers and customer service and reservation agents.

The airline likely expected to have an approved flight attendant contract before presenting a full contract proposal to pilots this week, said Mann, a former American executive.

The unions backed US Airways’ successful takeover of American after that carrier filed for bankruptcy in November 2011.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net Bruce Rule, Cecile Daurat