U.S. Bankruptcy Judge Sean Lane in Manhattan, who oversees the Chapter 11 proceedings of American Airlines' parent AMR Corp (AAMRQ.PK), had objected to what he called the carrier's proposed "unfettered discretion" under its earlier proposal to temporarily lay off pilots and engage in code-sharing.

AMR said its revised plan addresses these concerns by retaining current contractual limits on furloughs and setting restrictions on the ability of the third-largest U.S. airline to enter code-sharing relationships.

"We believe both of those changes properly address the court's concern," and will help AMR "keep moving forward to achieve the savings and flexibility needed for our successful restructuring," AMR spokesman Bruce Hicks said in a statement.

Tom Hoban, a union spokesman, said he hopes AMR will return to the bargaining table before Lane has a chance to rule.

"The company is a little tone-deaf in taking into account the 8,000 pilots' state of mind," he said in an interview. "It is embarking on a scorched-earth policy, when the goal should be a consensual agreement that recognizes the sacrifices the pilots have made and reflects the competitive landscape. To rush this process doesn't behoove either party."

A hearing on the revised plan is scheduled for September 4.

Lane's decision on Wednesday was unexpected and set back Fort Worth, Texas-based AMR in its effort to save more than $1 billion a year in labor costs, including $315 million from the pilots union.

The new code-sharing proposal would let AMR enter new relationships with other U.S. carriers and their regional partners, subject to limits based on seating and miles traveled.

It also would allow restricted code-sharing relationships with Alaska Air Group Inc's (ALK.N) Alaska Airlines and Hawaiian Holdings Inc's (HA.O) Hawaiian Airlines.

"American has taken heed of the court's decision as to the deficiencies of its previously open-ended domestic code-sharing proposal and has made a revised proposal that imposes real limits," Todd Duffield, a lawyer for AMR, said in a filing.

AMR's creditors committee has supported the carrier's bid to abandon union contracts, and has said it would not be difficult for the carrier to address the judge's concerns.

Lane on Wednesday also said "significant" concessions from the pilots were needed before AMR could emerge from Chapter 11, though he rejected an argument by unions that AMR must consider a merger with smaller rival US Airways Group Inc (LCC.N).

The pilots' union last week overwhelmingly rejected AMR's best and final contract offer.

AMR's flight attendants union is scheduled on Sunday to finish voting on their own final contract offer from management.

The carrier has already reached consensual labor terms with the Transport Workers Union, which represents ground workers.

The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.

(Reporting by Jonathan Stempel in New York; additional reporting by Karen Jacobs in Atlanta; editing by Matthew Lewis and Jim Marshall)

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