American Airlines on Monday kicked off a week-long court hearing on its bid to abandon union contracts, telling a judge that its bankrupt parent, AMR Corp, cannot survive without major concessions from its labor force.

Hundreds of lawyers, airline workers and others filled the courtroom and two overflow rooms in U.S. Bankruptcy Court in Manhattan for the start of the hearing, as other unionized workers rallied outside the courthouse.

Cordoned off by police, the workers held signs and chanted for fairer work terms and against AMR's plan to cut about 13,000 union jobs.

The hearing is AMR's chance to convince Judge Sean Lane not only that the company desperately needs labor concessions, but that its unions have unreasonably rejected prior attempts to negotiate those concessions. AMR filed for Chapter 11 in November, citing uncompetitive labor costs.

In opening statements, AMR lawyer Jack Gallagher said the company needs 20 percent across-the-board reductions in employee costs, half of which must come from medical benefits.

AMR spends three times as much annually on medical benefits as the average lower-cost carrier, like Southwest Airlines, he said.

It's not the unions' fault we're in bankruptcy, but it's not about whose fault it is, Gallagher said. It's about the facts of our business.

Edgar James, a lawyer for the Allied Pilots' Association, which represents about 10,000 AMR pilots, said AMR's proposed business plan is unfair, in part because AMR has not done enough to explore possible merger or consolidation options.

What everyone believes is going to occur is they're going to get out of this bankruptcy and consolidate with someone, yet the company has told the pilots' group it has not considered that option, James said.

In an unusual step in bankruptcy, the pilots' union and two other major AMR unions on Friday said they had struck a deal with US Airways Group Inc to support a potential merger between US Air and AMR. They said the deal could save more than 6,000 jobs and are pushing AMR to consider it.

US Airways Chief Executive Doug Parker cautioned his employees in a letter on Friday that the union deal does not mean a merger is in the works. He noted that a deal would need support from the AMR creditors, management team and its board of directors.

AMR has long shunned merger interest from US Airways.

Some of AMR's expert witnesses were expected to testify on Monday afternoon, along with the company's chief restructuring officer, Bev Goulet.

After the hearing wraps up, the company and its unions have another two weeks to negotiate. If new terms are still not reached, the unions will have a chance to present their case in court in May.

Regardless of how Lane rules, AMR must keep negotiating for a consensual deal with its unions. A ruling by Lane granting AMR's request to break its contracts would allow AMR to impose its own unilateral labor terms while those negotiations go on.

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

(Reporting By Nick Brown; editing by Carol Bishopric)