Momentum has returned to the campaign to address one of the most burdensome legacies for the US major carriers, their long-standing pensions commitments.
The issue is back in the headlines after US Airways abandoned retirement plans and United Airlines said it would seek bankruptcy court approval to drop its pension schemes. Accompanied by widespread publicity, both terminations prompted enormous public attention just as the possible reform of Social Security, the government-backed old-age scheme, has gained a place on the public docket with President George Bush's promise to tackle the issue.
The scope of the airline dilemma is enormous: by the end of 2003, the six largest legacy carriers had pension pots that were underfunded by $20 billion, a vast deterioration from the $632 million in overfunding tallied in 1999.
As United moved towards ending its pension plan, other forces emerged to press the issue. In late November the administrator of United's plan sued to block the move and to give pension funds greater priority in bankruptcy, where they now simply have to get in line and wait with other creditors. It wants to force United to fund between $261 million and $994 million in missing pension payments.
Simultaneously, the nation's pension insurer found itself facing a record deficit and the prospect of a taxpayer bailout. The Pension Benefit Guaranty Corp (PBGC), which insures pension plans for about 44 million current and retired workers, announced that its deficit had grown to $23.3 billion during 2004. Meanwhile, industry concern grew that if United gets final bankruptcy court approval to free itself from the $6-8 billion burden of its pension plans, it might force other carriers to match its move.
Bradley Belt, the PBGC executive director, told Congress that such a domino effect in the industry would put the government on the hook for an estimated $31 billion. That would require a bailout by taxpayers or by healthy companies. The prospect of this kind of backdoor "bailout" of the industry raised hackles in a Congress sceptical of any moves that benefit airlines.
Now, a joint proposal from PBGC former executive director Steven Kandarian, Northwest president Doug Steenland and Air Line Pilots Association (ALPA) national president Duane Woerth has raised hopes that Congress will take up the issue in 2005. The proposal advocates major steps which would stretch out the time over which the unfunded liability of a frozen pension plan could be amortised, while the PBGC's liability would decrease over time. This lessens some of the temptation of seeking bankruptcy protection in order to discard pension burdens.
ALPA's Woerth told congress: "Given the sufficient breathing room made possible by longer amortisation of the defined benefit plan liabilities, airlines and employees can craft creative solutions that may provide secure alternatives to pure defined benefit plans. Each airline and employee group must create an individual solution to their individual pension challenge."
Another change that the reformers advocate is relief from the deficit-reduction contribution rules that force airlines to make "catch-up" payments. This will let them fund the plans over time. Such "top-off" payments - and accompanying union demands that they be made - have been a major burden to carriers such as Delta Air Lines that are on the edge of bankruptcy but struggling to avoid it. ALPA's Woerth says this change will "go a long way toward removing the pension-plan termination incentive to enter bankruptcy, and will, as a result, help prevent further bankruptcies in the US airline industry".
Fitch Ratings analyst Bill Warlick, an expert on pensions, believes the proposal, coming from both labour and management, may help get the issue into Congress. "There are details to be worked out, but I think we will see some progress this year," he says.
DAVID FIELD WASHINGTON
Source: Airline Business
