As it struggle to emerge from bankruptcy, United Airlines has brought to centre stage the most burdensome legacy affecting the major US airlines: their pensions liabilities.
United has told the bankruptcy court that has overseen its reorganisation since December 2002 that it will probably terminate four major employee pension plans, to which it owes over $4 billion, in the next four years.
The plans are now about $8 billion short of the value of the pensions that its employees have already earned. They would be replaced with far less generous retirement schemes if the bankruptcy judge agrees. United's argument is straightforward: the only way it can win enough private funding to finance its exit from reorganisation is to cut pension payments. Without the $500 million in private financing it will remain stuck in bankruptcy because the federal government has already denied it loan guarantees to fund an exit. United believes that financiers are turned off by its roughly $13 billion of pension debt, the largest block of debt it has yet to reschedule.
The conflict may also guide the way other legacy carriers deal with the pensions issue. Long sacrosanct for all but dissolving firms, pensions have become one of the new controllables. They are one of the few remaining places where carriers can make meaningful cuts in costs without gutting their networks.
JP Morgan bonds analyst Mark Streeter says that, based on what United does, "we expect other legacy majors, notably American, Northwest and Continental, to pursue pension plan restructuring". Jamie Baker, JP Morgan's airline analyst, says such a trend "likely won't be pretty because bankruptcy rhetoric and labour restructuring typically go hand-in-hand".
After United's threat the rhetoric was strong, with vehement union objections. They were not alone. The USA's pension watchdogs - the Labor Department and the Pension Benefit Guaranty Corporation - have questioned the move. Labour secretary Elaine Chao forced United to accept an independent fiduciary to investigate and possibly litigate, while pension corporation officials urged the judge not to allow what they called an "invitation to rewrite" basic bankruptcy law. The bankruptcy judge has given United, the unions and the agencies until early October to resolve the issue and warned that without an agreement he would open the reorganisation to allow outside offers for United or even bids to liquidate the company.
But beyond United, the possibility of pensions restructuring has already changed the dynamics of Delta's attempts to restructure without bankruptcy. Roughly 2,000 of Delta's 6,900 pilots are eligible to retire; they can take half their calculated benefits as a lump sum at retirement. To avoid a possible retirement plan rewrite, up to 300 pilots are retiring a month, crimping the workforce and threatening the flow of payments into the pension funds.
US Airways, which has already sought to delay and spread out pension payments, is watching closely as it tries to avoid a second bankruptcy. This spring, the pension corporation assumed control of the airline's pilot pension plan. It was underfunded by $2.5 billion.
A termination by United "would send a terrible signal to employers in others industries", says American Benefits Council president James Klein. Should United dump its plans, it would be the country's largest pension default, topping Bethlehem Steel's $3.6 billion in underfunding in 2002.
Meanwhile, Congress has warned that an airline industry pensions failure could lead to a taxpayer-financed bailout to rival the $150 billion-plus savings-and-loan bailout. That would be "an absolute outrage", according to Republican John Boehner, chairman of the House workforce committee. An industry-wide pension restructuring could cost $110 billion - which Boehner notes is not now in the budgets of either the labour or the pension agency.
DAVID FIELD WASHINGTON
Source: Airline Business
