Pressure Mounts on Other Airlines to Seek Pension Relief

Now that United Airlines and US Airways have been granted bankruptcy court approval to terminate their pension obligations, competitive pressure is mounting on other struggling carriers to seek relief. Industry officials and analysts said they don't expect other carriers to file for bankruptcy merely to shed the cost of underfunded pension plans. But they warned that airlines facing severe financial troubles may be more inclined to seek a Chapter 11 reorganization.

X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Now that United Airlines and US Airways have been granted bankruptcy court approval to terminate their pension obligations, competitive pressure is mounting on other struggling carriers to seek relief. Industry officials and analysts said they don’t expect other carriers to file for bankruptcy merely to shed the cost of underfunded pension plans. But they warned that airlines facing severe financial troubles may be more inclined to seek a Chapter 11 reorganization, given the precedent established by US Airways Group Inc. and United’s parent company, UAL Corp. “It could help tip the scales,” said Phillip Baggaley, Standard & Poor’s airline analyst. A bankruptcy judge on Tuesday authorized UAL to dump four pension plans and shift $6.6 billion in pension obligations to the Pension Benefit Guaranty Corp. The government agency previously agreed to pick up $3 billion in pension obligations from bankrupt US Airways. Several airlines that hope to avoid bankruptcy are already lobbying Congress for pension law changes that would allow them to freeze their current obligations outside of Chapter 11 while giving them more time to meet large — and growing — funding shortfalls. On Wednesday, flight attendants at American Airlines, a unit of AMR Corp., gathered in Washington to lobby for such reform. Even though passenger traffic is rising, the bulk of the industry is suffering in a big way due to soaring fuel prices, unprofitably cheap fares and fierce competition from low-cost carriers. Losses have exceeded $30 billion since 2001, and U.S. carriers are on pace to lose another $5 billion in 2005, analysts estimate. Delta Air Lines Inc. tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to S&P. The funding deficit is $3.8 billion at Northwest Airlines Corp., $2.7 billion at American Airlines and $1.6 billion at Continental Airlines Inc. By contrast, profitable low-cost airlines such as Southwest Airlines Co. and JetBlue Airways Corp. have defined contribution plans, such as 401(k)s, meaning they don’t have pension funding gaps. They also run operations that are vastly more efficient in terms of how employees and aircraft are deployed. “The Southwests and JetBlues are the industry benchmark,” said John Heimlich, chief economist at the Air Transport Association, a Washington-based industry group. By shedding its pension obligations, “United has found one way to get closer to that benchmark.” Heimlich said he expects nonbankrupt carriers to take a hybrid approach, lobbying Congress while working simultaneously with employee groups. Continental Airlines, for example, was able to reduce its pension burden during contract negotiations with pilots, who agreed in March to have their benefits frozen as part of a package of cuts totaling $213 million. No matter what tack airlines pursue, some constituents are bound to be unhappy. On one side are shareholders, who don’t want to see their stock become worthless in a Chapter 11 reorganization, and workers, whose monthly retirement checks would likely be cut in bankruptcy. On the other side are debtholders and management, who want to see the company survive, even if it requires a trip to bankruptcy court. For its part, Delta is being punished on all sides. Its borrowing costs are rising, and its shares are plummeting even after its workers agreed to wage and benefit cuts. Delta’s stock fell to a multidecade low of $2.73 on Wednesday, just one day after the company warned yet again of a possible bankruptcy fililng if its cash reserves fall too low or if lenders seek immediate payment of debts. There is nothing in the federal law that covers pension benefit plans, the Employee Retirement Income Security Act, that says a company must file for Chapter 11 in order to freeze a pension plan and hand over the obligations to the PBGC. But as a practical matter it isn’t likely to happen any other way, lawyers and benefits specialists said. William J. Rochelle, a bankruptcy lawyer with Fulbright and Jaworski in New York, said Congress needs to devise some way for airlines and other businesses, such as automakers and truckers, to lighten their pension burden outside of bankruptcy court, where workers’ retirement benefits are quite likely to be gutted at the hands of banks and other creditors. The current system isn’t fair to retirees, Rochelle said, in that they lose their pensions and any money they had invested in the company’s stock, which typically becomes worthless during the bankruptcy reorganization. Investors, on the other hand, often are able to snap up debt at pennies on the dollar and then profit if the company recovers and their debt is converted into equity in the new company. “Right now our system is creating a transfer of wealth from retirees to junk bond investors,” he said. But James F. Hendricks, a senior partner at the law firm Fisher & Phillips LLP in Chicago, said he expects airline executives to work very hard for some kind of compromise from Congress so that they can avoid handing over their fates to creditors, who might just seek liquidation. “I don’t think any airline wants to go into bankruptcy,” said Hendricks, who represents companies negotiating with labor groups. “The question is, will they be forced to?” Copyright 2005 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

Trending Stories

 

Featured Product

Global Briefing

A weekly, curated selection of our international content from around the globe, across the business of law, in-house, regulatory, technology and more, with expert insights from our senior editors.

Learn More

More from ALM

 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Privacy Policy

About Us / Contact Us / Site Map / Advertise With Us/ Customer Service / Terms of Service/ FAQ / Privacy Policy

Publications

Law Topics

Rankings

More

Law.com

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.