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A day late and a dollar short. That’s the conundrum Congress finds itself in as it rushes to complete pension reform before bankrupt carriers Delta Air Lines Inc. and Northwest Airlines Corp. offload a combined $11.2 billion in liabilities on the already deficit-ridden Pension Benefit Guaranty Corp. A compromise bill introduced in the Senate on Wednesday would give the airlines 14 years to make up their pension shortfall, but many experts think both Delta and Northwest will go the route of their bankrupt rival UAL Corp., which dumped $6.6 billion in retirement liabilities on the PBGC. “It is very possible that Congress will pass airline-specific relief and they will still unload their pension obligations,” said Greg Kelly, a Washington analyst for Susquehanna Financial Group LLLP, a Bala Cynwyd, Pa.-based research firm. A new pension law “may be sufficient to buy time for Northwest,” noted Henry Morgenbesser, an employee benefits lawyer at Allen & Overy in New York. “But the general view is Delta can’t dig itself out of the hole.” According to the PBGC’s preliminary estimates of the pension funding status of the companies’ plans, Delta is underfunded by $10.6 billion, while Northwest’s liability is about half as much, at $5.7 billion. Of these amounts, the PBGC would be responsible for $8.4 billion for Delta and $2.8 billion for Northwest. The $11.2 billion liability on top of the PBGC’s $23 billion deficit could push the agency’s deficit in the $35 billion to $50 billion range when the terminations of other companies are included, Kelly said. Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., of the Senate Finance Committee, along with Sens. Mike Enzi, R-Wyo., and Edward Kennedy, D-Mass., of the Senate Health, Education, Labor and Pensions Committee introduced their consensus pension bill, the Pension Security and Transparency Act, on Wednesday. The bill includes a provision that would allow airlines 14 years to bring their pension plans to complete solvency. There is no such airline-specific relief in pension legislation Rep. John Boehner, R-Ohio, proposed in the House. The initial impetus for the pension reform was to prevent any other bankrupt airlines from doing what UAL, the parent of United Airlines Inc., did. UAL’s claim is now the PBGC’s biggest ever, though one by Delta could eclipse it. Delta and Northwest’s rush to the bankruptcy court on Sept. 14 — brought on by high fuel costs exacerbated by Hurricane Katrina and the specter of new and stricter bankruptcy rules that go into effect this month — caught Congress flat-footed. And even with Congress’ new sense of urgency, Kelly speculates there is a 70 percent likelihood pension reform can be enacted by the first quarter of 2006. Does that allow enough time before Delta or Northwest have to seriously consider what to do with its pension obligations in their bankruptcy case? Probably not. “If you take ethics, morals and whatever else out of the equation, the airlines can still argue that there’s a lot of money to be saved by getting rid of their pension plans, whether funded by current law or a new law,” according to Ronald E. Richman, an employee benefits lawyer at Schulte Roth & Zabel in New York. Tactically, the carriers can score some public relations points if they don’t rush to terminate their plans, pundits noted. For example, while the airlines’ reorganizations will undoubtedly be pegged to trimming down their capital structure, including their pension liabilities, they “will have a stronger case in front of the bankruptcy court if they can say they have at least looked at the changes” to the law, said Hugh McDonald, a bankruptcy lawyer at Allen & Overy. “There’s a tension between shedding liabilities and dealing with the PBGC,” he said. Susquehanna’s Kelly agrees. “While we view the eventual termination of Northwest and Delta pension plans as likely, if these two carriers succeed in getting pension relief from Congress, then they would have another option in bankruptcy court,” he said. Then there’s the matter of the rest of the legislation if the airlines are taken out of the equation. Passing it could still go a long way in helping the PBGC. For instance, the House and Senate bill would increase premiums that companies pay the PBGC to $30 per employee from $19. “It’ll salvage the rest of the companies,” said Morgenbesser. “It’ll create a healthier pension environment, and that’s good for the PBGC.” Copyright �2005 TDD, LLC. All rights reserved.

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