Pensions Are Already Underfunded by $14.1 billion
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WorldTraveler
Corn Field
- Dec 5, 2003
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Not only was Mr. Trainer wrong in that the decline in industry stocks due to the TATL capacity cuts which DL announced and which the market perceived as weakness which would affect earnings going forward, since DL stock recovered all it lost due to that announcement, but the stock has gained 6% since his article was released - since, as he notes, airline stocks almost always rise when oil prices fall, as they have done rather dramatically over the past several weeks.
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Specific to the underfunding issue, yes, DL's assumptions are aggressive, but they also recognize their pension obligations and are choosing not to buy new aircraft in order to ensure they can continue to meet their employee obligations. After AMR leaves BK with likely changes to its pension plans, DL will likely end up with the most employees and retirees for whom DL holds responsbility for their pension. Even if AMR retains some of its plans, expected, DL will not be the only airline with massive pension obligations remaining on the books. Given that there are some who argued for years about how noble AMR was for not terminating its pension plans earlier, "noble" may now be defined by how many retirees and employees each of the legacy airlines retains under its self-funded pension plans. At the very least, I'm sure there are alot of DL employees who can appreciate that their company recognizes that not spending on aircraft is a necessary step if the company is to continue to honor its commitments to its employees.
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As for the specific amount of underfunding, DL's CEO has been frequently quoted as saying in the pilot negotiations as saying $2B+ plus annual earnings are possible in the next few years as a result of DL's strategic initiatives including the NYC expansion, the refinery purchase, and the refleeting of small aircraft.
Based on DL's current earnings compared to its peers and the value of the initiatives it has already put in place and DL should have no problem in funding the pensions, even if the rate was dropped down to 7.5%.
The pilots believe that part of the incentive to do a deal now is based on DL's desire to participate in further consolidation in the industry - which could further add to DL's revenue momentum.
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Specific to the underfunding issue, yes, DL's assumptions are aggressive, but they also recognize their pension obligations and are choosing not to buy new aircraft in order to ensure they can continue to meet their employee obligations. After AMR leaves BK with likely changes to its pension plans, DL will likely end up with the most employees and retirees for whom DL holds responsbility for their pension. Even if AMR retains some of its plans, expected, DL will not be the only airline with massive pension obligations remaining on the books. Given that there are some who argued for years about how noble AMR was for not terminating its pension plans earlier, "noble" may now be defined by how many retirees and employees each of the legacy airlines retains under its self-funded pension plans. At the very least, I'm sure there are alot of DL employees who can appreciate that their company recognizes that not spending on aircraft is a necessary step if the company is to continue to honor its commitments to its employees.
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As for the specific amount of underfunding, DL's CEO has been frequently quoted as saying in the pilot negotiations as saying $2B+ plus annual earnings are possible in the next few years as a result of DL's strategic initiatives including the NYC expansion, the refinery purchase, and the refleeting of small aircraft.
Based on DL's current earnings compared to its peers and the value of the initiatives it has already put in place and DL should have no problem in funding the pensions, even if the rate was dropped down to 7.5%.
The pilots believe that part of the incentive to do a deal now is based on DL's desire to participate in further consolidation in the industry - which could further add to DL's revenue momentum.
I agree; I'm too lazy to look up AA's assumptions on rates of return, but I'll bet it's lower than 8.9%. I think the 8.9% is very aggressive and will not be achievable.
You can buy fuel-efficient new aircraft or you can buy old used planes plus lots of fuel+maintenance. As has been pointed out to Bob Owens dozens of times, the new aircraft at AA will pay for themselves in fuel and maintenance savings unless fuel prices collapse for the long-term. Although fuel prices have softened in recent weeks, my guess is that they continue to rise long-term. Except for those 100 new 739s (pointed out by 700UW), Delta is attempting "NW DC-9 2.0" with its cornering of the market on used MD-90s and 717s. The DC-9 refurbishment strategy worked brilliantly for cash-strapped NW in the 1990s as fuel prices stayed reasonable for about a decade, enabling NW to save money by not buying fuel-efficient aircraft. Whether the NW DC-9 2.0 strategy will again be a winner for the next ten years remains to be seen. If jet fuel hits $4/gal or $5/gal, I'll bet Anderson will screaming for the heads of the execs who advised him that old fuel-guzzlers were the way to go.
As to AA freezing instead of terminating its plans - I've already posted that I consider that to be the biggest blunder of AA management since November 29. UA and US shed those obligations completely. CO's frozen plans are tiny obligations compared to DL's or AA's. AA and DL will have the heavy backpacks going forward, full of frozen pension bricks that could have (and should have) been emptied at the last rest stop (their respective Ch 11 proceedings). In my view, backing down to Josh Gotbaum's empty threats was a huge mistake.
eolesen
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- Jul 23, 2003
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Who mentioned AA?... Why did AA even enter the argument?.... Deflection?
Earlier this year, CALSTRS (second largest public pension plan in the US) reduced their assumed rate of return to 7.5% from 7.75%.
Apparently AA doesn't post its ERISA disclosures anywhere except perhaps Jetnet. Maybe an active employee could find it. Non-actives vested in the pension apparently don't have access to it.
Earlier this year, CALSTRS (second largest public pension plan in the US) reduced their assumed rate of return to 7.5% from 7.75%.
Apparently AA doesn't post its ERISA disclosures anywhere except perhaps Jetnet. Maybe an active employee could find it. Non-actives vested in the pension apparently don't have access to it.
I found the AA assumptions in the 10-K. Going forward, AA is assuming 8.25% (was 8.5%):
AA's actual experience of 8.58% over the past ten years is pretty impressive and supports its 8.25% assumption. The Seeking Alpha article points out DL's rather low rate of return over the past few years.
WorldTraveler
Corn Field
- Dec 5, 2003
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AA is in BK and hasn't provided any funding into its in 6 months. Doesn't really matter what their previous rates of return were in the roaring 90s. The market is generating far lower returns.
No one can rightly believe that AA's pensions are better off than any other airlines. They too are massively underfunded and that level of underfunding will continue to grow until AMR exits BK, esp. since AMR pensions are NOT terminated at this point.
DL is a also about 1/3rd larger than AMR based on revenue right now.
A wouldn't expect a couple of people who touted the morality superiority of AA for maintaining their pension plans to admit that AMR is all of a sudden no better off than anyone else, esp. as their level of pension underfunding grows faster than the size of the company... those realities are very much necessarily given the context of the conversation and the previous comments that have been made about pensions by both of you.
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The difference is that DL KNOWS their pensions are underfunded and they have alot of debt. Their solution, like any responsible debtor, is to reduce their spending, pay off debt, and ensure they can live up to the promises they made not only to their employees in BK but also to the creditors by not terminating the pension plans in BK.
DL is generating $3B in free cash flow and spending about half of that on capital spending and 1/2 on debt payments - which is why they have knocked their level of debt down significantly since the merger. DL is managing to refleet by buying used airplanes that cost 1/4 or less of comparable new models; sure they are not the shiniest models in town but they have comparable fuel efficiency and they don't break the bank to acquire them.
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AMR might emerged w/o supporting its pension plans, but the mere structure of some of them make it highly unlikely that they will all emerge frozen or active.
When you add in that AA's current business plan is based on spending over $3B per year for a half dozen years or more as part of its refleeting efforts, then the level of pension underfunding will be inconsequential in light of the heaviest debt load that any US airline has ever carried.
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Even by the difference in the rate of return used by DL and what AA is assuming now, DL is generating cash far in excess of what would be necessary to cover the difference.
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When DL can no longer generate cash at rates far in excess of what other carriers in the industry are doing NOW or they go on a spending spree, then their pension underfunding is a problem.
When AA decides that they no longer will spend $20B or more on refleeting, then AMR's current level of pension underfunding relative to DL will be something to crow about.
No one can rightly believe that AA's pensions are better off than any other airlines. They too are massively underfunded and that level of underfunding will continue to grow until AMR exits BK, esp. since AMR pensions are NOT terminated at this point.
DL is a also about 1/3rd larger than AMR based on revenue right now.
A wouldn't expect a couple of people who touted the morality superiority of AA for maintaining their pension plans to admit that AMR is all of a sudden no better off than anyone else, esp. as their level of pension underfunding grows faster than the size of the company... those realities are very much necessarily given the context of the conversation and the previous comments that have been made about pensions by both of you.
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The difference is that DL KNOWS their pensions are underfunded and they have alot of debt. Their solution, like any responsible debtor, is to reduce their spending, pay off debt, and ensure they can live up to the promises they made not only to their employees in BK but also to the creditors by not terminating the pension plans in BK.
DL is generating $3B in free cash flow and spending about half of that on capital spending and 1/2 on debt payments - which is why they have knocked their level of debt down significantly since the merger. DL is managing to refleet by buying used airplanes that cost 1/4 or less of comparable new models; sure they are not the shiniest models in town but they have comparable fuel efficiency and they don't break the bank to acquire them.
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AMR might emerged w/o supporting its pension plans, but the mere structure of some of them make it highly unlikely that they will all emerge frozen or active.
When you add in that AA's current business plan is based on spending over $3B per year for a half dozen years or more as part of its refleeting efforts, then the level of pension underfunding will be inconsequential in light of the heaviest debt load that any US airline has ever carried.
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Even by the difference in the rate of return used by DL and what AA is assuming now, DL is generating cash far in excess of what would be necessary to cover the difference.
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When DL can no longer generate cash at rates far in excess of what other carriers in the industry are doing NOW or they go on a spending spree, then their pension underfunding is a problem.
When AA decides that they no longer will spend $20B or more on refleeting, then AMR's current level of pension underfunding relative to DL will be something to crow about.
WorldTraveler
Corn Field
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BTW. S&P, the debt rating agency said recently that Delta has one of the better competitive positions among the U.S. airlines, and its operating profitability is currently good, though subject to risks from volatile fuel prices and U.S. and global economic conditions and believes DAL's debt rating could be upgraded.
signals
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BoeingBoy
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- Nov 9, 2003
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Since I may be one of that "couple of people", I stand by that. But I also said that you could call me old fashioned. My parents, who lived and were raising children during the depression, taught me that a man's word was his bond & not to make promises that you don't think you can keep. In recent history, however, that has been turned on it's head - deals are worded to allow wiggle room and broken with a good lawyer, promises are not worth the hot air needed to say them, and bankruptcy is just another tool of business, no different than any other like fuel and interest hedging or trying to get the best deal from vendors.
Jim
WorldTraveler
Corn Field
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Jim,
I never said that I disagreed with the premise that companies should keep their commitments – nor have I ever defended the BK process as something that companies should do.
What I have said for years is that AA runs an airline, not pensions, and if they didn’t turn the airline around, they would be forced to do what every other US network airline has done – file for BK and restructure their costs. AA is now in that position and appears to be poised to gain the necessary cost cuts, even if the vast majority will come via employees and by getting rid of its older fleet by buying/leasing new aircraft. And the second part of that is precisely why a lot of people are concerned that AA WON’T be able to keep its word to retain the pensions – even in a frozen condition – because it will have debt levels that will far exceed that of any other airline today or in the past.
UA and US filed BK during the period when it was –ok- to dump your pensions on the PBGC. By the time DL and NW filed, the PBGC and Congress were a lot more on the ball and DL and NW obtained permission to freeze their pensions and then take the time payment plan in a process that still lives the burden on DL. The government and the other creditors were saved from the possibility of taking on DL/NW pensions (except the DL pilots because of their lump sum payout). Now that AMR is in BK, it is a given that there will be changes to its pension plans –and no US network airline will have ongoing active pensions except for the remnant of PMCO within UA – and who knows how long that will last. What does matter, then, is whether AA and DL who will have the industry’s frozen pension plans will create business plans that can support the remaining debt levels that are required to keep those pension plans.
DL hasn’t said it isn’t buying ANY new airplanes… they just happen to be acquiring more USED than NEW narrowbodies as part of their refleeting plan which will replace/grow the mainline domestic fleet to the tune of about 225 a/c – about what UA is rumored to be considering as part of its new narrowbody order – but half of what AA says it will purchase. Thus, of the 3, DL is taking the lowest acquisition cost plan to refleet and in the process saving at least $5B compared to if it bought new aircraft and as much as $15B relative to AA’s plan. The stronger balance sheet that DL will have for its efforts will go a long ways to funding those frozen pensions. In a recent earnings call (I think it was the 4Q2011 call), Anderson said that once DL pays down its debt to levels it desires, it may start using its cash to improve its pension funding. Adding an extra $500M per year (one-third of what they are using to pay down debt) would go a long ways to reduce DL's pension obligations since they are currently paying $600-700M per year on their frozen pensions - in addition to their active DC plans.
When it comes down to asking whether AA can afford its pension plans going forward, it is foolish to argue about what they have done in the past or what level of funding those plans are in now without also asking whether AA is building a plan that will allow them to continue to service the enormous levels of debt they will have going forward.
The reason why DAL stock is trading at a premium to its peers and S&P is talking about an upgrade is because DL is generating historically high levels of free cash flow and is paying down debt while at the same time generating some of the best revenue statistics in the industry, despite the fact that DL is carrying a pension burden larger than its peers.
One need only look to Europe to see what happens when promises from yesteryear can no longer be afforded today. Here at home, the recall election of Gov. Walker of WI is all about whether government will be allowed to take back some of those promises – and as you probably know, polls show that he is ahead of his challenger right now indicating that the reality may be settling in that the problem has to be dealt with and many people on Main Street can no longer justify public sector pensions that are far richer than what Mr. and Mrs. America have. The front page article on the WSJ online today is about public sector pensions . The end of defined pensions except as a government entitlement program is not really a debate; figuring out how to wind them down and then live with the consequences of the debt that has been incurred is the issue that not only AA and DL but also governments throughout the world are having to answer.
I never said that I disagreed with the premise that companies should keep their commitments – nor have I ever defended the BK process as something that companies should do.
What I have said for years is that AA runs an airline, not pensions, and if they didn’t turn the airline around, they would be forced to do what every other US network airline has done – file for BK and restructure their costs. AA is now in that position and appears to be poised to gain the necessary cost cuts, even if the vast majority will come via employees and by getting rid of its older fleet by buying/leasing new aircraft. And the second part of that is precisely why a lot of people are concerned that AA WON’T be able to keep its word to retain the pensions – even in a frozen condition – because it will have debt levels that will far exceed that of any other airline today or in the past.
UA and US filed BK during the period when it was –ok- to dump your pensions on the PBGC. By the time DL and NW filed, the PBGC and Congress were a lot more on the ball and DL and NW obtained permission to freeze their pensions and then take the time payment plan in a process that still lives the burden on DL. The government and the other creditors were saved from the possibility of taking on DL/NW pensions (except the DL pilots because of their lump sum payout). Now that AMR is in BK, it is a given that there will be changes to its pension plans –and no US network airline will have ongoing active pensions except for the remnant of PMCO within UA – and who knows how long that will last. What does matter, then, is whether AA and DL who will have the industry’s frozen pension plans will create business plans that can support the remaining debt levels that are required to keep those pension plans.
DL hasn’t said it isn’t buying ANY new airplanes… they just happen to be acquiring more USED than NEW narrowbodies as part of their refleeting plan which will replace/grow the mainline domestic fleet to the tune of about 225 a/c – about what UA is rumored to be considering as part of its new narrowbody order – but half of what AA says it will purchase. Thus, of the 3, DL is taking the lowest acquisition cost plan to refleet and in the process saving at least $5B compared to if it bought new aircraft and as much as $15B relative to AA’s plan. The stronger balance sheet that DL will have for its efforts will go a long ways to funding those frozen pensions. In a recent earnings call (I think it was the 4Q2011 call), Anderson said that once DL pays down its debt to levels it desires, it may start using its cash to improve its pension funding. Adding an extra $500M per year (one-third of what they are using to pay down debt) would go a long ways to reduce DL's pension obligations since they are currently paying $600-700M per year on their frozen pensions - in addition to their active DC plans.
When it comes down to asking whether AA can afford its pension plans going forward, it is foolish to argue about what they have done in the past or what level of funding those plans are in now without also asking whether AA is building a plan that will allow them to continue to service the enormous levels of debt they will have going forward.
The reason why DAL stock is trading at a premium to its peers and S&P is talking about an upgrade is because DL is generating historically high levels of free cash flow and is paying down debt while at the same time generating some of the best revenue statistics in the industry, despite the fact that DL is carrying a pension burden larger than its peers.
One need only look to Europe to see what happens when promises from yesteryear can no longer be afforded today. Here at home, the recall election of Gov. Walker of WI is all about whether government will be allowed to take back some of those promises – and as you probably know, polls show that he is ahead of his challenger right now indicating that the reality may be settling in that the problem has to be dealt with and many people on Main Street can no longer justify public sector pensions that are far richer than what Mr. and Mrs. America have. The front page article on the WSJ online today is about public sector pensions . The end of defined pensions except as a government entitlement program is not really a debate; figuring out how to wind them down and then live with the consequences of the debt that has been incurred is the issue that not only AA and DL but also governments throughout the world are having to answer.
Kev3188
Veteran
DL is quite good at manufacturing it's own alternate realities...
Sad but true...
It's about so much more than that...
Most show an almost dead heat. Neither is "ahead" of the other, and both candidates acknowledge that.
Oh goody; you're now trafficking in far-right talking points. I know plenty of public sector employees. NONE of them are rich now, nor will they be in retirement.
Back to the subject at hand, can people on Main Street "justify" the outlandish pension packages that many in the C-suite (including at DL) have?
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