AA at pension disadvantage!


Dec 21, 2002
Senate passes pension reform

PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy William L. Watts, MarketWatch
Last Update: 11:27 PM ET Aug 3, 2006

WASHINGTON (MarketWatch) -- The Senate overwhelmingly approved sweeping changes in the nation's pension laws Thursday night, sending President Bush legislation designed to force most companies to shore up their private pension plans.
The Senate voted 93-5 to pass the bill. The House passed it last week.
"The Senate is about to deliver a real victory for working Americans who spend a lifetime earning their pensions by adopting the safeguards and reforms we promised" when House and Senate lawmakers began negotiations in March aimed at ironing out differences between each chamber's version of the complex legislation, said Senate Health, Education, Labor and Pensions Committee Chairman Mike Enzi, R-Wyo., ahead of the vote.
"Too many Americans lie awake at night worrying about how they can afford retirement. Too many workers have seen their pensions fail in recent years. And fifty percent of Americans have no pension at all at their job," said Sen. Edward Kennedy of Massachusetts, the senior Democrat on the Senate pensions panel and a co-author of the original Senate pension bill.
Around 44 million Americans have defined-benefit pensions, which pay retirees a fixed amount based on length of service and salary history. But pensions are underfunded by around $450 billion, and the federal Pension Benefit Guaranty Corp., which is funded by corporate premiums and investments, is running a deficit of more than $22 billion. Read the MarketWatch special report on pensions.
The agency, which is funded solely by premiums collected from firms with defined-benefit plans, has sufficient cash flow to meet its obligations for now. But the possibility of more trouble in the airline and auto sectors has raised fears that the nation's pension system might one day require a taxpayer-funded bailout on the scale of the savings-and-loan debacle of the 1980s.
Under current law, corporate defined-benefit pension plans must be 90% funded. The bill would require all companies to ensure their plans are 100% funded within seven years. And companies whose plans fall below a certain threshold would be required to make even larger contributions to make up the gap.
Among its more contentious provisions, the 900-plus-page bill would give airlines that have frozen their pension plans, barring new employees from participating and halting the accrual of benefits, 17 years to meet their funding obligations. The provisions apply to Delta Air Lines and Northwest Airlines, which also qualify to use a more advantageous interest rate when figuring their pension liabilities.
The carriers, which remain in bankruptcy protection, contend they will have no choice but to dump their pension plans on the PBGC unless funding rules are changed.
Other airlines that opt for a "soft freeze" would have 13 years to fully fund their pension plans. That's drawn criticism from Texas lawmakers, who contend Dallas-based AMR Corp. (AMR : AMR Corporation
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Maybe the management rank and file should pull together for AA and donate some of thier hourly wage to help AA pay down the pension debt. After all I am sure Arpey could afford it now with his 23 percent bump in pay :D
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Maybe the management rank and file should pull together for AA and donate some of thier hourly wage to help AA pay down the pension debt. After all I am sure Arpey could afford it now with his 23 percent bump in pay :D
U.S.: Pay Gap Widens Between CEOs and Workers
by Abid Aslam

WASHINGTON -- The chief executives of major U.S. corporations enjoyed double-digit pay raises last year, adding to a record of ''jaw-dropping'' compensation largely undisturbed by recent years' falling profits and share prices and a wave of scandals involving management chicanery, the country's leading labor federation said in a new survey.

Chief executive officers (CEOs) were being enriched at the expense of working families' retirement savings, the AFL-CIO said in its Executive Pay Watch study, released Monday as a Web site. The latest annual update aimed to rally support for labor and other investors who plan to force some 140 companies to confront pay issues at annual shareholders' meetings in coming months.

''We have seen a tremendous amount of interest among workers in holding CEOs and their boards accountable,'' said Richard Trumka, secretary-treasurer of the 13-million-member labor federation. ''They are rightfully outraged when they learn about jaw-dropping executive compensation packages. It's time to put the brakes on runaway CEO pay.''

An analysis of securities filings showed that CEO salaries rose 12 percent in 2004 compared with average raises of 3.6 percent for rank-and-file workers, further widening the world's largest gaps between executive and labor pay.

The average CEO of a major corporation received $9.84 million in total compensation in 2004, the AFL-CIO said.

Business Week magazine arrived at similar numbers last week, when it released its 55th annual executive pay scorecard. It pegged the average CEO pay raise at 11.3 percent and described this as ''not far off the rise in shareholder gains'' last year.

''Increases were moderated in 2004 by the continued impact of corporate reform, an ongoing shareholder revolt over astronomical pay levels, and pending accounting changes that are reining in the use of stock options,'' said the magazine's survey of 367 CEO pay packages.

But it also found that CEO raises once again dwarfed those of the average worker, who saw pay rise 2.9 percent, to $33,176 per year, and concluded: ''Nearly 40 of the nation's chief executives walked away with more than $20 million, excluding windfalls from option exercises. There have been improvements, but pay for performance is still not the standard practice everywhere. Some [corporate] boards, at least, are still lavishly rewarding CEOs who deserve far less.''

With more than $400 billion in assets invested in the capital markets through pension funds, unions have emerged as increasingly vociferous and influential investor activists, especially on pay-related issues.

Last year, union-sponsored pension plans won majority shareholder support for an unprecedented 34 proposals on CEO pay. Although shareholder resolutions usually are non-binding, those that win majority backing have been virtually impossible for companies to disregard.

Activists and analysts alike have credited investor pressure as a major reason why firms have begun to wean themselves off stock options, which give executives the right to buy shares at a fixed price over a specified period, essentially gambling that the price will have risen by the time they convert the options into actual shares. They then keep or sell the shares as they prefer.

Stock options made up 69 percent of a typical CEO's compensation in 2001 but last year the figure was down to 31 percent, the AFL-CIO said, citing news reports.

This year, unions have submitted more than 140 shareholder resolutions demanding that firms tie CEO pay to corporate performance, limit ''golden parachute'' severance packages, and seek shareholder approval of preferential executive pensions.

Executive Pay Watch highlighted six companies it described as emblematic of the issues confronting firms at this year's annual shareholders' meetings.

The AFL-CIO said it would ask biotechnology firm Amgen to boost the amount of company stock that executives are required to hold. This, it added, was because CEO Kevin W. Sharer had cashed in millions of dollars in stock options in recent years without actually owning any of the biotech firm's shares outright. Amgen in 2002 began requiring company executives and directors to own more of its stock but they were given five years to comply.

Unions said they would demand that Sempra Energy clearly state the costs of issuing stock options when it prepares its income statements. U.S. accounting rule makers have ordered large companies to do so beginning with financial statements issued after Jun. 15 and Sempra has said it would comply.

In addition, they would ask Wal-Mart Stores, the world's largest retail chain, to switch from stock options to actual shares when compensating top executives, and to grant shares based on corporate performance.

Other proposals will target CEO pay and severance levels at Coca-Cola, energy supplier Dynegy, and communications company Sprint.

The United States long has had the industrialized world's largest gap in pay between chief executives and blue-collar workers. CEO compensation swelled from 85 times what workers earned in 1990, to 209 times in 1996, and 326 times the following year. In 1999, CEO pay surged to a record 419 times the average worker's wage, according to the U.S. Bureau of Labor Statistics.

The gap then declined, to 282-to-1 in 2002, before surpassing 300-to-1 the following year, according to the research and advocacy group United for a Fair Economy (UFE).

Comparable figures for other wealthy nations generally do not exceed the double digits.

U.S. CEOs' pay rose 313 percent from 1990 to 2003, UFE said. By contrast, the Standard & Poor's 500 stock index rose 242 percent and corporate profits gained 128 percent.

During the same period, average worker pay rose 49 percent while inflation climbed 41 percent.
AA thanks Congress for passing pension reform:

American Airlines Thanks Congress for Passage of Much-Needed Pension Reform Legislation

Friday August 4, 11:00 am ET

Airline Expresses Gratitude to Members of the Senate and to Its Employees for Their Assistance

FORT WORTH, Texas, Aug. 4 /PRNewswire-FirstCall/ -- American Airlines today praised members of the Senate for passing much-needed pension legislation that will aid many companies and their employees, including the world's largest airline.

"It would have been a tremendous hardship for many people if this legislation had not passed before the Senate adjourned for its August recess, and we worked hard to make sure that did not happen," said Will Ris, American's Senior Vice President - Government Affairs. "American, its three unions and other employee groups have indicated that they want to keep their defined benefits plans and have worked together for well over a year to ensure that Congress passed pension legislation that would benefit, and not harm, their plans. In fact, it was in June 2005 that more than 300 employees volunteered to go on their own personal time to speak directly with members of Congress about this issue. This legislation will aid American Airlines and we ask President George Bush to sign it promptly."

American and its employees have received overwhelming support from many members of Congress on this issue. In the Senate, a strong bipartisan coalition of Senators stepped forward to insist on equitable treatment for companies like American that have chosen to maintain their defined benefit pension plans, rather than freezing or terminating them. Texas Sens. Kay Bailey Hutchison and John Cornyn joined forces to do so with fellow Sens. Jim Inhofe of Oklahoma, Bill Nelson and Mel Martinez of Florida, Dick Durbin and Barak Obama of Illinois, Chuck Grassley and Tom Harkin of Iowa, Ted Kennedy of Massachusetts, Trent Lott of Mississippi, Kit Bond and Jim Talent of Missouri, Max Baucus of Montana, Minority Leader Harry Reid of Nevada, Jay Rockefeller of West Virginia, and Mike Enzi of Wyoming.

In the U.S. House of Representatives, a unified group of Texas members has supported American throughout the process. Particular thanks from American go to Reps. Sam Johnson, Joe Barton, Kay Granger, Kenny Marchant, Michael Burgess, Pete Sessions, Jeb Hensarling, Ralph Hall, Chet Edwards, Eddie Bernice Johnson, Henry Bonilla and Kevin Brady.

While the bill enacted today goes a good deal of the way to solving the problems faced by American in maintaining its defined benefit pension plans, it has created far more favorable rules for airlines that have frozen their pension plans.

"We were pleased to see many Members of the Senate during debate strongly urge that the disparity in treatment among airlines be addressed upon the return of Congress from the August recess," said Ris. "There is significant consensus in both the House and the Senate that the discount interest rate applied to airlines should be more fairly equalized.

"American does not object to the favorable rules given to airlines that have frozen their plans," Ris added. "We simply believe that those maintaining their plans should not be placed at a competitive disadvantage."


While this looks like good news, I await the spin from the perpetually disgruntled.
"Maybe the management rank and file should pull together for AA and donate some of thier hourly wage to help AA pay down the pension debt."

uhm...gets salary and typically less than most other employees. So, if you're a mechanic, pilot, senior flight attendant, you could donate to mgmt rank and file.
I await the spin from the perpetually disgruntled.
I'll bite. :p

How long before AA goes for the "soft freeze" to get the 13 year funding? It would appear to me that AA and the unions have pushed for a bill that will ultimately result in more concessions. I don't have the full text of the bill, but I did read in one article that if AA does go for the 13 year funding, in addition to the soft freeze, they will be forced to discontinue the defined plan for new employees, as is with NWA and DAL. So no, I'm not ready to applaud a piece of legislation that might result in more concessions. I'll get back to you on this one, and knowing the twu, most likely very soon. :p
AA might very well ask the represented employees whether they want the pensions frozen or not. I don't know how that referendum would play out? Would you rather have a frozen pension plus future retirement additions in a defined contribution plan?

Here's what we do know: Until yesterday, AA faced the legal obligation of contributing $2.3 billion to its plans next year (or terminating them, which seemed unlikely). Assuming the President signs the bill, AA now has 10 years to make up that $2.3 billion. Given the veto-proof vote in Congress, I assume the President signs it.

So given that huge benefit it didn't have yesterday, is AA really gonna try to convince the employees to freeze the plans to get the same treatment as NW and DL?

Or is AA gonna keep lobbying its paid-for Congress to amend the law next session to give AA (and CO) the same 17 years and same beneficial interest assumptions?

As I've pointed out many times before (with recent agreement from Mr Owens in several posts), the AA DB plans have been cheaper for the last few years for AA than a WN-style DC plan would have been. WN's retirement contributions are a much larger % of its total revenues and employee comp. Now that AA has a decade to make up the shortfall in its plans, it looks like AA will have that same cost advantage over WN (and over UA, which now has DC retirement plans) for up to 10 years.

Color me eternally optimistic, but I don't see anything happening to the AA DB plans. $230 million/year over 10 years is nothing to a $23 billion/year company. Sure, AA would like to have the extra 7 years that DL and NW got, but 10 years is sure better than paying $2.3 billion next year (as current law required).

Now that AA has $2.3 billion more free cash than it did yesterday, look for AA to pay down some serious debt this quarter as well as potential orders for fuel efficient airplanes. B)
AA now has 10 years to make up that $2.3 billion.
I don't see the 10 year part, I'm only seeing 7 years. If it is 10 years, then I would agree with you and can see them greasing(lobbying) someone to push it closer to 17 years in the next session.
What I'm seeing is that everyone gets 7 years; AA and CO get 3 extra (for 10) and NW and DL get an extra 10 (total of 17). But I may be reading poor summaries - I don't have the bill yet.
What I'm seeing is that everyone gets 7 years; AA and CO get 3 extra (for 10) and NW and CO get an extra 10 (total of 17). But I may be reading poor summaries - I don't have the bill yet.
The bill is below, all 386 pages of it. Don't have the time to look it over right now.


The home page with summary link:


Update: FYI...Looks like page 88(98 on pdf counter) does speak of the 10 year schedule.
Holy Christ - the bill itself is almost 1000 pages. :p

The summary is 386 pages. Whew. That's a lotta reading. Thanks for the links. :up:

OK, to get the extra 3 years, AA would have to "soft freeze" the plans. Hmmmmm....

That may not be something everyone is itchin' to do. After all, AA might someday hire some new pilots, FAs, mechanics and rampers and their unions might not want to sell them out (just yet). Maybe.

Well, even if that's unpalatable, AA still gets 7 plus one, since the 2004 relief is extended thru 2007 (so next year's contribution will likely be about $250 million, like this year's is). Eight years to make up $2.3 billion is still worthy of a celebration.
If they don't have the money now,what makes you think they will have it 8,10,17 years from now?

Uhh, AA disclosed a couple weeks ago that on 6/30/06 there was $5.15 billion of unrestricted cash on hand. And that was up several hundred million from 12/31/05. By the end of this year, I expect AA to have well over $6 billion of unrestricted cash (of course extra debt repayments will reduce that).

Whaddaya mean "they don't have the money now?"
Uhh, AA disclosed a couple weeks ago that on 6/30/06 there was $5.15 billion of unrestricted cash on hand. And that was up several hundred million from 12/31/05. By the end of this year, I expect AA to have well over $6 billion of unrestricted cash (of course extra debt repayments will reduce that).

Whaddaya mean "they don't have the money now?"

Thanks for proving my point. If they are refusing to fund the plan fully now, what makes you think they will obey the law in the future?