Bankrupt Carriers Must Fund Pensions

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Mar 7, 2003
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Associated Press
Update 2: Bankrupt Carriers Must Fund Pensions
09.15.2005, 06:28 PM

As long as newly bankrupt Delta and Northwest airlines continue to fly planes, they must contribute to their employees' pension funds, the director of the federal agency that protects private-sector pensions said Thursday.

"These companies will continue to pay for fuel, wages, health care, utilities and aircraft leases. As long as companies remain in operation with ongoing pension plans, they have a legal obligation to meet their funding requirements," said Pension Benefit Guaranty Corp. Executive Director Bradley Belt.

Delta Air Lines Inc. and Northwest Airlines Corp. filed for Chapter 11 bankruptcy protection on Wednesday, and Delta said it would miss its next pension fund payment to the PBGC.

The pension funds of both carriers are underfunded by billions of dollars.

Northwest said Wednesday it would continue to seek changes in pension laws to give it more time to make payments.

"We are determined to continue to push for that legislation so that we'll be in a position to preserve pension benefits that our employees have earned to date," said Doug Steenland, Northwest's president and CEO.

U.S. Sen. Norm Coleman, a Republican who represents Northwest's home state of Minnesota, said Thursday he'll push hard to get the legislation moving through Congress again.

The proposal would give the airlines 14 years to catch up on their pension payments, but it's part of a broader pension overhaul bill that has stalled.

Gerald Grinstein, Delta's CEO, said Wednesday his company couldn't guarantee its defined benefit plans, even with pension reform.

"Ultimately, what we can afford in the future airline business environment, as well as the nature of any legislation, will determine what is possible," he said.

In a conference call with reporters, Coleman said Hurricane Katrina relief has pushed back progress with the pension bill, but he's hopeful the Senate will pass the measure before it breaks in late November.

Northwest's pension plans are underfunded by $3.8 billion, by its figures, and the airline is obligated to make $2.5 billion in payments into those plans this year and next, and a total of $4.3 billion by 2008. The PBGC estimated Northwest's pensions were underfunded by $5.7 billion.

Delta faces more than $3.1 billion in pension payments over the next three years. Pension plans at Delta are underfunded by $10.6 billion, according to the PBGC.

"Delta's been doing everything it can within the bounds that it can afford to provide active and retired Delta people with already-earned retirement benefits," spokeswoman Chris Kelly said Thursday. "Delta will continue to pursue meaningful pension reform legislation that might make the pension plan more affordable."

Steenland said Northwest wants to avoid terminating its pension plans the way UAL Corp.'s United Airlines and US Airways Group Inc. did. Those airlines used bankruptcy to dump their pension liabilities onto the PBGC.

"Our employees are going to go through a difficult enough process ... that if we can avoid the termination of the plans, it's one harmful effect that we can avoid occurring," Steenland told reporters in a conference call late Wednesday.

Coleman said he's frustrated that the PBGC has not pushed harder for changes such as the legislation he's co-sponsoring. The PBGC is facing a deficit of over $20 billion, caused partly by bankrupt airlines.

"They're pushing airlines to make payments under a system that is going to push them over the edge, and in the end result in the entire pension being dumped in the PBGC's lap," Coleman said.

If the PBGC has to take over Northwest's pension plans, pilots would take the biggest hit. They could lose half or more of their pensions. The PBGC caps payments at $45,613 a year for plans canceled in 2005, and pilots are required by law to retire at age 60, but PBGC rules cut payments to workers who retire before turning 65. Other work groups would see smaller reductions, if any.

In the longer term, Northwest wants to freeze its current defined benefit pension plans and switch to defined contribution plans, such as 401(k)s, which are cheaper for employers but don't provide workers the guaranteed benefits of traditional pensions.
 
Which potentially says that DL and NW employees could end up w/ their pensions despite being in BK. DL has been more cautious on any statements about pensions in the past 24 hrs but NW says it intends to try to keep theirs.

Part of pension reform legislation includes being able to change the interest rate used to calculate pension liabilities to more realistic long-term numbers. Since all of the major airlines had overfunded pensions pre-9/11 and the financial downturn that hit the US and caused interest rates to drop, it is not realistic long-term to think that pension underfunding should be based on current interest rates.
 
But what will happen if say the congress or senate dont get the reforms thru? then what will nwa do? at least they are trying to keep their pensions. I wish them the best and good luck to all the affected employees at both DAL and NWA
 
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How can it be a done deal if they are not allowing them to dump now?
 
There is a reason why UA waited late in the bankruptcy process to terminate its pensions. Pension liabilities affect the balance sheet of the reorganized entity. There can be no decision as to whether to keep or dump the pensions at this point until the viability of the two carriers is known - and that is entirely based on their ability to turn themselves around in bankruptcy. Both DL and NW are moving swiftly to cut costs with the full intent of emerging as sustainable companies.

Pension reform is almost certain to pass Congress. They realize that DL and NW do have the right to terminate pensions in bankruptcy and so the law has to be changed in such a way that it is either punitive for DL and NW to terminate their pensions, or more likely, that DL and NW can afford them. Repeating what I said before, part of pension reform legislation includes changing the assumptions about how underfunded DL and NW's pensions are. The amount of DL's underfunding could be significantly reduced while NW might not be considered underfunded at all. The PBGC will sit on DL and NW's creditors committees and is not at all interested in seeing the plans dumped although they cannot stop the process. As in both UA and US' cases, they can assert claims against the estates and if they are large enough, other creditors will want the pensions kept because it hinders their ability to protect their interests.

Assuming pension reform passes, which I am certain it will, DL and NW's cases will be very different than UA and US's. UA and US simply did not have the options that DL and NW will have. UA and US also did not have the pressure put on them to preserve them that DL and NW will have put on them.

One other little angle, DL and NW could argue that their viability is best preserved by merging either at the end of the BK process or shortly after they come out. They could also argue that if the gov't allows them to merge quickly, they will preserve their pensions.

It will be months before any of this is finalized but it would be really nice if the US government would learn from the mistakes that cost UA and US people their pensions.
 
Delta to miss pensions

NEW YORK (Reuters) - Delta Air Lines Inc. (NYSE:DAL - News) warned it may miss 3,500 retirees' pension payments, while Northwest Airlines Corp. (NasdaqNM:NWAC - News) hired a battery of lawyers and advisors as the carriers began a long march through bankruptcy.

Delta pilots suffered what may be the first of many blows for the airlines' employees as the Atlanta-based carrier said it would send a letter to some 3,500 retired pilots telling them it may miss their October pension payments.

http://biz.yahoo.com/rb/050915/airlines_ba...tcies.html?.v=5
 
WT...if the pensions are allowed to be paid over 14 years, has anyone crunched the numbers on what DL's monthly obligation would be? That is the bottom line..can they exit AND pay for the pensions. My perfect world says freeze them as they are and try to pay those benefits...then start a new pension plan from that point on. I wish we could have done that at U. Hopefully the DL pilots will be flexible on this, because if they are not they WILL end up with the PBGC pittance. Best. Mark.
 
I will guaranty that Dl and Nw will terminate pensions. You can thank U and Ua for that.

I wrote earlier when Ua was allowed to dump their pension plan that it would cause a ripple effect within the industry. How can one major carrier pay for a plan and stay competetive when other companies have dumped their plans. The one left is Amr. I wonder how long it will be before they decide they need to terminate their plan as well?
 
Hatu,
the part of the pensions that is being missed is the supplemental (non-qualifed) portion.

Mark,
I think DL and NW are hoping that pension legislation will require that they freeze their current pension plans. Part of the urgency in getting something passed now is to stop further accruals. It's doubtful ALPA will have any say in the decision to freeze. While DL moves through bankruptcy, they will assess whether they can afford to maintain existing pension obligations. Part of the proposed bills would allow them (and other companies) to change the interest rate used which could lower the amount of pension underfunding. Because the bills are still in flux, it is hard to determine the liability DL will end up with but I'm betting that Congress will come up with something that will give DL a $3-5B liability which if spread over 15 or more years comes out to 2-5% of current revenues - a number that should easily be sustainable. The ball is clearly in Washington's court to come up with a deal that DL and NW can afford; AA and CO will probably take advantage of it but they are not at present threatening to terminate. DL is going to play very cagey as to whether they will accept or reject pensions in order to get the best deal. Because of its lower pension liability (driven by fewer early retirements over the last few years), NW is saying they are intending to keep the pensions. DL is making no such statements at present.
 
WT,

I would have expected you to know this already. The last round of cuts already froze the DB plan with the pilots and was replaced with a defined contribution fund.
 
luv2fly said:
WT,

I would have expected you to know this already. The last round of cuts already froze the DB plan with the pilots and was replaced with a defined contribution fund.
[post="301724"][/post]​


Thanks luv and WT. Greeter. (I know it hurt, but that was a sharp move on the DL pilot's part)
 
Anything is possible...BUT,

As a pilot who lost his pension and has gone on this roller coaster ride (twice) now...if I were at DAL/NWA I would be planning on PBGC for my pension.

This is a major chunk of change that will be very hard for management to leave on the table.

Why would they? BK is not about being employee friendly, it is about making sweeping deep cuts available that would otherwise not be available.

WorldTraveler said:
Which potentially says that DL and NW employees could end up w/ their pensions despite being in BK. DL has been more cautious on any statements about pensions in the past 24 hrs but NW says it intends to try to keep theirs.

Part of pension reform legislation includes being able to change the interest rate used to calculate pension liabilities to more realistic long-term numbers. Since all of the major airlines had overfunded pensions pre-9/11 and the financial downturn that hit the US and caused interest rates to drop, it is not realistic long-term to think that pension underfunding should be based on current interest rates.
[post="301279"][/post]​
 
Dl has already changed the pension plan going forward to a cash balance plan. I think they did it two years ago. There is a transition period of seven years. This was set up to protect those closer to retirement. The company contributions were very back end funded so if they had just cut it off those would not have been funded.

The new plan puts a set percentage into your fund each year. Those that were older at the time the fund was intially set up get a larger percentage. We all took pretty good hits with this new set up. Some took real large hits. Anyone who was less than 35 with 15 years senority took the worst hits. The pay out from the old pension will be very small and they didn't get the larger percent contribution for the new one. The lead mechanic I was working for at the time fell into this catagory. We figured if we both retired at the same age my pension would be much higher than his. Our payouts from the old plan would be very similar, but my new plan payout would be much higher. At the time I had five years at DL, but I was 36 so I will get more put into the cash balance plan.
 

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