Judge: Dal Pilots Overcompensated!

[Ch. 12]

Wow!!!! A whole entire ONE MILLION DOLLAR retirement lump sum? I'm offended. how could that be? For reference, you can retire from the armed forces at age 48 as an ENLISTED with man and have a pension worth more than a $1,000,000 lump sum (3% per year inflation, discounted at 5% per year). You can retire at 52 as an O-6 and have a retirement worth twice as much. Yet somehow you think getting a lump sum after 40 years of flying equal to $1,000,000 is excessive. Apparently, your investments of late havent been quite to "Savy"........

Nobody has ever said that government retirement was sub-par. That is the ONLY reason many stay in government positions...the retirement is better than the private sector by far. The reason is that the government doesn't need to have operational revenues to pay for the retirement. If there is a deficit, they can and do either tax more or borrow more from other countries (the latter being the recent case). So I hardly think that comparing to the government is very relevent.

 

[Busdrvr]

Actually $1,000,000 was a significant "low ball" estimate. Also, "too'Savy" is more like it. Anyway, as I said I do not sit in judgement nor do I believe I'll see any pilots in the bread line. I'll not go into the advantages of lump sum pension payments , but getting your money up front has many. Savy

If we are playing school marm before 8:00 am, then you should correct your's to read "too Savy".

The reason is that the government doesn't need to have operational revenues to pay for the retirement.

Actually, DAL shouldn't need to use operating revenue to fund up the pension. During the good years, they pension fund grew without adding contributions, so the company spent what should have been put in the pension plan on such worthy things as buying back stock and paying premium prices for now worthless regional feeders. That's the whole purpose of a pension FUND. You pay as it accrues, not as it's due. The regulations were ill thought out (a liberl tax grab, we can't have companies "hiding" profits in "overfunded" pension plans...) and the execs at DAL were only concerned with how much money they could make during their tenure. And now a professional who spent his entire adult life building DAL into one of the worlds greatest airlines gets to pay the bill. I'm sure Ron Allen and Leo Mullin are eating pork and beans for dinner....

 

[savyinvestor]

In days of old lucrative contracts were negotiated and then a fare increase was filed with the CAB who hand stamped the approval. This went on until deregulation and now things are a little different. The Golden Goose is now road kill.I don't blame anyone for negotiating the best deal, but eventually what goes around comes around. Savy

 

[Ch. 12]

If we are playing school marm before 8:00 am, then you should correct your's to read "too Savy".

The reason is that the government doesn't need to have operational revenues to pay for the retirement.

Actually, DAL shouldn't need to use operating revenue to fund up the pension. During the good years, they pension fund grew without adding contributions, so the company spent what should have been put in the pension plan on such worthy things as buying back stock and paying premium prices for now worthless regional feeders. That's the whole purpose of a pension FUND. You pay as it accrues, not as it's due. The regulations were ill thought out (a liberl tax grab, we can't have companies "hiding" profits in "overfunded" pension plans...) and the execs at DAL were only concerned with how much money they could make during their tenure. And now a professional who spent his entire adult life building DAL into one of the worlds greatest airlines gets to pay the bill. I'm sure Ron Allen and Leo Mullin are eating pork and beans for dinner....

It is a gross misconception that underfunding is the cause of pension shortfalls. Pensions are the same as insurance policies...they are not meant to be fully funded by premiums and they are not meant to be paid out en masse. Like insurance, pensions actually grow with the stock market and the constributions are merely investments. No company could pay its retirees with the contributions alone...they have to generate a return on their pension investments to pay out to retirees. The real issue is that these investments crumbled with the bubble burst of the late 90's/early 00's. This was a market issue and not a mgmt decision issue. Also...as I mentioned, the payouts of pensions, just like insurance payouts, were not intended to happen all at once but with so many choosing early retirement, the need to payout ballooned.

The emotions on these boards seem to completely cloud everyone's knowledge that there truly is a market force that is affecting things out there. The airlines could not have predicted the degree of the bubble burst and they could not have spent the past 20 years planning for an influx of new entrants that have created over-capacity and the advent of the Internet that has created complete fare transparency. You give mgmt too much credit if you think they can control the market conditions and/or predict major turbulence in the economy and in technology that is steering many industries. Get over your "mgmt is evil" emotional rant and read up on recent developments in the economy and technology that are the real "evils" affecting everyone's salaries and retirements.

 

[Busdrvr]

It appears you are the one with the lack of understanding WRT pension plans.
Let’s consider your response element by element.
- Pension funds are the same as insurance policies: wrong. Insurance policies are a mechanism to pool risk. By aggregating individual risk from risk adverse people, the insurance company is able to mitigate the individual’s risk while making a profit on the risk premium of each of these individuals.
- No company could pay it’s retiree’s on contributions alone: no really? Actually, they could, it would just be prohibitively expensive. I never said it should be funded that way.
- they have to generate a return on their pension investments to pay out to retirees. The real issue is that these investments crumbled with the bubble burst of the late 90's/early 00's. This was a market issue and not a mgmt decision issue.: Now this was the comical part of your response. Let’s go over this slowly, and maybe then you can understand what happened in the late 90’s. Companies make pension assumptions. This is what the actuarial pension funding level is based on. Let’s pretend that you run a company and you assume your pension fund returns 30% this year. Do you , A: pat yourself on the back for being soooo smart to return 30% during a bull market when the market itself went up 35% and then reward yourself by not making a contribution to the pension fund that year since it’s now ‘overfunded’, and then use the money that actuarially should have been put in the pension fund to buy back company stock in an effort to make your options worth more, or do you B: continue to contribute the amount you should each and every year based on the LONG TERM performance of the market and rational expectations on how the market should perform. Well Mr. Ponzi? Did you think your Dell stock would continue up at 50% per year forever? Does the term “doubling rates†have any meaning to you? The company should have continued to contribute to the pension as if the Bull market were NOT happening. They didn’t. They squandered the money. This was NOT a market problem. The market did exactly what it should have when it was dramatically overpriced. It corrected. This WAS a management mistake, and one driven by greed. Then again, it wasn’t much of a mistake at all. If you went to Vegas with my checkbook and the rules were “you win, you keep your winnings, if you lose, I get to cover youâ€, you rational gambling behavior will not be one that provides the best benefit to me now will it….
- You give mgmt too much credit if you think they can control the market conditions and/or predict major turbulence in the economy and in technology that is steering many industries: I never said management should have been able to accurately predict exactly when the market would take a dump. What I expect management to do is HEDGE against such things. I expect management to prepare during the 7 years of plenty for the 7 years of famine. This isn’t rocket science. But it is awfully easy to take the risk with someone else’s pension. It’s all about responsibility and accountability. Again, those responsible will likely keep most, if not all, of their pension. That’s not “management bad†rhetoric. That’s simply wondering why those responsible for the damage pay the smallest price to clean it up.

 

[corl737]

Nice reply, BusDrivr!

I applaud your rational explanation, especially the observation that managment's failure to contribute to the pension funds based on LONG TERM expectations vs. short term aberrations.

Use the good times to prepare for the bad. What a concept!

 

[Ch. 12]

-By aggregating individual risk from risk adverse people, the insurance company is able to mitigate the individual’s risk while making a profit on the risk premium of each of these individuals Ummm no...if you think the profits are from premiums, you are sadly mistaken. The insurance companies took it in the shorts when the market turned to bear as well. The reason is that the profit from INVESTMENT of the premiums...not the premiums themselves.
-Do you , A: pat yourself on the back for being soooo smart to return 30% during a bull market when the market itself went up 35% and then reward yourself by not making a contribution to the pension fund that year since it’s now ‘overfunded’The comical thing is that this "rewarding yourself" bit was actually rewarding the employees, pilots included, with substantial wage increases and maintaining a high morale (i.e. the "profit sharing" concept that so many tout on these boards but look the other way when it is pointed out that this IS what actually happened in the past). And I don't disagree that future pension needs should be kept in mind when contributing and don't disagree that DL should have contributed more...even during strong return years (but then wouldn't the complaint, back then, be that mother Delta did not ante up to the employees during successful times?) but in reality, how do you predict that you are going to have to superfund pensions b/c you are forced to offer early retirement to get wages in line and you now have an unforeseen glut of current pension requirements. THAT could not have been planned for.
-What I expect management to do is HEDGE against such things.Again, this is a "both sides of the mouth" arguement. Tell me what would have happened if DL had superfunded the plan during such peak years and did not increase wages as they did. I tend to think that the sh*t would have hit the fan far earlier than it did. Even though DL would have been doing the "wise" thing of superfunding/"hedging", therefore mitigating future risk, they would have been doing the wrong thing by not contributing to employees' paychecks. You see...the employee doesn't care about their future pension when times are good because they feel they should see an immediate return. This is a lose-lose situation...especially when the market takes one of the most dramatic upswings and downswings in a relatively short period of time.

So don't get me wrong...I do TOTALLY agree with you in concept but in reality your argument misses the entire picture. While you can hedge for market conditionis, what has happened at DL is more than just the bubble burst...it is also the worst negative factors (that I mentioned earlier...Internet and new entrants) to EVER affect this industry. These detriments go WAY beyond the typical cyclical nature of the airline industry. And it is easy to get caught up in what has happened now but to go back and not offer adequate reimbursement to employees for their efforts to create record profits would have been suicidal. Hindsight is 20-20 but nobody knew the degree of the multi-faceted collapse (bubble burst COUPLED with the massive changes to the airline industry that I pointed out earlier) of the economic picture. If DL management knew of the impending "doom" AND could educate all employees of it as well (since EVERYBODY would have to completely understand market forces and be able to predict such a massive change), this could have been a better situation.

 

[WorldTraveler]

busdrvr and Ch. 12,
Delta and other legacies including UA had pensions that were fully funded up to the maximum amount of overfunging (I believe 120%) in the late 90s. DL and UA did contribute to their pensions to the maximum amount allowable by law because it was to their benefit from a tax standpoint to do so. To say that DL or UA could have funded their pensions to any greater degree is just plain wrong and you both are well versed enough in the industry to know it.

Part of the reason DL's pension underfunding grew so much faster than other airlines is because DL offered several years worth of early retirement in the post 9/11 period. Not only were investment returns tanking but DL was stressing the system even further by putting people on retirement much faster than the previously expected.

As is often the case with the airlines, the pension crisis for the airlines is just a foretaste of what is to come for the rest of the country. The US cannot afford the pension promises that have been made to most Americans - whether the pension is private or public. The Europeans can't afford theirs and the US is desperately trying to keep the economy growing through spending so the US economy doesn't grind to a halt because of high taxes as has happened in Europe. Until someone in Washington is ready to admit that the US is living to high on the hog for future generations to sustain, the dominos will continue to fall. The auto industry's coming pension crisis will make the airlines' problems look like child's play. Unless Washington moves decisively to shore up pensions and also put significant penalties in place if companies dump their pensions as part of Chapter 11, we will continue to see companies take the easy route of dumping their pensions on the government who will finally be the bad guy that will have to tell the workers who built this country that they will not have the pensions for which they worked.

 

[Busdrvr]

The comical thing is that this "rewarding yourself" bit was actually rewarding the employees, pilots included, with substantial wage increases and maintaining a high morale (i.e. the "profit sharing" concept that so many tout on these boards but look the other way when it is pointed out that this IS what actually happened in the past).

Wrong. The pilot group at DAL asked for a mid term contract adjustment after some VERY good years (late 90's). Leo said "A Contract is a Contract", while he merily embarked on a stock buyback scheme and a very expensive feeder purchase. IOW, HE DID NOT "SHARE". Why do you think the DAL pilots were so unwilling to sit down and talk when things got bad? Maybe since a "Contract is a Contract"?

how do you predict that you are going to have to superfund pensions b/c you are forced to offer early retirement to get wages in line and you now have an unforeseen glut of current pension requirements. THAT could not have been planned for.

Uh, accrued pension liability is just that. In theory, if your pension is fully funded, every single pilot on the list could retire tomorrow, and the fund could give each and every one his entire lump sum payout. You "plan for that" BY FUNDING THE F'IN PENSION IN GOOD TIMES AND BAD!!

Now, lets go over the FACTS.
DAL pension
1998 Cont: $54 Mill Full funding: $100 Mill Shortfall: $46 mill
1999 Cont: $45 Mill Full Funding: $56 Mill Shortfall: $11 Mill
2000 Cont: $48 Mill Full Funding: $49 Mill Shortfall: $1 mill

UAL Pension
1999 Cont: $175 Mill Full Funding: $81 Mill Overage: $94 Mill
2000 Cont: $230 Mill Full Funding: $251 Mill Shortfall: $21 mill

This is just a quick look, and is not meant to show that UAL did better, but to ILLUSTRATE how you can play games with the assumptions. Riddle me this. If you expect the market to go up an average 10% per year, and you just had a primo 30% year on the market, what's your rational expectations for next year? Is it a "markov process", ie does next years performance have nothing to do with last years? Does the market correct back to the long term trend line? The financial wizards at DAL assumed it would continue to perform at 10% a year. Had they lowered the assumptions, they could have contributed more. Had they raise the assumptions for annual pay raises, they could have put more into the fund. They didn't. Buying back the now worthless stock seemed like such a better call. I guess they made out OK.

 

[WorldTraveler]

I'm not debating that DL or any other company's management didn't cut corners on pensions and viewed pensions as simply a tool to be used to leverage the rest of the company's assets and liabilities and not the obligation to employees it should have been. Nonetheless, the airlines in question weren't as reckless with their pensions in the 90s as some other companies but when the troubles post 9/11 came, they quickly jettisonned any commitment to their pensions even though executives at just about every legacy airline collected no small rewards for themselves.