A Plan to Postpone Pension Financing at United
By MARY WILLIAMS WALSH and MICHELINE MAYNARD
Published: November 20, 2003
nited Airlines is devising a plan to postpone about $2 billion of required pension contributions over the next three years, having concluded that doing so is the only way to bring the airline out of bankruptcy.
The plan, which was described in general terms by company executives and people briefed on the deliberations, would require the federal agency that insures pensions to take on a significant risk, and the agency is expected to resist it forcefully. The plan would be subject to Internal Revenue Service approval.
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Other airlines might also oppose it or insist on comparable breaks in their pension contributions. Slowing contributions to any pension plan can put workers' benefits at risk.
United officials say the airline does not have enough cash to make the required payments to its pension funds and finance its business operations at the same time.
They say resolving the pension issue is the biggest hurdle to obtaining federal loan guarantees, which would allow the airline to emerge next year from more than a year of operating under bankruptcy protection. If United fails to get some type of break from its pension contributions, it would be forced to try to renegotiate contracts with its unions, which have already granted significant concessions. If the unions balked, United would have few options but to ask the bankruptcy court to cancel its pension plans and replace them with less generous retirement programs. Only severely distressed companies can qualify for such a cancellation in bankruptcy court.
A United official said the airline did not want to change its pension plans — just stretch out its required contributions.
United has disclosed in court documents that it has to contribute $4.8 billion to its pension plans over the next five years, but much of that is due in the first two years. The official indicated that United was seeking instead to pay about $1 billion annually over the next four years, and about $500 million in the fifth year.
"We aren't looking for a silver bullet; we're looking for combinations of things that deal with the challenge," Frederic Brace III, United's chief financial officer, said in an interview yesterday. He said that the airline did not want to foist additional obligations onto the pension agency.
Pension contributions are a matter of law, and companies are allowed to request up to three exceptions in any 15-year period. But such waivers are granted sparingly, and only to companies that can demonstrate a "temporary, substantial business hardship." It is unprecedented for a company to request all three waivers at the same time, or to use them over three consecutive years, as United hopes to do.
Companies are also required to post business assets as collateral to secure what is, in effect, a debt to the pension plan. United, however, does not have assets that are not already promised to other creditors. It would be unusual for the government to bend the rules on collateral for a waiver of this size.
The I.R.S. is supposed to consult with the pension agency on what type of collateral is adequate, but it alone has the power to approve requests to waive pension contributions.
The I.R.S. declined to comment on United's request.
United officials said the airline has requested waivers for four pension plans, covering benefits for pilots, flight attendants, unionized ground workers and employees who have contact with the public. It said the waivers for the plans would be staggered, but declined to specify the order in which they might be made.
The agency that insures pensions, the Pension Benefit Guaranty Corporation, would almost certainly oppose a special break for United because it would require the government to assume considerable risk. As of last April, United's pension plans were $7.5 billion short of the amount needed to cover all promised benefits, according to documents filed in bankruptcy court. If the airline made smaller contributions and then defaulted on all its pensions, the agency would add obligations of more than $5 billion to its balance sheet, Steven A. Kandarian, its executive director, said.
That would eclipse the $3.7 billion in pension obligations that the agency assumed in December 2002, when it took over Bethlehem Steel's failed pension plan — by far the largest pension default.
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A Plan to Postpone Pension Financing at United
Published: November 20, 2003
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United's employees — particularly its pilots — would also be subject to big losses in the event of a pension default. The government's pension insurance is limited, and does not fully cover generous benefits like those of commercial airline pilots. But United's pilots have said they agree with the airline's efforts to slow its contributions to their pension plan, because they believe that the plan's weakness is a result of temporary market conditions that will pass.
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If United succeeds in getting its pension break, it might prompt other airlines to try the same thing. No other airline is in bankruptcy, but all of the major airlines offer pensions to large numbers of employees, and the cost has made it hard for them to compete with new airlines like JetBlue.
But some airlines — and indeed other companies — that have tried to stay current on their pension contributions might question the fairness of a special deal for United.
"I think there would be an outcry," said a senior official of a competing airline, when asked how businesses would view pension relief for United. "Not just in the airline sector. Many others are suffering. It's not fair that the P.B.G.C. bails out United and doesn't bail out other plans that are similarly situated."
The official did not want to be identified by name, but he also expressed concern that other companies would end up paying for United's deal.
"If the P.B.G.C. keeps getting deeper in the hole, guess what?" he said. "They're going to be in Congress asking if they can raise premiums."
The pension agency finances its insurance program by charging premiums to all companies that offer pensions to their employees. The agency has not raised premiums since 1994.
When Northwest Airlines was recently granted pension waivers by the I.R.S., it was required to put up collateral worth more than $454 million to secure waivers for contributions due to two of its pension plans, according to a filing with the Securities and Exchange Commission.
A Northwest official declined to comment on whether it would oppose United's efforts, but the official said he expected the industry to support legislation that would reduce pension contributions because the major airlines cannot pay for both their pensions and their day-to-day operations.
In addition to the slowdown in pension contributions, United is hoping that Congress will pass legislation allowing all companies to calculate their pensions in a new way, making the obligations look smaller. That, in turn, would mean companies could make smaller annual contributions. Several such bills are pending in the House and Senate. A new bill containing a provision to delay the pension contributions of airlines for the next two years was attached yesterday to a tax bill that is expected to be voted on by the House today.
If such a measure is enacted, United might be able to reduce the amount of pension contributions it seeks to have waived.
