Airlines seek to lighten pension load
By Mitchell Schnurman
Star-Telegram Staff Writer, 9 22 2004
Pensions must be the third rail of business, a sacred benefit that nobody wants to touch.
Since United Airlines filed for bankruptcy protection almost two years ago, it has put the squeeze on shareholders, bondholders, creditors and employees. But if it tries to dump its pension plans there'll be a real outcry.
In a letter to United, more than 100 Washington lawmakers are urging the company to "honor the promises you have made to your employees and their families."
The politicians say it's unfair to sacrifice the workers' retirement security.
True enough, but it's also unfair to wipe out shareholders and put some 40,000 people on the street.
Cold as it sounds, that's life in bankruptcy. And if United wants to raise money to emerge from Chapter 11, it has to ax the pensions -- or get employees to again take deep cuts in pay and benefits.
Like the pilots' contracts and network hubs of the 1990s, the pension plans at legacy airlines got out of whack, and a price is being paid today.
United says it would have to put $4.1 billion into its pensions in the next five years to meet funding requirements. New investors don't want their money going there; they want it going into flying routes, maintaining planes and the like.
US Airways says it would be "irrational" to pay up its pensions, because it's in bankruptcy again.
The pension question has been an elephant in the room for the older airlines since 9-11, when the industry's finances started to crater. To compete with discounters, airlines had to cut their fleets, then their work forces, then their pay scales.
They changed work rules and made hubs more efficient.
Yet the discounters have marched on, picking up market share and keeping airfares low, while rising oil prices have taken an additional toll.
So now it's pensions on the to-do list, at least for the struggling carriers.
Impressively, American Airlines has pumped $461 million into its pensions this year and has kept them intact. If American workers wonder about the advantages of restructuring their contracts early and without bankruptcy, this is one of them.
In contrast, United won't make a $575 million contribution to its pensions that's about due. US Airways, which this month went into bankruptcy for the second time, is ignoring a $110 million pension payment.
Delta Air Lines is trying to cut $1 billion from its pilot costs, including pension obligations.
Low-cost airlines don't face this expense, because they use 401(k)s, profit sharing or similar pay-as-you-go plans.
Pensions are a remnant of an age when retirees were promised a payment for life, based on their income and years of service. Employers have stopped creating these defined-benefit plans, but existing pensions remain popular with employees.
That's because they're shielded from inflation and downturns in the stock market.
But those factors can make them expensive for companies. If an industry turns down when the stock market does -- as occurred with the airlines -- the burdens can soar.
United's unfunded pension liability tops $8.3 billion; US Airways' is $2.1 billion; and at the end of the 2003, Delta's was $5.7 billion and American's was $2.7 billion.
The airline industry owes $31 billion more than it can pay for its pensions.
But companies can't just walk away from them. Pensions are often negotiated with unions. To close one, a company has to pay out its obligations and amend its collective bargaining agreement. That can be difficult.
Or it has to demonstrate, usually to a bankruptcy judge, that it can't fund the pension. Then the Pension Benefit Guaranty Corp. takes over the plan and pays out up to about $44,000 per person annually.
Only high-paid workers lose when the Pension Benefit Guaranty Corp. rescues a failing pension, which is why pilots are often willing to make other concessions to keep their pensions whole.
The Pension Benefit Guaranty Corp. is a federal agency that receives premiums from companies sponsoring the pension plans. One fear in Washington is that United and US Airways could begin a cascade of pension terminations, which could force the government to bail out the industry.
Many plans are fully funded or close to it, so they're less of a financial burden to companies, says Richard Ippolito, former chief economist of the federal agency.
"And workers don't want their plans terminated," he said.
Employers also use them as retention tools, with pension formulas that reward longevity.
A 40-year-old worker has a strong incentive to stay, Ippolito says, because he could lose about two-thirds of his pension if he quits.
Can American, Northwest Airlines and Continental Airlines continue to have pensions if their competitors don't?
That depends on whether they have advantages elsewhere, perhaps squeezing more efficiencies out of operations or generating higher revenue.
If a pension is a priority for workers, management may be able to find a way to fund it. But if investors are making the call, they'll have other ideas for the money.
--------------------------------------------------------------------------------
Mitchell Schnurman's column appears Wednesdays and Sundays. (817) 390-7821 [email protected]
--------------------------------------------------------------------------------
© 2004 Star-Telegram and wire service sources. All Rights Reserved.
http://www.dfw.com
By Mitchell Schnurman
Star-Telegram Staff Writer, 9 22 2004
Pensions must be the third rail of business, a sacred benefit that nobody wants to touch.
Since United Airlines filed for bankruptcy protection almost two years ago, it has put the squeeze on shareholders, bondholders, creditors and employees. But if it tries to dump its pension plans there'll be a real outcry.
In a letter to United, more than 100 Washington lawmakers are urging the company to "honor the promises you have made to your employees and their families."
The politicians say it's unfair to sacrifice the workers' retirement security.
True enough, but it's also unfair to wipe out shareholders and put some 40,000 people on the street.
Cold as it sounds, that's life in bankruptcy. And if United wants to raise money to emerge from Chapter 11, it has to ax the pensions -- or get employees to again take deep cuts in pay and benefits.
Like the pilots' contracts and network hubs of the 1990s, the pension plans at legacy airlines got out of whack, and a price is being paid today.
United says it would have to put $4.1 billion into its pensions in the next five years to meet funding requirements. New investors don't want their money going there; they want it going into flying routes, maintaining planes and the like.
US Airways says it would be "irrational" to pay up its pensions, because it's in bankruptcy again.
The pension question has been an elephant in the room for the older airlines since 9-11, when the industry's finances started to crater. To compete with discounters, airlines had to cut their fleets, then their work forces, then their pay scales.
They changed work rules and made hubs more efficient.
Yet the discounters have marched on, picking up market share and keeping airfares low, while rising oil prices have taken an additional toll.
So now it's pensions on the to-do list, at least for the struggling carriers.
Impressively, American Airlines has pumped $461 million into its pensions this year and has kept them intact. If American workers wonder about the advantages of restructuring their contracts early and without bankruptcy, this is one of them.
In contrast, United won't make a $575 million contribution to its pensions that's about due. US Airways, which this month went into bankruptcy for the second time, is ignoring a $110 million pension payment.
Delta Air Lines is trying to cut $1 billion from its pilot costs, including pension obligations.
Low-cost airlines don't face this expense, because they use 401(k)s, profit sharing or similar pay-as-you-go plans.
Pensions are a remnant of an age when retirees were promised a payment for life, based on their income and years of service. Employers have stopped creating these defined-benefit plans, but existing pensions remain popular with employees.
That's because they're shielded from inflation and downturns in the stock market.
But those factors can make them expensive for companies. If an industry turns down when the stock market does -- as occurred with the airlines -- the burdens can soar.
United's unfunded pension liability tops $8.3 billion; US Airways' is $2.1 billion; and at the end of the 2003, Delta's was $5.7 billion and American's was $2.7 billion.
The airline industry owes $31 billion more than it can pay for its pensions.
But companies can't just walk away from them. Pensions are often negotiated with unions. To close one, a company has to pay out its obligations and amend its collective bargaining agreement. That can be difficult.
Or it has to demonstrate, usually to a bankruptcy judge, that it can't fund the pension. Then the Pension Benefit Guaranty Corp. takes over the plan and pays out up to about $44,000 per person annually.
Only high-paid workers lose when the Pension Benefit Guaranty Corp. rescues a failing pension, which is why pilots are often willing to make other concessions to keep their pensions whole.
The Pension Benefit Guaranty Corp. is a federal agency that receives premiums from companies sponsoring the pension plans. One fear in Washington is that United and US Airways could begin a cascade of pension terminations, which could force the government to bail out the industry.
Many plans are fully funded or close to it, so they're less of a financial burden to companies, says Richard Ippolito, former chief economist of the federal agency.
"And workers don't want their plans terminated," he said.
Employers also use them as retention tools, with pension formulas that reward longevity.
A 40-year-old worker has a strong incentive to stay, Ippolito says, because he could lose about two-thirds of his pension if he quits.
Can American, Northwest Airlines and Continental Airlines continue to have pensions if their competitors don't?
That depends on whether they have advantages elsewhere, perhaps squeezing more efficiencies out of operations or generating higher revenue.
If a pension is a priority for workers, management may be able to find a way to fund it. But if investors are making the call, they'll have other ideas for the money.
--------------------------------------------------------------------------------
Mitchell Schnurman's column appears Wednesdays and Sundays. (817) 390-7821 [email protected]
--------------------------------------------------------------------------------
© 2004 Star-Telegram and wire service sources. All Rights Reserved.
http://www.dfw.com
