NEW YORK, Jan 13, 2003 (BUSINESS WIRE) -- The US airline industry is likely to assume a new and prominent place as the industry is at risk for financial fallout resulting from the growing magnitude of its pension funding problem. In a new report to be released this morning, Fitch Ratings estimates that the aggregate level of pension plan underfunding in the industry will exceed $18 billion as of Dec. 31, 2002.
'Increased pension funding burdens will ultimately affect the credit quality of major network carriers currently operating outside of bankruptcy, and will complicate the task of reorganization under Chapter 11 for both US Airways and United,' said analyst William Warlick. 'These growing obligations will inevitably lead to large increases in required cash contributions to pension plans, compounding the financial stress and cash flow concerns that already exist in the industry.'
However, this is a situation that is affecting only the major US network carriers. 'The absence of defined benefit plans among the low-cost carriers, such as Southwest, AirTran, ATA, JetBlue and Frontier, represents yet another source of competitive advantage for these airlines in relation to their high-cost network carrier rivals,' Warlick added.
According to Fitch estimates, Delta has the largest underfunded pension obligation at $4.4BN and United follows with $4.1BN. American, Northwest and US Airways each have a gap of $3.0BN or more.
Fitch will be hosting a teleconference to further address questions regarding the pension issue on Tuesday, Jan. 14, 2003 at 11:30 a.m. Information regarding the call will follow.
The Fitch Report 'Rapid Descent: Pensions in the US Airline Industry' is available on the internet at 'www.fitchratings.com'.
CONTACT: Fitch Ratings
William Warlick (Airlines), 312/368-3141
Chris Struve (Pensions), 312/368-3188
Mark Oline, (Airlines), 312/368-2073, Chicago.
James Jockle, 212/908-0547, New York.
This article clearly shows we're not alone.Other airlines have the luxury of time to work through their problem.U has to confront the pension problem now as a condition to exit CH-11.
Since Washington is not able to help with a bill to help U.
U says they may be force to terminate the pilot pension plan and replace it.
My question is what are the procedures and possible consequences to this action of replacing the pension plan
It's crunch time with respect to the underfunded pensions.U's POR is based on an approval to spread the payments over 30 years.This approval will likely not be granted and it will be a show stopper for U unless the PBGC swoops in and provides distress terminations.The employees will be hurt (especially the pilots) but the company will be required to use the money earmarked in the POR for pension restoration for an alternate pension plan for the affected employees.
According to the financial projections section of the company's POR filed with court, the pension issue will be dealt with before Thusdays BK court hearing.
"c) Projections regarding pension funding requirements are based primarily on assumptions regarding interest
rates and asset returns, the level of existing past service liabilities, changes to ongoing accrual rates, including
changes in the recently ratified ALPA agreement and an assumed 30-year amortization of unfunded pension
liabilities. The Debtors have not obtained approval of 30-year (or similar) funding under existing law, and
therefore it appears that legislation would be required to achieve this result. Accordingly, there can be no
assurance that the Debtors will be able to adopt this or a similar amortization of the unfunded pension liabilities.
If the 30-year or similar funding is not available, pension plan terminations may be required, which may result
in further negotiations with labor groups. Any solution must be accomplished within the timeframe permitted
under the Companyâ€™s Chapter 11 proceedings. The treatment of pension funding will be updated prior to the
hearing to approve the Disclosure Statement.with before Thursdays hearing."
If Senator Specter can get an expedited hearing sometime in January on the U pension issue the BK court could defer action pending the hearings outcome.If the judge agrees creditor voting could proceed with the understanding if the Capital Hill effort fails the PBGC will step in.
"SENATOR SPECTER:There is a U.S. Bankruptcy Court hearing on this matter on Wednesday. I do not think we have a problem about the solvency of US Airways being involved as I thought there might have been several weeks ago. But I think the court might be willing to defer action which touches upon these issues if there was knowledge that there was going to be expedited treatment."
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
At US Airways, a unit of US Airways Group Inc., Arlington, Va., four unions
on Friday and Saturday approved a secondary round of savings, most in
benefit reductions and work-rule changes, that are intended to help the
carrier win a government loan guarantee that would help it secure funds to
emerge from bankruptcy.
Workers represented by the machinists union, the Association of Flight
Attendants, the Communications Workers of America and the Transport Workers
Union narrowly approved the additional savings, valued at an estimated $98
million a year for six years. The pilots union last month ratified a savings
package valued at $101 million annually. These concessions are in addition
to $840 million in annual cuts the unions agreed to last summer, when US
Airways filed for Chapter 11.
But the nation's seventh-largest airline faces a new dilemma. Its pension
liability over the next eight years is estimated at $3.1 billion. In its
plan of reorganization filed in U.S. Bankruptcy Court in Alexandria, Va.,
last month, US Airways said it must find a way to deal with that liability
if it expects to win government aid, tap the last tranche of its
interim-financing package and gain creditors' approval for the
The company first asked the quasi-governmental Pension Benefit Guaranty
Corp. to let the airline extend the payments to the employee-pension plans
over 30 years. But the agency refused. Last week, two Republican senators
from Pennsylvania asked the Senate to unanimously adopt a bill that would
let US Airways string out the pension payments over three decades. The bill
was defeated, prompting a US Airways spokesman to say the company must
reassess its alternatives.
The bulk of the liabilities are related to pilot pensions, suggesting that
the company ultimately could terminate the plan and let the PBGC take over
with its lower payouts. The Air Line Pilots Association branch at US Airways
still hopes for a legislative solution, a spokesman said. "We are not
receptive to talking to the company about gutting the plan," he said, noting
that the pilots already agreed to a reduction in the payout to 50% of final
earnings from 65%. The union doesn't plan to cave in on this front, he said,
"even if it hinders the company's emergence from Chapter 11."
Judge Stephen Mitchell, who is hearing US Airways case, is expected to hold
a hearing Thursday to review the reorganization plan. If he authenticates
it, the plan would go out for a vote of creditors, who might balk at the
Seems to me like they really played the pilots big time. The pilots seem to have been willing to take such big pay cuts in order to save the pension. Now that the company has the pay cuts, they will go after the pension. If they had been up front about the pension problems, I bet the pilots would not have been so agreable to the huge pay cuts they have taken, cause lets face facts, they have taken much bigger cuts than anyone.
The problem as I understand it is that it's the PAST pension obligations which are in arears. The future ones aren't even being discussed yet. The PBGC has to allow the company to terminate the pension, a situation which dumps any sort of shortfall on the government to make up. Granted, the payout levels would be much less, but they would still be paid. The question is whom manages the accounts until then. I believe that the ONLY way the PBGC can protect the pensions and the government from this liability would be to 1) liquidate the company, repay the funds from asset sales, or 2) come up with a creative solution including longer repayment terms. In as much as ALL the major airlines (and all other industries with defined benefit plans) are in this boat, I think that the best thing for the government to do is somehow allow a creative restructuring of the shortage amount. Just terminating the pensions alone would have NO EFFECT on the balance already owed, therefore it doesn't solve the company's problem.