Treasury changes pension regulations so pilots cannot exercise lump sum option


Jan 5, 2003
AA had earlier signaled that it wanted to terminate the underfunded employee pensions (especially the pilots' plan) so that would enjoy some of the advantages enjoyed by US, UA and DL, which terminated their pilots' plans in Ch 11, reducing their cash outlays. CO and NW froze their pilot plans, so DL and UA have some pilot pension contributions, but both of those plans were small.

Josh Gotbaum of the PBGC went ballistic when he heard of AA's plans and embarked on a crusade to convince AA to freeze all of its pensions instead of termination, so that his PBGC would not be burdened with the underfunding problem (that US, UA and DL had achieved). Eventually, AA captitulated, and agreed to freeze the plans instead of termination.

Problem was, the pilots' A plan (like DL's pilot plan) contained a lump sum distribution option. Over 1,000 AA pilots retired early from 2008 thru late 2011 before the Ch 11 filing so that they could exercise this option and withdraw far more than they would receive if the plan was terminated in Ch 11. Without changes in the federal regulations, a freeze would still permit the pilots to take the lump sum option. AA's fear (just like Delta's fear) was that another thousand or more pilots might retire immediately upon exit from Ch11, crippling the airline and causing massive accelerated cash contributions to the pilot plan. Of course, DL terminated its pilot plan, ending its financial obligations to the underfunded plan.

Gotbaum's answer to those concerns was that he would help AA obtain regulatory changes that would permit AA to freeze the plan and cancel the lump sum distribution option, freeing AA from the mass early retirement danger.

As promised, Treasury came thru and amended the rules to enact the AA exception:



While good news for the pilots (obviously) and good news for the PBGC, this ensures that AA will still have the highest pension costs in the industry. Despite the freeze in benefit accrual, all employees will still receive the pension they had accumulated as of the freeze, which will require substantial contributions going forward. Essentially, AA's backpack continues to be heavier than that of UA, DL or US even with the Ch 11 filing.
Essentially, AA's backpack continues to be heavier than that of UA, DL or US even with the Ch 11 filing.
which makes you wonder what WAS the purpose of the BK filing if AA emerges with costs that aren't any lower than its competitors and debt that far surpasses its peers, since a large portion of the secured debt remains on the books (AA had very little unsecured debt anyway) and AA is adding to that with substantial aircraft orders.

The possibility ALWAYS existed that AA would be forced to carry its pension obligations and not terminate them.