United Pensions Fuels Anxiety

Schwanker

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Dec 20, 2002
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United pension fuels anxiety

Funding gap stirs retirement fears

By Greg Griffin
Denver Post Business Writer


Capt. Herb Giefer's final flight on United Airlines ended with a water-cannon salute and kind words at Denver International Airport last week.

But Giefer, completing a 34-year career with United, is worried that the bankrupt company won't be able to treat him so well in retirement.

United's pension plans are critically underfunded. Its employees and retirees could lose hard-earned benefits if the company terminates the funds and hands them to the government.

"I'm very concerned. It could cost me an awful lot of money" if United can't honor its pension obligations, the Evergreen resident said. "It hasn't affected my life measurably yet, but if it happens, it certainly will."

United's pension shortfall - the gap between the current value of the investment assets in its retirement plans and the total payments it must eventually make to retirees - is the largest in the airline industry at more than $6 billion.

Just four years ago, United and many of its competitors had comfortable pension surpluses. But a declining stock market, low interest rates and financial troubles that kept airlines from making scheduled plan payments, combined to create one of the biggest pension crises in U.S. business.

The shortfall for all U.S. airlines is $26 billion, according to government estimates. The carriers and their labor unions are lobbying for relief on Capitol Hill. But some observers say the industry may have trouble getting special treatment in Washington, where it has looked frequently for help during the last two years.

The pension problem is acute at United because the carrier is developing a business plan under which it can emerge from bankruptcy. Cash-draining pension payments in the next few years could pummel United's earnings and drive away billions in investment it needs to exit Chapter 11.

Under federal law, United must make accelerated pension payments because the funds are at such low levels.

United must pay $4.2 billion into the plans by the end of 2008. The company has no payments due this year but owes in the range of $1 billion next year, according to sources familiar with the pensions.

"We have a number of big issues ahead of us, and the pension is clearly one of the biggest," said United chief financial officer Jake Brace. "It's very much front and center in everyone's mind."

Potential investors "don't want to see their money financing the pension plans," he said.

The company is working on several fronts to resolve the crisis. Brace said United will likely seek waivers, available under current law, allowing it to postpone some of its looming payments.

But the company also is pushing hard for a political solution. Company and union leaders believe the crisis will pass if United can push a chunk of its payments far enough ahead to give the airline, the economy and the stock market time to recover.

United chief executive Glenn Tilton traveled to Washington last week to lobby for a bill, sponsored by Rep. David Camp, R-Mich., that would allow airlines to postpone some payments for five years and give them another two decades to pay off pension deficits.

Other legislation is being considered to recalculate how pension liabilities are calculated, essentially reducing their size.

United has other options. It could issue new stock into the pension funds, similar to a plan approved by the government last month for Northwest Airlines. United also could use its leverage in bankruptcy to force the unions to accept more pension concessions than they already have.


The final possibility, experts said, is termination, in which the government would take over the funds but provide many retirees only with partial benefits. US Airways terminated its pilots' pension this year, cutting benefits in some cases by 70 percent.

Union leaders oppose additional benefit reductions, but others say they may be necessary.

"One way or another, the pension obligation must be reduced," said Richard Bittenbender, an airline analyst at Moody's Investors Service in New York. "Whether that's through eliminating the pension plan or adjusting it is clearly the question. Either of those outcomes is a possibility."

United asked U.S. Bankruptcy Court last week for a six-month extension, until April, to develop its reorganization plan. Brace said the airline needs more time to deal with several restructuring issues including the pensions.

For United retirees, that means more uncertainty. Many say they've postponed vacation plans and major purchases until the pension issue is resolved. Others have taken new jobs or are looking.

"We can't plan anything. We've cut back our spending and put all of our retirement plans on hold," said retired United pilot Peter Lynch of Golden.

Lynch, 61, left United in August 2002 and now flies corporate jets for a fraction of the income, in part because he said he's worried about his United pension.

He has good reason to be wary. He lost another pension when his former employer, Eastern Airlines, liquidated in 1991. Lynch also lost about $400,000 in retirement savings through his United employee shares, as the stock fell in value from $100 in the late 1990s to nearly zero today. Lynch also said he is concerned that United will cut his health coverage.

Lynch, Giefer and other retired United pilots said they support the proposed pension bill, known as the Air Line Pension Act.

There are about 250 retired United pilots in the Denver area and hundreds more retired flight attendants, customer-service agents and ramp-service workers.

The company employs about 6,100 in the area, and DIA is United's No. 2 hub, where it flies about 60 percent of passengers.

United has four separate plans covering the pilots, flight attendants, mechanics and ramp workers, and management and public-contact employees.

If any of the plans are terminated, United would hand control of the funds to the federal Pension Benefit Guaranty Corp. That agency, already stressed by a cascade of failing pensions, might pay greatly reduced benefits. Retirees from higher-paid work groups, such as the pilots, stand to lose the most, while lower-paid workers such as flight attendants could receive close to their full benefits.

United hasn't ruled out the possibility of termination, but such a move would spark a bitter battle with the unions and groups representing retirees.

"The termination of the pilots' pension plan is completely out of the question," said Capt. Scottie Clark, spokeswoman for the United unit of the Air Line Pilots Association. "United's pilots have already given, and we won't be giving again on the pension issue."

Pilots gave up between $1 billion and $1.5 billion in pension benefits over the next six years in their latest contract, which also included pay cuts of 30 percent.

Other work groups, including the flight attendants, also gave up pension benefits and are lobbying for legislative relief.

"There's a real need for pension reform," said Sara Dela Cruz, spokeswoman for the Association of Flight Attendants. "The way it's set up now penalizes companies at the worst possible time."