MEC CODE-A-PHONE UPDATE
March 1, 2003
This is Roy Freundlich with a US Airways MEC update for Saturday, March 1.
Fridayâ€™s bankruptcy court hearing on the Companyâ€™s motion to distress terminate the pilots defined benefit plan reconvened at 930 a.m. In Judge Mitchellâ€™s opening remarks he commented on his frustration with the pace of the proceedings and stated that the hearing needed to be concluded quickly. After two full hearing days, the Company has called precisely two witnesses out of the five it identified, Duncan Darrow from RSA and CFO Neil Cohen. No objections to the Companyâ€™s motion had been heard prior to yesterday.
Judge Mitchell stated that he was not going to let the debtors, US Airways, take up all the time at the hearing and was frustrated at Company witnesses wasting the courtâ€™s time by not giving straight answers to straight questions on cross examination. He said that it was frustrating to listen to Neil Cohenâ€™s testimony and his refusal to answer straightforward questions. The Judge commented that he makes credibility judgments based on such responses and that Neil Cohenâ€™s approach to responding to the proceedings as if he was making a corporate boardroom presentation was inappropriate in a court of law, where questions are answered directly, under oath.
The Company called its final three witnesses yesterday and completed its presentation of its motion.
The Companyâ€™s actuary, Mark Duncan, from Towers-Perrin, provided testimony, under cross examination from an objector attorney representing retired pilots, on the IRS liability interest rates used by the Company to forecast funding obligations. The testimony centered on whether the interest rate used by the Company was appropriate for 2004 and following years where balloon funding requirements are currently projected and being used by the Company for justifying a distress termination of the pilots pension plan.
To project liabilities the IRS requires that a 4-year weighted average of the 30-year bond interest rate be utilized. Since 30-year bonds are no longer issued, as of February 2001, the rate is determined by bond yield. The rate is then increased by a factor of 1.05 or 105%. However, in 2001, in response to pension liability issues, legislation was passed to increase this factor to 1.2 or 120%, which has the effect of increasing the current IRS interest rate for projecting liabilities from 5.5% to 6.3% through 2003. This interest rate waver was meant to relax funding obligations by increasing the interest rate. This waver expires at the end of 2003.
Duncan testified that the Company decided not to extend the effect of the waver to 2004 and thereby project lower funding obligations, because the legislation that allows it is scheduled to expire in 2003.
The objecting position was that the legislation is expected to be extended by most industry experts. Or that the basis for the liability interest rate would be changed to a composite bond rate that would be significantly higher than 5.5% previously required by IRS conditions. An actuary witness for the objector attorney testified to the legitimacy of assuming that future legislation would produce the higher interest rate to reduce funding obligations for the pension plan, which he estimated to be 500-600 million dollars below the Companyâ€™s forecast over the seven-year period between 2003 â€“ 2009. The objector actuary witness also testified that if the pension plans were frozen, as opposed to terminating one plan, the funding obligation would be reduced by 700-900 million dollars over the same period when combined with assuming that the higher interest rate from expected legislation is legitimate for forecasting pension funding requirements.
Under direct examination, President and CEO David Siegelâ€™s testimony included comments on the restructuring negotiations, approval of the ATSB business plan, the Companyâ€™s attempt to receive an IRS super waiver, restoration funding for all employee pension plans, and the legislative relief for pilot pension plan funding.
When asked under direct examination if there was any chance that the Company could emerge from bankruptcy after March 31, 2003, Siegel testified that he believed that the Company runs an extremely high risk of not emerging from bankruptcy after March 31, as a result of the credit card processor agreement, which requires plan confirmation by that date.
Under cross-examination, Siegel testified that his current base is salary of $600,000, which includes a 20 percent pay cut and no incentive income. He will receive pay increases beginning in 2004 and by 2009 his base pay will be higher than his original pay prior to the reduction. Beginning in 2004 his annual compensation will include using his base salary plus an annual cash incentive, which he said he would begin receiving in 2005, that would double his base pay if performance targets are met. The performance targets have not yet been established by US Airways Board of Directors. Siegel further testified that he was not familiar with the details of managementâ€™s compensation plan, filed with the court Thursday night.
Under cross examination by ALPAâ€™s attorney, Siegel testified that there has been no discussion with Company officials for recovering the 35 million dollar non-qualified lump sum payout provided to Stephen Wolf, Rakesh Gangwal, and Larry Nagin prior to the Company filing for Chapter 11 bankruptcy.
When questioned on the Companyâ€™s position that ALPA agreed to a distress termination of the pension plan in the December 13, 2002, letter that addressed potential follow on plan funding minimums, Siegel testified that the letter was supposed to remain confidential until the final legislative decision on funding relief was issued. However he could not identify in the December 13 letter where that condition existed, since it is not the confidential condition of the letter.
He also testified on redirect examination that the final legislative decision was delivered on January 22, after his January 16 memo to all pilots breaching the confidential provisions of the letter. The Company also seemed to be suggesting to the court that a memo to thousands of US Airways pilots was a targeted communication, which somehow preserved some criteria of confidentiality while the pursuit of a legislative solution remained active.
ALPA questioned Siegel about his January 28, 2003, letter to all pilots, which contained a question and answer attachment on pension issues and stated that if we, ALPA, didnâ€™t agree to the Companyâ€™s plan, which was to distress terminate the defined benefit plan and institute a replacement defied contribution plan, then the Company would be facing liquidation. Specifically, how could the Company have thought ALPA agreed to a distress termination on December 13, 2002, and then state to all pilots on January 28, 2003, that if ALPA does not agree with the Companyâ€™s plan, it would face liquidation?
Siegel responded that it meant that if the pilots were not happy with the follow on defined contribution plan, then the Company could not emerge from bankruptcy. However, ALPA has still not noticed in the Companyâ€™s disclose statement on its Plan of Reorganization that pilots being happy is condition for US Airways to emerge from bankruptcy.
The MEC will be attending tomorrowâ€™s hearing in uniform, which will begin at 9:00 a.m. at the US Bankruptcy Court at 200 S. Washington Street in Alexandria, Va. A shuttle bus will be available to all pilots hourly from DCA baggage claim area, door 12, to the courthouse beginning at 8:30 a.m.
Thank you for listening.