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United Plan to Stop Pension Contributions Challenged (Update2)
July 26 (Bloomberg) -- UAL Corp.'s United Airlines violated federal laws by agreeing with bankers to halt contributions to its employee pension plans under terms of a new bankruptcy loan, the U.S. Pension Benefit Guaranty Corp. told the airline.
The agency, which pays benefits when corporate pension plans fail, told UAL Chief Executive Glenn Tilton in a letter that United's failure to pay $72.4 million due July 15 and plan to skip more than $500 million this year is ``of great concern.'' A United pension default would be the agency's biggest.
Chicago-based United, the world's second-largest airline, secured an additional $500 million for operations during bankruptcy on condition that it suspend pension payments. Internal Revenue Service rules and the Employee Retirement Income Security Act prohibit such agreements, the letter said.
``Please provide a detailed explanation of how the company's business plan will enable it to meet these obligations,'' Bradley Belt, executive director of the agency, said in the letter released by the agency. ``If UAL intends to terminate any of its defined benefit pension plans, the PBGC and plan participants should be made aware of that fact as soon as possible.''
The agency said it wants the issues discussed at a meeting Thursday with United. United spokeswoman Jean Medina said a mutually agreeable date for a meeting still needed to be set.
United Response
``We believe we are taking the steps necessary to retain liquidity and flexibility as we work to arrange exit financing,'' Medina said.
A UAL default would be the biggest in the pension agency's 30- year history, spokesman Randy Clerihue said Friday. The agency estimates it may be liable for $5 billion of UAL's $7.5 billion in outstanding pension benefits, he said. United retirees would likely lose $2.5 billion if the company didn't replace some of the benefits.
The agency, financed by companies with defined pension plans and not taxpayers, has had more than 70 percent of its claims filed by airlines and steel producers, Clerihue said.
After UAL was turned down for a federal loan guarantee last month, Standard & Poor's Philip Baggaley and other analysts said the airline would likely have to consider reducing its pension obligations and other costs to attract alternative financing. UAL had hoped the guarantee would secure $2 billion in exit financing.
The pension agency took over the US Airways Group Inc. pilot pension plan after the airline ended benefits for almost 7,000 active and retired pilots in March 2003 while in bankruptcy proceedings. Ending the plan helped US Airways cut $1.9 billion in costs and exit bankruptcy the following month.
US Airways
Arlington, Virginia-based US Airways obtained $1.24 billion in financing that was conditioned on termination of the retirement plan. The U.S. government provided a guarantee for $900 million of the post-bankruptcy financing.
The pension agency pays up to $44,000 annually in benefits to a 65-year-old retiree who has earned at least that amount or more in a corporate plan that the agency takes over. Younger retirees get less. Pilots, who are paid more than other airline workers, stand to lose the most while lower-paid workers, such as attendants, would lose less, or nothing at all.
Terminating the pension plans would cut pension benefits for about a third of United's Association of Flight Attendants members, according to preliminary union estimates. The union represents 21,000 workers and 4,000 retirees.
`Powerful Move'
``I think that's going to be a powerful move on the part of the PBGC,'' said Greg Davidowitch, president of the United Association of Flights Attendants. ``That sums it up to say that United is not going to get away with this.''
UAL shares fell 5 cents to $1.26 in over-the-counter trading at 3:55 p.m. UAL, which was 55-percent owned by employees before the bankruptcy filing, has said the shares aren't likely to have any value after the reorganization.
UAL told the bankruptcy court Friday that it had received the additional bankruptcy financing through the middle of next year from J.P. Morgan Chase & Co., Citigroup Inc., CIT Group Inc. and a General Electric Co. unit. The company declined to say when it plans to exit bankruptcy.
Missing the payments makes UAL subject to monetary penalties, though recovery is difficult when a company is in bankruptcy, Clerihue said. The company is expected to report a second-quarter loss on Thursday.
To contact the reporter on this story:
Lynne Marek in Chicago at lmarek@bloomberg.net
To contact the editor responsible for this story:
Steve Geimann at sgeimann@bloomberg.net
Last Updated: July 26, 2004 17:45 EDT
