Updated with correction
The PBGC and its director, Joshua Gotbaum, have a fighting chance of winning their battle against American Airlines, which is trying to terminate four pension plans as part of parent AMR Corp.'s Chapter 11 bankruptcy filing.
“It (is) a three-dimensional chess game ... and (Mr. Gotbaum) knows how to play,” said one bankruptcy expert, who declined to be identified.
The risk of assuming a $9 billion unfunded liability from American offers plenty of motivation for officials at the Pension Benefit Guaranty Corp., Washington. For the PBGC, AMR employees and retirees as well as a slew of other creditors, American's Feb. 1 announcement that it intends to terminate its defined benefit plans was the beginning of what promises to be a full-pitched battle that will be fought on several fronts. The dramatically high stakes include thousands of jobs, billions of dollars and the $9 billion pension deficit.
For Fort Worth, Texas-based American Airlines, it is a fight for survival among more cost-efficient competitors. To stay in the game, AMR executives say they need to cut annual costs by $2 billion, with $1.25 billion of that coming from reduced labor costs, including a 15% work force reduction.
When it comes to the pension plans, the airline says on its website, “We simply do not see a way we can secure the company's future without terminating our defined benefit plans.” Instead, it proposes to offer all active employees except pilots a new 401(k) plan with a company match up to 5.5%. The higher-paid pilots, who currently have a DB plan, a money purchase plan and a small 401(k) plan that does not have an employer match, would get a new defined contribution plan of their own.
For the PBGC, it is a battle to avoid, or at least minimize the damage from, what promises to be the largest claim in agency history. The current record holder, United Airlines, added $7.4 billion in pension claims to the PBGC's books after its 2005 exit from bankruptcy.
Taking over all four American plans — for pilots, flight attendants, agents and ground crews — would give the PBGC $18.5 billion in liabilities but just $8.3 billion in assets, creating a $10.2 billion difference. PBGC benefit limits would cap the claim at $9 billion, leaving roughly $1 billion in benefits unpaid.
That makes PBGC a major player on the bankruptcy creditor's committee, and Mr. Gotbaum hasn't been shy about jumping into the role. Mr. Gotbaum, the bankruptcy trustee for Hawaiian Airlines from 2003 to 2005, jockeyed early on for a spot on American's creditors committee even though AMR did not include the agency on its list of top 50 largest creditors (because plan termination had yet to become an issue).
Having sat across the negotiating table from the PBGC for Hawaiian Airlines, Mr. Gotbaum said he appreciates both sides. “We want American Airlines to be able to reorganize successfully and succeed as a business. However, we would like it to succeed as a business without killing its pension plans.”
The first step, Mr. Gotbaum said, is for American to prove that it has no alternative but to terminate its plans. “First, we have to see if they can keep their plans,” Mr. Gotbaum said in an interview. “If they can't, then we have to be prepared to take them.” He is pushing for access to past expenditures and pension contributions, as well as restructuring plans.
Preparing for the possible outcome and trying to minimize its financial burden, the PBGC already has filed 76 liens against $91.6 million in company assets not involved in the bankruptcy case. That legal tool became available when American made $6.5 million of a $100 million required pension contribution in January, saying it needed the cash to reorganize. With another $100 million due April 15, the PBGC is prepared to take similar action if American misses that, Mr. Gotbaum said.
Mr. Gotbaum is also lining up supporters on Capitol Hill, reminding them that Congress gave American roughly $1 billion in pension funding relief in 2007, when American was allowed to use a higher discount rate for calculating pension obligations, reducing the amount the company had to put aside for those obligations.
Rep. George Miller, D-Calif., urged Mr. Gotbaum in a letter “to avoid allowing a repeat of United Airlines” that “may leave taxpayers on the hook” for the unfunded liabilities for American Airlines employees. “Termination should only be a last resort and not part of any business strategy to exploit the bankruptcy process and dump pension liabilities onto the taxpayer,” Mr. Miller wrote.
The first skirmishes will take place between the company and the three unions representing American's pilots, flight attendants and ground crew, which are determined to minimize the damage and protect as many jobs and benefits as possible. When it comes to terminating the pension plans, Patrick Hancock, a benefits expert with the Association of Professional Flight Attendants, said: “We don't think it's necessary. We think it's overreaching, but we are going to negotiate with the company to see if we can accomplish what they need to do.”
Once those union negotiations begin in earnest, union solidarity is expected to give way to self-interest, most notably among the pilots, who stand to lose the most if their pensions are transferred to the PBGC. Because of a $54,000 annual benefit cap, some pilots could lose one-third or more of their retirement benefits, and they are expected to work unilaterally with the company to at least freeze their defined benefit plan, industry sources say.
The threat of plan terminations and other work-force cuts “is setting up for a cage match” between the unions, said Robert Mann, former American executive and an airline financial analyst at his eponymous firm.
That dissention will give the company leverage as it tries to renegotiate its labor contracts and maneuver through bankruptcy proceedings, he said.
For now, each party has engaged small armies of experts to pore over financial documents to see what the company can and cannot afford, and how much each creditor will get paid. In the PBGC's case, it's a question of how much the agency will be stuck with. AMR has 18 months to figure out a final plan.
To help address labor and pension issues, American engaged Perella Weinberg Partners, New York, and Groom Law Group, Washington. The bulk of their work will be with the creditors' committee.
Perella Weinberg will review American's pension and benefits plans and options, including “strategic alternatives and tactics and strategies for negotiating with various stakeholders and pension regulators,” according to court documents.
Groom, noted for its ERISA expertise and insight into PBGC strategy, has numerous PBGC alumni — many of whom were working for the PBGC when it dealt with other airline bankruptcies with mixed results. The PBGC ended up assuming responsibility for all United Airlines pension plans in 2005, but only the pilots plan at Delta Air Lines in 2006 and none at Northwest Airlines Corp. Following US Airways' two bankruptcies, the PBGC took over the pilots plan in 2003 and the rest of its pension plans in 2005. Of all liabilities assumed by the PBGC since 1974, roughly 45% are from airlines, data from the PBGC show.
At the end of the day, it is up to the bankruptcy judge to decide how much pain is needed to keep American in the airline game. Mr. Gotbaum and his fellow creditors will be competing with AMR to make the case for who should get hurt the least.