Airline industry ponders UAL move

UAL Corp.'s decision to stop contributing cash to United Airlines' severely underfunded pension plans might sound the death knell for the carrier's defined benefit plans, according to industry observers.

Less clear, however, is what the knock-on effect would be for the rest of the airline industry.

While some experts think a termination of Chicago-based United Airlines' four pension plans will force other major carriers to shut down their costly plans to remain competitive, others argue that airlines are unlikely to plunge into Chapter 11 bankruptcy proceedings just to terminate their plans.

Rather, some might turn to the model offered by Gerald A. Grinstein, chief executive of Delta Air Lines Inc. In a July 30 letter to the Air Line Pilots Association, Mr. Grinstein implied he will seek to freeze benefit accruals at Delta's plans and to create a new retirement plan to cover future accruals.

"Delta's objective is to maintain the ability to fund the existing plans and provide a secure, sustainable new retirement plan for the future, within the boundaries of viability for Delta," he wrote. Delta spokeswoman Catherine Stengel declined to provide additional details.

In response, the union's leadership lambasted Mr. Grinstein's proposal, which was part of a broader package seeking $1 billion in concessions from the union.

"Management's proposal appears to have only one purpose — to exploit the current situation and attack our profession by destroying our contract," Capt. John J. Malone, chairman of ALPA's leadership committee, said in an Aug. 4 letter to pilots about the $1 billion in concessions. Delta pilots had offered a package worth up to $705 million in wage and benefit cuts in exchange for company stock, profit-sharing and governance changes, in an offer that kept the defined benefit plan intact.

Freezing benefit accruals would be far less costly to plan participants than terminating their pension plans. For example, UAL participants stand to lose billions of dollars in benefit payments if UAL dumps the plans on the Pension Benefit Guaranty Corp. Because the PBGC guarantees pensions of up to a maximum of $44,386 a year, only $5 billion of the $7.5 billion in United's pension liability would be covered by the agency, according to a PBGC official.

Jeff Speicher, a spokesman for the PBGC, said that 11 airlines reported a total of $31 billion in pension plan underfunding as of Dec. 31, the most recent such report. That figure represents the PBGC's maximum total exposure to the airlines, he said.

Robert Mann, an independent aviation consultant in Port Washington, N.Y., said United might be able to cut in half its $4 billion pension obligation through 2008 by terminating its plans and adopting new defined contribution plans in their place. In contrast, Atlanta-based Delta could save $300 million a year by freezing its defined benefit plans and using defined contribution plans going forward, he estimated.

Experts fear that the termination of United's plans would lead major airlines to shut down their own plans as a way to pare costs.

"With the competitive balance in the industry, if United were to do it, everyone else would follow suit," said Frank Cummings, of counsel with the firm LeBoeuf Lamb Greene & MacRae LLP, Washington, which is representing United Airlines' retired pilots.

If any of the airlines could shed their pension liabilities, "it would be like a row of dominoes," he noted.

Ray Neidl, an airline analyst with Blaylock & Partners, New York, agreed that if UAL ultimately decides to shift the burden of its pension plans to the PBGC, "it would put severe cost pressure on all the other airlines" that have similar defined benefit plans.

Airlines have some of the worst funded pension funds. At year-end 2003, United had a pension deficit of $6.16 billion, followed by Delta at $5.66 billion; Northwest Airlines Inc., Eagan, Minn., $3.75 billion; AMR Corp.'s American Airlines, Fort Worth, Texas, $2.66 billion; and US Airways Group Inc., Arlington, Va., $1.74 billion.

"I am exceedingly pessimistic about the ability of those plans within the airline industry" to survive, said one source close to the airline industry. "Frankly, I think that's going to just accelerate the race to the bottom with any employer that has defined benefit plans" facing serious international competition.

Particularly vulnerable are the steel and auto industries, where foreign competitors' pension benefits are largely provided by state pension systems, thus providing an implicit taxpayer subsidy, he said.

Others disagreed, saying one size doesn't fit all.

American Airlines' pilots had already gone to the mat to protect their pension benefits during negotiations last year in which they accepted a pay cut of nearly 25%, American management and labor officials said.

"We're on a different track," said Capt. Ralph Kruger, chairman of the pension committee for the Allied Pilots Association, Fort Worth, which represents American pilots. "We avoided bankruptcy. American has contributed to the plan, and the plan is very well funded."

"Our perspective is very different. We think the pension obligations are very important, and we're funding them," said William F. Quinn, president of AMR Investment Services Inc., Fort Worth. The manager oversees the investment of $14.7 billion in American Airlines pension assets.

But things could change, he acknowledged. "If UAL terminates, if it passes (its plans) onto the PBGC and discharges other debt payments, it would put us at a disadvantage. It would put us in a great debate and discussion with our employees," Mr. Quinn said.

Houston-based Continental Airlines Inc.'s pension plans are less vulnerable. Its pension fund, with $1.3 billion in assets as of Dec. 31, was 90% funded, according to spokeswoman Julie King. "So we don't have the same type of pension pressure that we've seen at the other carriers. We have not asked our employees for concessions, and we're working hard not to."

Less well off are US Airways and Northwest. US Air, which terminated its underfunded pilots plan last year as a means to exit bankruptcy proceedings, is now poised to once again seek protection from its creditors. Its pension plans were 65.1% funded as of year-end 2003.

David Castelveter, US Airways spokesman, would not comment on whether his airline is considering terminating its existing pension plans, saying "that's a question that will be answered in due course."

Right now, Mr. Castelveter said, US Airways' "immediate focus is on consensual concessions with labor groups that would keep (US Airways) from defaulting" on any of its financing agreements. The airline is seeking to cut $1.5 billion of costs, $800 million of which would come from restructured labor agreements, he said.

Meanwhile, Northwest's pension plans were only 56.2% funded as of year-end 2003. Last year, the company contributed shares of subsidiary Pinnacle Airlines Corp. to its three underfunded plans. In December, the company sought permission from the Internal Revenue Service to reschedule some of its pension payments for the 2004 plan year, but it withdrew that request after the Pension Equity Funding Act was signed into law on April 15, according to the company's latest quarterly filing.

This year, the company has paid in $169 million of its $253 million pension contribution to date, and plans to make the remaining $84 million payment during the course of the year.

Northwest spokesman Kent Ebenhock declined to comment on the impact of a UAL termination on Northwest's plans.