According to Mr. Ugoretz, the problems with defined benefit plans are "pretty much limited to the airline and steel industries." He said those two industries have faced a fairly similar and unique set of problems — while airlines have experienced deregulation and the advent of low-cost carriers, old-line steel companies that handled the entire steel-making process faced competition from firms that only dealt with the finished product. He said the rest of the defined benefit "universe" is doing what it's supposed to — funding plans and paying benefits, which is a reason Mr. Ugoretz believes it's a mistake to presume defined benefit plans, overall, are on the verge of extinction.
Bradley Belt, executive director of the Pension Benefit Guaranty Corp., Washington, expressed a bleaker view, saying the United agreement "sets a dangerous precedent." The PBGC "will be scrutinizing this agreement very closely and will take all appropriate steps to protect the financial interests of the pension insurance program," Mr. Belt said in a Dec. 17 statement.
The PBGC estimates United's plans are underfunded by $8.3 billion, according to the agency's most recent figures. United's plans had $6.96 billion in assets as of Dec. 31, 2003, according to parent company UAL Corp.'s 10-K filing. The PBGC estimates the pilots' plan is underfunded by $2.3 billion.
David Swierenga, an independent aviation consultant with AeroEcon in Vienna, Va., said he believes the problems that plague airline defined benefit plans deviate from general defined benefit woes, in part because the industry is so cyclical and dependent on market trends. He noted that airlines are more closely tied to the stock market's rise and fall than most other sectors.
These problems "have been hanging over the industry" since it was deregulated in 1978, when low-cost carriers like Southwest Airlines Co. took flight and provided their employees with defined contribution plans, which are not as expensive to maintain as traditional pension plans, Mr. Swierenga said. The success of those low-cost airlines have made older airlines with large defined benefit plans reconsider their retirement plan strategies.
Frank Cummings, of counsel with the law firm LeBoeuf Lamb Greene & MacRae LLP, Washington, is representing United's retired pilots and said the old-line airline industry is in a "perfect storm" because of the convergence of factors contributing to the decline of their defined benefit plans. He said the cyclical nature of airlines — like the steel industry — has played a significant role in the decline of their defined benefit plans.
Mr. Swierenga believes airlines' defined benefit plans are "on their way to becoming extinct," but he doesn't see them going away quickly. The struggle between the airlines and their labor groups "will go on for a long time," he said.
In response to the airline and steel industry's woes, Congress earlier this year passed the Pension Funding Equity Act of 2004, which gives airline and steel companies a pass on accelerated plan contributions for this year and 2005. That stopgap measure expires at the end of next year.