American Airlines Inc. and Continental Airlines Inc. would continue to use a discount rate of 8.25% to calculate their pension underfunding under legislation approved today by the Senate Finance Committee. But according to committee sources, the legislation would require the airlines to fully fund benefits that accrue in a current year. We dont want American to underfund its plan by not paying benefits that accrue in a current year, a committee source said.
Under an amendment to an Iraq war funding measure last year, Fort Worth, Texas-based American and Continental, Houston, would have been able to use the 8.25% discount rate to calculate their pension underfunding without fully funding current year benefits.
The amendment to the Iraq war bill, credited to Sen. Richard Durbin, D-Ill., was intended to level the playing field between American and Continental, which have active defined benefit plans, and Northwest Airlines Corp., Eagan, Minn., and Delta Air Lines Inc., Atlanta. Under a key provision in the Pension Protection Act of 2006, Northwest and Delta, which have frozen DB plans, received authority to use a discount rate of 8.85% to calculate their own underfunding. Without the amendment, American and Continental would have been required to use lower corporate bond rates to calculate their funding obligations.
The Northwest and Delta provisions are not affected by the measure approved today.
"We are carefully reviewing the action taken today by the Senate Finance Committee, Andrew Backover, a spokesman for American parent AMR Corp., said in a statement. Until we see actual legislative language, we will not be able to measure the impact of the proposal.