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.”