UAL Corp's United Airlines, attempting to cut costs and exit bankruptcy, reached an agreement to have a United States agency take over US$6.6 billion of employee pensions owed by the carrier.
It is the biggest claim that the agency, which insures retirement plans, has had to cover since it was created in 1974. United will seek bankruptcy court approval of the agreement this week, United spokeswoman Jean Medina said on Friday. The airline will terminate pension plans that are underfunded by US$9.8 billion.
United workers are left to absorb as much as US$3.2 billion in pension benefit losses because the agency, called the Pension Benefit Guaranty Corp (PBGC), does not fully cover payments promised under the plans. Chicago-based United, the world's second-largest airline, has said the plans must be eliminated to reduce expenses and win financing for a bankruptcy exit.
"The PBGC has an obligation to reduce its losses," agency Executive Director Bradley Belt said in a statement. "By reaching a settlement now we further that goal."
The agency, which insures pensions for about 44 million people in the US, has a deficit of US$23.3 billion and is being increasingly burdened by failures in the airline industry, where retirement plans had a US$21.1 billion negative balance last year. The PBGC also took over the plans of US Airways Group Inc, which is also under bankruptcy protection.
Bankruptcy claims settled
The four plans that would be terminated under the settlement are for flight attendants, pilots, mechanics and bag handlers; and management, administrative and customer service workers. The agency previously sought to terminate the pilot and ground workers' pensions over objections from United. Those motions have not been acted on by the court and would be addressed by this agreement.
Friday's agreement would also settle the PBGC's bankruptcy claims against the carrier over the pension liabilities. United and the agency declined to say what compensation the agency would receive in the settlement. Details are to be disclosed in this week's filing and a hearing will be held on Thursday, Medina said. The agreement would take effect on different dates for each of the plans, she said.
"The PBGC and its financial advisers believe the settlement is superior to the recovery the agency would have received as an unsecured creditor in the bankruptcy," Belt said in the agency's statement.
The seven major US network airlines, including Delta Air Lines Inc, are struggling to cut costs, especially the billions of dollars in future pension expense, after posting US$33 billion in losses since 2000. Wage and benefit costs are the carriers' biggest expense. Stock price declines and low interest rates have eroded the value of their plans.
Pension termination
United, which filed for bankruptcy in December 2002, earlier this month filed court motions to terminate pensions for its pilots, flight attendants, mechanics and bag handlers. Before that, the Chicago-based carrier had been negotiating with most of its unions for alternatives to termination.
"Our door remains open if there are other pension ideas that meet the needs of our business plan," UAL Chief Financial Officer Jake Brace said in an interview.
Greg Davidowitch, president of United's Association of Flight Attendants, called Friday's agreement "outrageous" and said the union would fight it. United's Air Line Pilots Association had previously agreed not to protest the carrier's plan to terminate its members' pensions.
The carriers are trying to lower labour costs because fuel expense, their second-biggest cost, has risen on higher energy prices and because competition for US flights has reduced fares. The airlines are urging passage of US legislation to help ease their pension obligations by spreading payments over a longer period.
The PBGC insures the pensions of the 20 per cent of the US workforce that has defined-benefit plans, which prescribe a fixed monthly payment for workers after retirement. The payouts of defined-contribution plans, such as 401(k)s, depend on how much employees contributed over their tenure.
(China Daily 04/25/2005 page12)
