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Get Four
|  | AUGUST 26, 2004
By Amy Borrus Pensions on a Precipice What could happen if UAL offloads its retirement plan on the feds? Let's take a look The threat by UAL, parent of struggling United Airlines, to walk away from its four pension plans has set off shock waves throughout the airline industry. Thousands of pilots, flight attendants, and mechanics are sweating possible drastic reductions in their retirement benefits. And if UAL were to make such a move, other ailing old-line carriers such as Delta Air Lines (DAL ), Northwest Airlines (NWAC ), and US Airways Group (UAIR ) might also slash pension costs to remain competitive. Yet UAL's crisis could spread well beyond airlines. Already it has renewed worries about the shaky financial health of the quasi-governmental agency that insures old-fashioned "defined benefit" pensions for 44 million Americans, the Pension Benefit Guaranty Corp. With the PBGC already $10 billion short of what it needs long-term to pay promised benefits, some experts fear the situation eventUALly may require a multibillion-dollar taxpayer bailout. Here's a primer on what could happen if United or other airlines dump their underfunded pension plans on the PBGC. Can UAL simply stop making payments to its pension plans? That's a matter of contention. UAL, which is seeking new financing to emerge from bankruptcy protection, missed a July payment of $72 million owed to three of its plans and says it will skip more than $500 million in payments due in September and October. A bankruptcy court judge so far has not ruled on the PBGC's request that UAL make the payments, which are required under federal pension law. But UAL is under intense pressure to pony up. Treasury Secretary John W. Snow, who sits on PBGC's board, told BusinessWeek on Aug. 23 that he agrees that UAL must pay. Says Snow: "Those are binding obligations, and they have to be taken seriously." How would a pension dump work? To offload its pensions onto PBGC, United would have to prove it is under severe financial distress. That shouldn't be hard, since the carrier has been in Chapter 11 since 2002, and its financial condition remains weak. The PBGC would assume the assets and liabilities of the plans, which the insurer estimates are underfunded to the tune of $8.3 billion. That would be the largest corporate pension default ever, far surpassing the $3.6 billion that Bethlehem Steel Corp. saddled the agency with in 2002. PBGC could petition for more of UAL's assets, but it would fall in line behind many other creditors. What would United's workers and retirees get? Collectively, $1.9 billion less than they expect now, since the PBGC would cover only $6.4 billion of the underfunding. That's because the PBGC's payments to retirees are capped by law at $44,386. And that maximum annual payout is far less than most pilots and some attendants and mechanics have been promised. Pilots face a double hit: Not only are they big earners, but by law they must retire at 60. Yet the PBGC reduces its payouts for those who retire before age 65. That means a 60-year-old senior pilot at United, who could expect a yearly pension of $100,000, would receive just $28,500. Little wonder that some pilots at United and other older carriers who can take lump-sum pension payouts if they retire now, are calling it quits. Would other carriers follow United's lead? Very likely. If United can offload its pensions, it would add hundreds of millions in annual cash flow. That would enable it to boost spending on facilities and planes, and lower fares to compete with upstart carriers that don't offer traditional pension plans. Such a move would give UAL a huge edge, thus compelling Delta and us Airways to do the same, says Roger E. King, senior analyst at CreditSights Ltd., an independent debt research firm. But handing pension plans over to the PBGC would essentially require airlines to file for Chapter 11, an unappealing step. That's why Standard & Poor's credit analyst Philip A. Baggaley thinks it's more likely that UAL's old-line rivals would use United's pension termination as a cattle prod to win big concessions from pilots and other employees. From their perspective, "even if concessions are bad, bankruptcy is far worse," says Baggaley.
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