Airlines Seeking Delayed Pension Funding

May 6, 2003 ( - The airline industry may be seeking legislation that will allow commercial airlines to put off making any catch-up contributions to their underfunded pension plans for almost five years.

>The latest cry for help to the federal government, which last month passed a war-spending bill providing aid to the industry totaling $3.8 billion in cash grants and other assistance, would exempt airlines from making “deficit reduction contributions,” which are special accelerated payments companies must make to pension plans that are less than 90% funded on a current-liability basis. The moratorium would apply for plan years beginning between December 27, 2002 and December 27, 2007, according to a Wall Street Journal report.

>In addition, the bill would allow the airlines to amortize their unfunded liabilities in equal installments over 20 years and put off making the first payment until late 2007 or 2008.   Starting in 2008, the airlines must begin paying down the postponed debt, plus interest costs, but can do so over 20 years.

>However, the airlines would still have to contribute money to cover benefits earned that year by their workers, plus some interest.

>The airline legislation, which has no identifiable author, and as yet no named sponsors, is intended to be attached to an existing bill rather than to stand alone as separate legislation. The intention is to enhance its chances of passage and reduce the amount of scrutiny it receives. If successful, other industries may line up for similar funding relief.

With an aggregate level of pension plan underfunding among the country’s seven largest air carriers projected to be $18.8 billion as of December 31, 2002, Fitch Ratings said airlines will join the auto companies that have been the most recent critical problem areas for pension funding. The 2001 underfunding level was $12.1 billion (See  Fitch: Airlines’ Pension Picture ‘Most Dire’ ).

According to Fitch estimates, Delta has the largest underfunded pension obligation at $4.4 billion (See  Delta Hit With ‘Substantial’ Pension Charge ) and United follows with $4.1 billion. American, Northwest and US Airways each have a gap of $3 billion or more.

Ready Relief

>Companies already have various funding-relief opportunities under current law. Any company suffering “demonstrable temporary business hardship” can apply to the US Treasury Department to waive funding rules for three years out of any 15 consecutive years. In addition, the labor secretary is allowed to extend by as long as 10 years the time during which any company must amortize funding contributions. Together, both measures would help a cash-strapped company pinioned between low interest rates and poor investment returns, but few companies apply for either kind of relief.

>However, companies tend to not take advantage of the current provisions because, by not funding, they are essentially borrowing from the pension plan, and the Internal Revenue Service (IRS) would require collateral notes. In addition, the Treasury and Pension Benefit Guaranty Corp. (PBGC) could be expected to examine past funding practices; companies would rather receive blanket-funding relief.

Also, in a hearing Tuesday at the Labor Department, Northwest Airlines sought permission to exceed certain limits on the amount of employer securities held in pension plans. The carrier wants to use the stock of its Pinnacle Airlines subsidiary as opposed to cash to fund three Northwest defined benefit pension plans (See  DoL Hearing to Examine NW Airlines Stock Contribution ).