American Airlines Proposes Termination of Pensions

Part of the savings the company seeks to achieve by terminating its defined benefit plans and transitioning to defined contribution plans is included in the overall direct employee cost savings of $1.25 billion that American Airlines says is necessary as part of the restructuring process.   

Not included in the total direct employee cost reductions in the restructuring proposals is the unfunded pension liability for previously-accrued benefits. “If this liability is not eliminated, we will need to have more than $800 million each year in additional savings to service the unfunded liabilities. This represents the annual cost of paying off our liability over the term of the contract,” the company said.  

American proposes to amend all of the collective bargaining agreements so the company is not required to maintain, fund or provide benefits under a defined benefit pension plan. This will permit the company to seek to terminate its defined benefit pension plans for unionized employees, as well as those of management, support staff and independent employees. “If we receive court approval to terminate our plans, every active employee’s and retiree’s vested defined pension benefit will be turned over to the PBGC and guaranteed up to the PBGC’s 2011 maximum benefit limits,” American said on the website.  

The proposal provides for an uncapped, first-dollar profit sharing plan that sets aside 15% of the company’s pre-tax income to pay out to all eligible employees, proportional to their earnings. This plan would replace the current plan and the Annual Incentive Plan (AIP), including both the financial and customer experience components.  

In a statement, PBGC Director Josh Gotbaum said: “Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have declined to provide even the most basic information to decide that.”  

The agency previously said its financial position would be weakened and American Airlines employees could lose a billion dollars in pension benefits if American terminates its plans (see PBGC: American Airlines Bankruptcy Could Hurt Financial Position).  

American Airlines' parent company this year made only a small fraction of the roughly $100 million payment it was scheduled to contribute to the company's employee pension plans (see American Airlines Makes Reduced Pension Payment).  As a result, the PBGC filed 76 liens against the assets of American Airlines parent company AMR, seeking $91.68 million, according to news reports.  

Last week, a group of non-union AMR retirees asked a federal bankruptcy judge to let them participate in the bankruptcy case of AMR, American Airlines and other AMR subsidiaries (see AMR Retirees Ask to Participate in Bankruptcy Case).