Delta Makes Another Contribution to Controversial Deferred Comp Plan

Revelations about special bonus programs and a supplemental employee pension plan for a number of key executives at American Airlines triggered a firestorm of public outcry just as airline workers were voting on a series of significant labor concessions at the troubled carrier (see  Executive Comp Issue Could Ground AMR Labor Deal ).   While the company pleaded poverty and slashed costs in 2002, it had quietly funded a trust for its formerly unfunded supplemental executive retirement plan (SERP) for its top executives.   The ill-timed disclosure of that funding activity ultimately cost parent AMR Corp.’s Chairman and CEO Donald Carty his job.
 

Despite that controversy, on March 28, just three days after the initial disclosures of its SERP in an SEC filing, Delta made a second round of payments into the pension trusts totaling $19.6 million, according to the Atlanta Journal-Constitution, citing Michele Burns, chief financial officer.   The payments also include the executives’ current tax liability for receiving the payments. Two more executives have been added to the covered group since the initial disclosures, Burns said, bringing the total to 35.

Not Surprising?

Additionally, “It wouldn’t be surprising” if a third payment due in 2004 is about the same amount, added Burns, who is among the executives covered, according to the report. That would take the total to about $65 million the airline will have paid to essentially pre-fund 100% of the after-tax pension benefits of the covered executives. Delta may make smaller payments in future years to keep the trusts fully funded, according to the Atlanta-based paper.

Delta paid $25.5 million in 2002 to establish special bankruptcy-proof pension trusts for 33 executives. Those payments, along with hefty performance bonuses for top executives, ignited a firestorm of criticism when they were disclosed in regulatory filings this spring (see  US Airways President Says Peers Make Too Much ).

The airline has made no move to reconsider the pension trusts, despite the urging of former executives who termed them “unconscionable” at the present time.   Delta’s CEO Leo Mullin said at the firm’s shareholder meeting the company would not rescind its plan, claiming it is necessary to retain its management team at a crucial time for the industry.

In late April, Delta asked pilots to accept roughly a one-third cut in pay and other concessions before their contract ends in 2005 (see  Delta Pilots Mad At Pay Cut Proposal ).   The union may decide this week whether to enter concession talks.

Burns said the timing of the 2003 payment, which had to be made by April 1 under the pension plan's rules, was unrelated to the current criticism of the program, according to the Journal-Constitution report.   The 2002 payment had funded the trusts to 60% of their total pension obligations.

Delta's largest employee pension plan is underfunded by about $4.9 billion -- the largest such liability in the airline industry (see  Delta Hit with 'Substantial' Pension Charge ,  Fitch: Airlines' Pension Picture 'Most Dire' ) .   That means the plan would likely be canceled in a bankruptcy and the workers would be left with whatever PBGC or company guarantees they have (see  PBGC Head Paints Gloomy Picture for 2003 - and Beyond ).   Under federal pension law, the maximum guaranteed pension at age 65 for participants in plans that terminate in 2003 is $43,977.24 a year. Maximum guarantees are adjusted for retirees older or younger than age 65 and for those who choose survivor benefits.

Half of the 10 largest claims against the nation's private pension plan insurer have arisen in the past three years, and of those 10 companies, five were from the steel industry, and three were airlines (see  Steel, Airlines Weigh on PBGC ).