Fitch: Airlines' Pension Picture 'Most Dire"

January 13, 2003 ( - The beleaguered US airline industry is likely to be the next poster child for pension funding problems as well as a growing headache for the federal pension insurance agency, according to a new report.

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 (See Fitch: Auto Sector Pension Gap $30B by YE 2002 ) and steel sectors (See  PBGC Exec: Pension Insurer Hit by ‘Perfect Storm) ‘ that have been the most recent critical problem areas for pension funding. The 2001 underfunding level was $12.1 billion.

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.

“Although the automotive and steel sectors have received the lion’s share of investor attention with regard to the pension funding issue, the US airline industry is likely to assume a new a prominent place as the industry most as risk for financial fallout from the growing magnitude of its pending-funding problem,” Fitch analysts wrote.

Fitch pointed out, however, that this situation only affects the major US network carriers. ‘The absence of defined benefit plans among the low-cost carriers, such as Southwest, AirTran, ATA, JetBlue and Frontier, represents yet another source of competitive advantage for these airlines in relation to their high-cost network carrier rivals,’ analyst William Warlick said in a statement.

Difficult to Make Required Contributions

The problem is only compounded these days because airlines, beset by post-9/11 industrywide weakness, are less and less able to come up with enough money to make the legally required pension contributions.

“Due to weak market returns and growth in obligations, minimum required contribution levels mandated (by ERISA) are ratcheting up significantly at a time when airlines can least afford it,” the Fitch analysts wrote.

The Fitch report predicts that the year-end 2002 funding level will be a “disastrous” 59% level – down from 72% in 2001 and 96% in 2000.

The Fitch report noted that both United and US Airways are not likely to successfully emerge from bankruptcy without changes to their pension obligations or to the timing of those obligations. (See   Senator Would Give US Airways More Time for Pension Payments)   “Failure to meaningfully alter these obligations could result in the liquidation of either or both airlines,” the Fitch analysts wrote.

The Fitch report also includes detailed discussion of the pension situation at Alaska Airlines, American Airlines Continental Airlines, Delta Air Lines, Northwest Airlines, Southwest Airlines, United Airlines.

“The airline sector’s pension problem is perhaps the most dire in corporate America,” the Fitch analysts wrote. “The combination of substantial funding shortfalls and very poor operating performance endangers almost every company in this sector.”