IMHO: Holding the Bag?

December 22, 2004 ( - This is the time of year one really wants to write about things like peace, joy, hope, and the brighter prospects for the New Year just around the corner.

However, last Friday United Airlines announced that it had struck a deal with representatives of its pilots’ union that could help the airline emerge from bankruptcy.   While that might ultimately seem like a nice Christmas present for those pilots (though it’s doubtful, considering that it includes a 15% pay cut), most of the rest of us could be left holding the bag…and not the St. Nicholas version, either.

Ultimately, United wants to terminate its pension plans, which are significantly underfunded – and shed itself of that liability (more than $8 billion, according to reports).   Accomplishing that requires certain stars to line up just right – the approval of a bankruptcy court judge, for one thing – and that will be more readily obtained if its unions support the move, it is thought.   In exchange for the Air Lines Pilots Association’s (ALPA) complicity, United will sweeten up its contributions to a separate, existing defined contribution plan for pilots.   Active pilots would also be issued $550 million worth of notes convertible to company stock once the carrier has emerged from bankruptcy.   They also promise to keep the pilots’ pension plan going until at least May 2005.

These extra conditions are significant, both because of their blatant attempt to circumvent the spirit of the nation’s pension insurance system and their willingness to tout the circumvention as a “solution” for others in such straits.

Abusive Follow-Ons

In several published reports, the investment banker for ALPA said that the $550 million package was specifically crafted to overcome the Supreme Court’s rejection of an “abusive follow-on plan” in a similar bankruptcy challenge involving steelmaker LTV.   LTV, which has gone through bankruptcy twice in the past decade (or so), also tried to buy off its unions with a sweetener.   Like a drunk falling off the wagon, the steelmaker dumped four heavily underfunded pension plans on the nation’s private pension insurer (the Pension Benefit Guaranty Corporation) – then resumed operations, and promised workers new pensions that were just as extravagant as the old ones.   In the United case, the ALPA banker said, apparently with a straight face, that the UAL deal would clear the LTV problem because it was designed as compensation, rather than in the form of a “plan.”   And they say it could “work” for other, similarly situated, employers.

Then there is the matter of promising to keep the pension plan going for another six months.   All in all, if this represented a commitment to supporting its pension obligations, this would be laudable.   Unfortunately, there is a sleight of hand going on here as well.   The PBGC does not fully insure pension increases from the date they are offered (trying to avoid the temptation of companies to promise big benefits just before they default).   Instead, the insurance coverage phases in over five years – and since United’s pilots won their last pension increase in April 2000, by waiting until May to terminate the plan, the airline and its pilots would complete the entire phase-in period, according to the NY Times.

Track Record

Now, all of this would be bad enough if it weren’t for the fact that United has recently blown off its pension contribution obligation – less than six months after the airlines convinced the US Congress that they should be given what amounts to a free pass from mandated “deficit reduction contributions” imposed on severely underfunded plans (see  Pension relief comes with a cost ).   And United is not, of course, alone in its willingness to dump its obligations on the PBGC, the rest of the pension industry and, potentially on the US taxpayer.

I can appreciate that the airline industry faces challenges.   While desperate times call for desperate measures, these are the same guys that, just days after the September 11 terrorist attacks, took advantage of the situation to announce the layoff of hundreds of thousands of workers – while imposing so-called emergency, or “force majeure,” provisions of its collective bargaining agreements to waive furlough protections for laid-off workers (see  IMHO: The Aftermath ).

To its credit, the PBGC has taken aggressive actions to combat the kind of pension payoffs embodied in the type of arrangements that UAL now touts – and they were quick on Friday to denounce the plan.   But the PBGC shouldn’t have to wage this battle alone.   Even though it may be about their pensions – ultimately, the money the airlines – and their unions – are now squabbling over …may be a bill the rest of us will be stuck paying.