PBGC Says Delta's Settlement with Pilot's Union Defies ERISA

May 25, 2006 (PLANSPONSOR.com) - The nation's private sector pension insurer has rejected key terms of Delta Air Lines' settlement with its pilot's union on contract concessions needed to ease the financial burdens of the bankrupt carrier.

The Pension Benefit Guaranty Corp. (PBGC) said Delta’s aim to compensate active pilots for unfunded benefits in their retirement plan violates the Employee Retirement Income Security Act (ERISA).

The PBGC said that Delta intends to give the pilots $650 million in notes, conditioned on termination of the pilot retirement plan, and a $2.1 billion unsecured claim to fund “follow-on retirement plans and other payments or distributions to pilots,” according to the Associated Press. Under ERISA provisions, that money should go to the PBGC, the court filing said.

On Tuesday, a group that represents some retired Delta pilots asked a bankruptcy court judge to reject the wage concession agreement, contending that approval of the agreement would mean drastically reducing certain pension benefits of Delta’s retired pilots. The group also claims that the airline failed to negotiate the agreement “so as to treat fairly and equitably all creditors and affected parties.”

A hearing on the objection is scheduled for May 31, the same day Delta’s active pilots are scheduled to complete their voting on the agreement, according to the AP. If the deal is not approved by the airline’s active rank-and-file pilots or the court, it could revive the threat of a pilot’s strike, according to the wire service.

In November, the bankrupt airline asked a US bankruptcy court to cancel the airline’s contracts with its pilots, saying that cutting $325 million from its collective bargaining agreement would free up money to keep its operations afloat (See  Delta Wants Union Contract Voided: Pilots Ask Judge to Step Down ).

The airline has since agreed to $280 million in concessions (See Delta Deal Considers Likelihood of Pension Termination ). The agreement also includes a promise by the union not to block company efforts to dump the pension plan. The union saidWednesday that it would oppose an effort by some retired pilots to block the union’s wage concession deal with the bankrupt carrier, according to the Associated Press.

The Air Line Pilots Association (ALPA), which represents Delta’s 5,930 active pilots, said in a statement that the agreement reached last month is in the best interest of the airline, its pilots and its creditors.

In March, Delta asked a federal judge for permission to void the more than 90 million stock options contracts held by thousands of current and former employees (See Delta Asks to Void ‘Worthless’ Employee Stock Options ). Delta claimed that if the options were exercised, they would be of little value to the holders.