Administration May 1, 2008

Senate Allies Help American Stave Off Pension Funding Provision

May 1, 2008 (PLANSPONSOR.com) - With the help of allies in the U.S. Senate, American Airlines this week was able to beat back efforts to strip it of pension funding breaks it gained with the passage of the Pension Protection Act (PPA).

Reported by

Fred Schneyer

The Fort Worth Star-Telegram reported that senators ultimately stripped out of a funding measure for the Federal Aviation Administration (FAA) a provision that could have cost the airline hundreds of millions of dollars in added annual pension costs.The newspaper said Senators Kay Bailey Hutchison (R-Texas) and Dick Durbin (D-Illinois) co-sponsored an amendment to the FAA spending bill stripping out the provision that affected both American and Continental Airlines.

The deleted pension provision would have knocked out portions of the PPA allowing Fort Worth-based American and Houston-based Continental to assume a higher rate of investment return when calculating their annual pension obligations. The PPA also gave the carriers a longer time to stretch out payments.

According to the Star-Telegram, Hutchison estimated that reducing the benefits could cost American $1 billion in extra pension expenses over the next three years.

She warned the added financial pressure, combined with record fuel prices and a softening economy, could have “disastrous consequences” that could put the airlines into bankruptcy, the newspaper said. “The timing of this could not be worse,” Hutchison said during a Senate speech, the Star-Telegram said.

American pumped $380 million into its employee pension plans last year. This year’s obligation is estimated to be about $350 million, according to financial filings.

The PPA allowed airlines to assume a fixed return on investments of 8.85% for their pension plans, and stretch the payments over 17 years. Most companies are required to use a 6% return rate to calculate pension funding obligations, and are given seven years to pay them off.

The funding relief only applied to airlines that had frozen their pension plans. In 2007, Congress approved a measure that gave American and Continental 10 years to pay off their obligations, and allowed them to assume an 8.25% rate (See Legislation To Partly Renege Pension Funding Break ).