Texas Air Carriers Catch up on Federal Pension Relief

May 25, 2007 (PLANSPONSOR.COM) - Continental Airlines and American Airlines have successfully lobbied Congress to include new pension relief in emergency spending legislation, according to a Reuters news report.

Reuters said lawmakers have proposed amending sweeping pension reform legislation approved last year that eased funding pressures for all companies with traditional pensions.

Airlines got special breaks, but American and Continental believed they were shortchanged and pushed for the changes now being considered by lawmakers.

“This will create a more even playing field within our industry and is welcome news for American and the other airlines that continue to fund their defined benefit plans,” American said in a statement (See  Cover: Corporate Plan Sponsor of the Year: Slow and Steady ).

Responding to problems in the defined benefit community (See  Pension Reform Stalls on Tax Break Provisions ), Congress extended a special break to airlines in last year’s pension reform bill. Delta Air Lines and Northwest Airlines were given 17 years to narrow the substantial gap between planned assets and promised benefits of their remaining plans while other airlines, including American and Continental, got 10 years.

Delta and Northwest were also permitted to use a higher interest rate to calculate market returns on their pension investments. Better rates reduce a company’s cash contribution, which in the case of big U.S. airlines can total hundreds of millions of dollars annually.

But American and Continental and their allies in Congress, especially U.S. Senator Kay Bailey Hutchison, a Texas Republican, said the two Texas-based carriers were penalized for averting Chapter 11. They argued that the congressional pension overhaul gave Northwest and Delta — both bankrupt at the time — significant financial and competitive advantages.

After months of negotiations this year, lawmakers have proposed letting American, Continental and other smaller airlines use an 8.25% interest rate, which is still below Northwest and Delta but more generous than the tougher formula required by lawmakers last year, Reuters reported.

The Bush administration has signed off on the changes.