Airline Execs Seek Revised Pension Rules
The chief executives of Delta and Northwest airlines Tuesday warned Congress that pension obligations could force their companies into bankruptcy, saddling taxpayers with vast new costs for their retirees unless lawmakers ease the funding rules.
Both men urged Congress to give airlines greater latitude to spread out the payments they are required to make for billions of dollars in unfunded pension liabilities.
“There is no question that the single biggest uncertainty that may well determine whether or not Delta can successfully restructure outside of Bankruptcy Court is the pension cloud that hangs over the company,” Delta CEO Gerald Grinstein said in his prepared testimony.
Delta Air Lines Inc. said it had $2.6 billion in unfunded pension obligations. The price tag at Northwest Airlines Corp. is $3.7 billion. Major airlines face $22 billion in unfunded liabilities, according to the Pension Benefit Guaranty Corp., which insures private pension plans.
“The current funding rules are too volatile, unpredictable, inflexible and expensive for our company to survive and compete” in the current environment, maintained Douglas M. Steenland, who runs Northwest.
The airline executives testified at a hearing of the Senate Finance Committee, which is reviewing pension problems after United Airlines’ decision to pass $6.6 billion of its pension obligations to the PBGC. United, a unit of UAL Corp., filed for Chapter 11 bankruptcy protection in December 2002.
Experts testified that the pension woes extend far beyond the airlines to a range of industries, most notably auto manufacturing and other old-line sectors of the economy. Overall, companies with underfunded plans reported liabilities that exceeded assets by $353.7 billion last year, a 27% jump from 2002, the PBGC said Tuesday.
Concerns have increased on Capitol Hill that the PBGC, which has $23.3 billion more in liabilities than assets, may need its own bailout in the future.
Tuesday’s hearing, however, was focused on the airlines, which are seeking special legislative help. U.S. carriers have lost more than $30 billion since the Sept. 11, 2001, terrorist attacks. Although passenger traffic has rebounded to its pre-9/11 levels, most airlines still are struggling in the face of widespread fare cutting and soaring fuel prices.
Sen. Charles E. Grassley (R-Iowa) on Tuesday said United took advantage of accounting loopholes to meet the legal requirements for its pension plan, even though funding was falling far short of demands. One such technique is known as “smoothing,” which allows companies to project past financial gains into the future, creating a false picture of a fund’s stability.
Grassley compared United’s pension bookkeeping to with the “phony accounting” of Enron Corp. but added that there was “a very significant difference: Unlike Enron, however, everything United did was perfectly legal. In fact, what the company did is accepted practice by pension plans everywhere.”
Sentiment is growing in Congress to force changes to strengthen the pension system, but it is far from clear what measures will be adopted. Moreover, too-tough legislation could lead more companies to abandon pensions because they are under no obligation to provide them.
The Bush administration has proposed increasing the premiums that companies pay to the PBGC, shoring up its ability to take over ailing plans, while changing the pension funding formula in a manner that could increase what most companies have to pay into their pensions.
On the House side, Reps. John A. Boehner (R-Ohio) and Bill Thomas (R-Bakersfield) plan to introduce legislation as early as Thursday that may include a premium increase and address pension problems throughout the private sector.
Legislation by Sens. Johnny Isakson (R-Ga.) and John D. Rockefeller IV (D-W.Va.) is limited to the airline industry and has won support of airline executives. Their bill would allow carriers to stretch out billions of dollars in payments for unfunded liabilities over 25 years.
In return, airlines would agree to freeze their current pension plans, holding off on future benefit gains. If an airline chose to offer benefit hikes, it would have to cover the cost upfront.
“Airline employees deserve to have their pensions protected, while ensuring their airlines remain viable,” Isakson said in a news release.
But any such approach will have to overcome concerns that postponing some of the airlines’ funding payments increases the possibility of a pension bailout by taxpayers if the companies go belly up in the near future.
“I want to know why we should reward lousy management,” said Sen. Jim Bunning (R-Ky.).
For their part, airline employee unions argued Tuesday that management was backing away from promises made to workers, and doubted the need to cut back on benefits. They suggested alternatives, such as having companies pool their pension plans to help offset weakness in any individual program, and called on management to shoulder a greater financial sacrifice in stabilizing the troubled companies.
“Many of our members are now looking at the possibility of working many years longer than they had intended,” said Patricia A. Friend, president of the Assn. of Flight Attendants-CWA. Many retirees “are now trying to determine how they can pay for the basic necessities of life.
“These are not careless people who failed to plan for their retirement. They did everything right -- they worked hard, they saved as much as they could, and they invested when possible. Their only mistake was one of trust -- they trusted the retirement promises United made for decades,” she said.
