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More ailing companies escaping pension costs
When officials of the federal agency that protects worker pension plans meet Thursday with United Airlines executives, they'll likely be seeking the answer to a fundamental question:
"Is United planning to stick Uncle Sam with the entire $7.5 billion tab for pension obligations the company owes but can't pay? Or just part of it?"
Observers think United's recent actions indicate the airline is planning to dump its hugely expensive pension woes onto the government. And if that turns out to be the case, experts say, United faces only modest legal obstacles to doing so.
In recent years a growing number of such handoffs have taken place, and the trend has raised questions about whether companies are maneuvering the government into bailing them out of commitments the companies find financially inconvenient.
But others contend that by shedding the expensive pension costs that are dragging them under, stumbling companies can become financially viable once again, preserving tens of thousands of well-paid jobs. That is exactly what has happened with the steel industry.
United became a player in the growing controversy last week, when it sent tremors through employee ranks by disclosing that it doesn't intend to make financial contributions to its pension plans as long as it is in Chapter 11 bankruptcy.
Terms of a new credit agreement recently reached with lenders, the carrier said, prohibit it from putting money into the pension funds. Doing so, it explained, would impair the company's financial position.
The sums involved aren't small. Parent UAL Corp. failed to make a scheduled $72 million pension contribution two weeks ago, and it has announced that it also won't make $496 million in contributions that come due between now and mid-October. In the next several years, United is supposed to contribute more than $4 billion to the plans.
Naturally, if the Elk Grove Township-based company is freed from having to make those contributions, it will enjoy "a competitive cost advantage" over such rivals as American Airlines and Delta Air Lines, which are obliged to set aside hundreds of millions of dollars to fund their pensions, said Ray Neidl, airline analyst at Blaylock & Partners in New York.
United's rivals have been keeping their thoughts about the issue private. But the Pension Benefit Guaranty Corp., the government agency that guarantees companies' pension programs, has been quite vocal.
On Monday, the agency sent a sternly worded letter to United Airlines Chairman Glenn Tilton, saying that it wants company officials to explain Thursday just how the carrier plans to honor its pension commitments. Any loan agreement that bars the company from meeting its pension-funding obligations is illegal, the letter pointedly asserted.
And if United is planning to terminate any of its pension plans, the agency said, then the government and United workers should be told promptly. What won't fly, the letter continued, is United's effort to keep its pension plans in a sort of limbo, where the workers' plans are neither receiving company funds nor being taken under the government's wing.
United's employees also are angry. On Wednesday, the International Association of Machinists and Aerospace Workers said its representative on United's board will not attend Thursday's meeting.
The union has announced it is preparing legal action against United over the pension issue, and Randy Canale, United district president and the union's representative on the company's board, said Wednesday that he can't participate in board matters while his union prepares to sue the board.
With last week's disclosure, United became the latest in a series of financially strapped U.S. companies that have moved to resolve longstanding pension problems.
The recent episodes represent "a cleanup from the past," said Douglas Baird, a bankruptcy professor at the University of Chicago Law School. Old-line industries face the biggest pension exposure, he noted, and for those that can't fund their earlier pension promises, "these chickens are going to come home to roost."
"We've seen it in the steel industry, and we're seeing it in the airline industry," Baird said.
As U.S. steelmakers suffered through weak prices and intense foreign competition during the period from 1999 through 2001, it became increasingly clear that many of the cash-strapped companies couldn't afford to keep setting aside the money necessary to fund their pension obligations.
Those "legacy costs" dated back to a wealthier industry era, when there were few retirees and lots of active workers. But by the 1990s that situation was reversed, and retirees greatly outnumbered workers.
In addition, it seems that many companies had been happy enough to promise their workers pensions but never got around to putting enough money aside to cover those promises.
Steelmakers set tone
The result was a situation in which steelmakers struggling to stay solvent couldn't find any healthy company to buy them, because none were willing to take on the cost of all those retirees.
The ice began to break as 2001 came to a close, when steel giant LTV Corp. shut down its mills and went into liquidation. In the following months, the pension board took over the company's pension plans, which were $2.2 billion short of adequate funding. At the time it was the agency's biggest-ever takeover, covering 83,000 workers and retirees.
Freed of its burdensome pension obligations, LTV became an attractive acquisition candidate. Bankruptcy investor Wilbur Ross bought its assets, reopened steel mills, called thousands of LTV steelworkers back to work and began cranking out steel.
Not long afterward, Ross's International Steel Group acquired another bankrupt company, Bethlehem Steel. It did so, however, only after the pension agency took over Bethlehem's pension plans, which covered 95,000 people and were underfunded by $3.6 billion.
ISG has become the nation's biggest steelmaker, and one of the most profitable, by buying up companies once their pension troubles had been offloaded onto the pension board.
It seems likely that United studied the next high-profile pension handoff with great interest.
As US Airways sought to reorganize its finances and emerge from Chapter 11 bankruptcy, the airline got bankruptcy-court approval for a "distress termination" of its pilots pension plan. Terminating the costly and severely underfunded plan was "the only remaining option" for getting back on its feet, the carrier said,
The government assumed responsibility for the pilots pension plan early last year. US Airways has continued to set aside money for its other pension plans, so far.
The US Airways episode spurred a round of speculation that other airlines might try to terminate their pension plans, and United's recent statements suggest that may be about to happen.
Steve Kandarian, who was executive director of the pension agency from December 2001 to February of this year, concedes that US Airways gained a competitive leg up last year when it shed its pilots pension plan. But he stressed that the carrier wouldn't have been able to stay in business "unless it significantly reduced its pension expense going forward."
Companies can't simply drop their pension plans, of course. Since reforms were enacted in 1986, "companies can't simply terminate their pension plans to get the monkey off their back," said Kandarian.
Nowadays, he said, companies must go to court and prove that they would have to liquidate unless they are allowed to terminate one or more of their pension plans.
The agency "will fight plan sponsors in court," Kandarian said, "if the numbers indicate the company is able to afford its pension plans."