Pilots Agree to Scrap Pension
A tentative agreement by United Airlines’ pilots union to go along with the scrapping of its members’ main pension plan drew heavy criticism Friday amid fears that other companies would follow suit.
In a novel concession, the Air Line Pilots Assn. said it wouldn’t oppose the ailing carrier’s offer to give the pilots marketable securities instead of their guaranteed pension benefits. The giveback is intended to help United and its parent, UAL Corp., emerge from Chapter 11 bankruptcy proceedings. United had threatened to junk its union contracts to save cash unless it found an alternative arrangement with employees.
Under the proposed contract, the union also agreed to a 14.7% pay cut for its 6,600 members, on top of 25% to 30% wage reductions that they took last year to help United survive. The pact is subject to ratification by the pilots next month.
But the union’s concession led some to worry that other troubled airlines, along with other companies struggling to keep pension plans afloat, might try the same tactic.
“We are concerned that this agreement sets a dangerous precedent,” Bradley Belt, executive director of Pension Benefit Guaranty Corp. in Washington, said in a statement.
If United ends any of its four defined-benefit pension plans, it would be inherited by the pension insurer. The quasi-governmental agency has contended that United is legally obligated to keep funding its plans.
United says it can no longer afford its defined-benefit plans -- the type that sets monthly benefits for life -- because it’s facing more than $4 billion in required contributions in the next few years. It would be the largest corporate pension plan failure.
“I understand that it’s better to get something than nothing,” said David Walsh, associate professor of management at Miami University in Oxford, Ohio. “But I can’t see how this solves the basic problem of keeping pension plans ... that are critically important to employees.”
Based in Elk Grove Township, Ill., United is the nation’s second-largest airline, behind AMR Corp.’s American Airlines.
United also is the largest carrier at the Los Angeles and San Francisco airports. The airline’s 62,000 employees include about 4,000 in the Los Angeles area. About 57,000 retirees and other former employees are covered by United’s defined-benefit pension plans.
Under the proposed five-year contract, the pilots union wouldn’t oppose United’s bid to drop its defined-benefit pension plan. In return, the pilots would get $550 million in 15-year convertible notes -- debt securities that would be convertible into new UAL common stock -- after the carrier emerges from bankruptcy protection.
The pilots could then sell those securities in the financial markets to cover at least part of their pension shortfall.
It wasn’t immediately clear how much the value of the securities would fall short of the value of United’s pension obligations to the pilots, although most agree the shortfall would be substantial. The pilots would retain a less generous, defined-contribution retirement plan whose benefits vary depending on the plan’s investment returns.
United Chief Financial Officer Jake Brace, speaking to reporters after a monthly bankruptcy hearing in Chicago, declined to say whether United would make a similar offer to other unions. But spokeswoman Jean Medina said the airline “remains open to creative solutions” with the other unions.
It’s an ominous trade-off, some experts said.
If United “can avoid contributing to their pension plan, it gives them a competitive advantage” over other airlines, said Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries. “Their competitors are going to want to do the same thing.”
But United is in serious danger of failing.
“I’m a realist, and I -- along with most of the pilots -- am realistic enough to know that this is what we have to do,” said one United pilot based in California, who asked not to be identified.
Many experienced United pilots had earned more than $250,000 a year before the concessions last year. But if United succeeded in handing the plan to the PBGC, the pilots would be at a disadvantage.
Under the pension insurer’s rules, many retirees get lower payouts than their original plan offered, especially if they retire early. And pilots would fall into that category because, by law, they must retire at age 60.
United and UAL have been in Chapter 11 since December 2002 and still suffer heavy losses amid industrywide fare cutting, high fuel prices and massive debt costs. In the first nine months of this year, UAL lost $980 million on revenue of $12.4 billion.
Without more cuts, United said in a court filing this week, its cash position “will sink to precarious levels during the historically lean winter months, putting the entire operation at risk.”
