New Loans Forbid Pension Payments by United Airlines
United Airlines said Friday that a new funding package prohibited the company from making any further payments to its airline employee pension funds. The disclosure prompted criticism from the carrier’s unions.
The disclosure came nine days after United deferred a required quarterly payment of $72 million to the pension funds. Such contributions are under review as the airline scours its operations for further cost cuts in a restructuring under Chapter 11 of the U.S. Bankruptcy Code that is set to last into mid-2005.
Any move by United especially affects California, where the airline has 16,300 employees, more than in any other state. United has more than 800 daily flights and 26 destinations in California and is the busiest airline at the Los Angeles and San Francisco international airports.
The nation’s No. 2 carrier, whose parent is UAL Corp., said its new $1-billion interim financing package lined up this week effectively prohibited further pension contributions before it left bankruptcy protection. That financing, formally outlined at the company’s monthly bankruptcy court hearing, does not come due until June 30, 2005.
United’s next pension contributions, amounting to more than $500 million, are due this fall but will now be deferred, the company said.
“Such payments would diminish the company’s liquidity and reduce flexibility, thus impairing the company’s ability to attract exit financing,” United said in a Securities and Exchange Commission filing.
UAL confirmed that the interim financing package includes the $500 million remaining on the company’s current financing arrangement plus another $500 million.
The companies involved in the deal include the airline’s existing Chapter 11 lenders -- J.P. Morgan Chase & Co., Citigroup Inc. and CIT Group Inc. -- plus General Electric Co.’s Commercial Finance unit.
Two of United’s biggest unions swiftly condemned the move, and the one representing United ramp workers and public contact employees said it was considering legal action.
“United Airlines is following a very dangerous path and cannot successfully exit bankruptcy without living up to the commitments they made to their employees,” said Robert Roach Jr., general vice president of transportation for the International Assn. of Machinists and Aerospace Workers.
By securing the new financing and not making additional pension contributions, the company believes that it will have adequate funding until its exit from bankruptcy protection.
The Elk Grove Township, Ill.-based airline had been facing more than $4 billion in required payments to the underfunded pension plans through 2008, including $725 million for 2004.
Its need for cash intensified last month when the government rejected its bid for a government loan guarantee it said was needed to emerge from bankruptcy protection. The company now needs to get that backing from private lenders or investors, who are certain to demand that it shed more costs.
The news came the same day that United and Northwest Airlines Corp. won approval from the Transportation Department to operate new daily flights between the U.S. and China.
Northwest will operate seven new weekly fights from Detroit to Guangzhou, while United will have seven new weekly nonstop flights between Chicago and Shanghai.
United spokesman Stephan Roth said the new service was scheduled to begin Oct. 31.
In addition, United plans to begin flights to Ho Chi Minh City, Vietnam, with daily flights from San Francisco via Hong Kong starting Dec. 9. United already operates daily nonstops from San Francisco to Hong Kong, and the Ho Chi Minh City service will be an extension of that flight, Roth said.
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Associated Press and Bloomberg News were used in compiling this report.
