UAL’s Pension Move Called Illegal
UAL Corp.’s United Airlines violated federal laws by agreeing with bankers to halt contributions to its pension plans under terms of a new bankruptcy loan, the U.S. Pension Benefit Guaranty Corp. told the airline in a letter released Monday.
The agency, which pays benefits when corporate pension plans fail, told UAL Chief Executive Glenn Tilton in a letter that United’s failure to pay $72.4 million due July 15 and its plan to skip more than $500 million this year were “of great concern.” A United pension default would be the agency’s biggest.
United, the nation’s No. 2 carrier, secured an additional $500 million last week for operations under Bankruptcy Court protection on condition that it suspend pension payments. However, Internal Revenue Service rules and the Employee Retirement Income Security Act prohibit such agreements, the letter said.
“Please provide a detailed explanation of how the company’s business plan will enable it to meet these obligations,” Bradley Belt, executive director of the agency, said in the letter released by the agency. “If UAL intends to terminate any of its defined benefit pension plans, the PBGC and plan participants should be made aware of that fact as soon as possible.”
The agency said it wanted to discuss the issues Thursday with United. United spokeswoman Jean Medina said a mutually agreeable date for a meeting still needed to be set.
“We believe we are taking the steps necessary to retain liquidity and flexibility as we work to arrange exit financing,” she said.
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 more than two dozen destinations in California and is the busiest airline at the Los Angeles and San Francisco international airports.
A UAL default would be the biggest in the pension agency’s 30-year history, PBGC spokesman Randy Clerihue said Friday. The agency estimates that it may be liable for $5 billion of UAL’s $7.5 billion in outstanding pension benefits, he said. United retirees probably would lose $2.5 billion if the company didn’t replace some of the benefits.
The agency, financed by companies with defined pension plans and not taxpayers, has had more than 70% of its claims filed by airlines and steel producers, Clerihue said.
After UAL was turned down for a federal loan guarantee last month, Standard & Poor’s Philip Baggaley and other analysts said the airline probably would have to consider reducing its pension obligations and other costs to attract alternative financing.
The pension agency pays up to $44,000 annually in benefits to a 65-year-old retiree who has earned at least that amount or more in a corporate plan that the agency takes over. Younger retirees get less. Pilots, who are paid more than other airline employees, stand to lose the most while lower-paid workers such as flight attendants would lose less or nothing at all.
Terminating the pension plans would cut pension benefits for about a third of United’s Assn. of Flight Attendants members, according to preliminary union estimates. The union represents 21,000 workers and 4,000 retirees.
“I think that’s going to be a powerful move on the part of the PBGC,” said Greg Davidowitch, president of the airline’s flight attendants union. “That sums it up to say that United is not going to get away with this.”
Shares of Elk Grove Township, Ill.-based UAL shares fell 5 cents to $1.26 in over-the-counter trading. UAL, which was 55% owned by employees before the bankruptcy filing, has said the shares are unlikely to have any value after the reorganization.
Missing the payments makes UAL subject to monetary penalties, though recovery is difficult when a company is in bankruptcy, Clerihue said. The company is expected to report a second-quarter loss Thursday.
