Down in Flames

Dennis Miller

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Airlines go for broke while executives take the cash

Down in Flames

by Beth Hawkins
July 13, 2005


On May 10, following a lengthy bankruptcy hearing in a crowded Chicago courtroom, federal Judge Eugene R. Wedoff concluded that United Airlines could default on its pension plans. The airline could wash its hands of its $9.8 billion funding shortfall and walk away from the 134,000 people covered by the four plans. Payments to the retirees would plummet, in some cases by thousands of dollars per month, as their pensions became the obligation of a federal bailout agency.

United CEO Glenn Tilton's own $4.5 million retirement benefit, however, was safe and sound in an untouchable trust. Indeed, in recognition of his cunning leadership of the United, which has been operating in bankruptcy protection for more than two years, Tilton is the highest paid airline executive in the country at $1.1 million a year.

"In his time at United, which began shortly before the airline filed for Chapter 11 protection, Mr. Tilton has--wittingly or not--used bankruptcy protection as a competitive tool. And he has gained respect in the industry, however grudgingly, for doing so," the New York Times reported a few days later. "If nothing else, United has made itself an airline to be reckoned with--not in the traditional way, through strong operations, but in a completely new way, by leveraging its weaknesses."

The ruling was certainly a boon for United, and analysts were quick to predict that by lowering costs for one airline, the decision would compel its struggling competitors to follow suit. A cascade of pension defaults would in turn bankrupt the bailout agency, the Pension Benefit Guarantee Corporation, itself already underfunded to the tune of $23 billion.

Because going into bankruptcy is virtually the only way corporations can walk away from pension obligations, some even predicted that the ruling would spell the end of the pension system nationwide as automakers and other cash-poor industries relieved themselves of a burdensome debt. Taxpayers could ultimately end up liable for the pensions of hundreds of thousands of people.

Less than a month after the United ruling, Northwest CEO Doug Steenland appeared before the U.S. Senate Finance Committee asking for help. Without permission to "freeze" its pensions--that is, to stop making new payments into them--and to come up with the shortfall over 25 years instead of 5, he said, Northwest will be forced to file for bankruptcy by the end of the year.

In any case, according to a transcript of the congressional hearing, Steenlan said, the airline's pensions are going the way of the wooly mammoth: "Northwest has concluded that defined benefit plans simply do not work for an industry that is as competitive as we are and that is as vulnerable to forces ranging from terrorism to international oil prices."

There's no word on whether Northwest will freeze its executives' pensions, or whether United's Tilton has set the tone there as well. Right now, Northwest brass stand to retire in style, according to documents filed with the Securities and Exchange Commission on June 30. Under the current terms of his employment, Steenland can expect to receive pension benefits (including health care for life) totaling $947,417 a year. Other "named executive officers" can expect to receive $414,000 to $560,000 a year. Former CEO Richard Anderson, who left Northwest last year, walked away with a lump sum payment of $3.5 million in retirement money.

Northwest's executive retirement plans come with some additional perks, according to the federal documents: The airline agreed to grant Steenland and Anderson each 10 extra credited years of service, to calculate their benefits for certain periods at three times their actual salaries, and to consider their 36 most highly paid months when determining their pension payouts--not their last three to five years of wages like other employees.

The rationale given to shareholders and federal regulators in the SEC filing: "Given the difficult industry environment and the continued financial pressures facing Northwest, the Committee is presented with a challenge--to adopt executive compensation policies that provide incentives for and assist in the retention of Northwest's senior management team and that at the same time are consistent with Northwest's need to restructure its labor costs."

Not everyone buys the argument. Two weeks after Steenland's testimony, the U.S. House voted to bar the pension bailout agency from spending any money taking over United's pensions. "There are just a lot of concerns about whether or not these companies have unfairly targeted the workers to bear all of the brunt of their management decisions," Illinois Democrat Jan Schakowsky told the Chicago Tribune. As for other airlines employees, the parachutes are far less golden. With the exception of its pilots, Northwest's rank-and-file employees aren't anticipating lavish pensions. Monthly pensions for mechanics and custodians are pegged to job classification and years of service. A cleaner on the job for 10 years stands to receive $510 a month; a repair technician with 30 years on the job will receive $2,550. And in either case, an employee must have been on the job for 26 years or more to receive health care.
 

FlyBoeingJets

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Dennis Miller said:
United CEO Glenn Tilton's own $4.5 million retirement benefit, however, was safe and sound in an untouchable trust. Indeed, in recognition of his cunning leadership of the United, which has been operating in bankruptcy protection for more than two years, Tilton is the highest paid airline executive in the country at $1.1 million a year.

Northwest's executive retirement plans come with some additional perks, according to the federal documents: The airline agreed to grant Steenland and Anderson each 10 extra credited years of service, to calculate their benefits for certain periods at three times their actual salaries, and to consider their 36 most highly paid months when determining their pension payouts--not their last three to five years of wages like other employees.

Aw, c'mon...When you bilk your employees for >$1 Billion/year what's a few million. They'll never notice its gone.
 

BLUE BAYOU

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You ought to see what the bankruptcy lawyers are charging UAL for their services!!!
 

capt. megadeth

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And people wonder why I make sarcastic remarks about management on this board.
 

Guitar Guy

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Dennis Miller said:
In any case, according to a transcript of the congressional hearing, Steenlan said, the airline's pensions are going the way of the wooly mammoth: "Northwest has concluded that defined benefit plans simply do not work for an industry that is as competitive as we are and that is as vulnerable to forces ranging from terrorism to international oil prices."

Other than government jobs, are there any industries that aren't subject to "competitive" forces?
 

bafanguy

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So, NWA needs to pay big to attract and retain good management folks in a tough environment, huh ? Ask Delta how that worked for them. How can these people say stuff like that and expect any chance of being credible ? Of course, if you've got enough money, credibility is merely a luxury.
 

blzr

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I bet you could get a bunch of buisness school interns with no real airline experience and fresh ideas and they could run the airline alot better than most of the so-called EXPERIENCED managers.
 

pilotyip

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Of course they make sarcastic remarks about managment on this board, you ought to see what they say about pilots on the managment board. Sorry no one here has access you have to make over 1M per year to get on that site. Only kidding
 

PBRstreetgang

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Guitar Guy said:
Other than government jobs, are there any industries that aren't subject to "competitive" forces?
OhOh,
Read in newsweek that govt. agencies are having trouble funding their pension obligations also, seems like the only way to set up for the future is to be a politician or ceo.
sux to be us
PBR
 

skykid

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I bet you could get a bunch of buisness school interns with no real airline experience and fresh ideas and they could run the airline alot better than most of the so-called EXPERIENCED managers.

I bet you're wrong. United spent a lot of money to get Tilton away from ChevronTexaco, and we could argue all day it was worth it or not. I am convinced there are very few who could have gotten the company in the position they are at today. The board went after Tilton specifically for his past experience in successful dealings with unionized labor, and whether you like it or not he did what no one thought was possible in respect to the many unions at United. I wish Tilton would work for free, that is not the reality of the situation.
 

Godvek

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skykid said:
I wish Tilton would work for free, that is not the reality of the situation.

You mean the way he wants the labor of his airline to work?
 

vclean

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Hey, Glenn just joined the board.

Hi Glenn, great work you're doing.
Can I have a job? I have no integrity, so I'll fit in.
 

skykid

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You mean the way he wants the labor of his airline to work?

Your're right, he could have given everybody a raise and still be sucsessful with exit financing.
 

blzr

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skykid said:
I am convinced there are very few who could have gotten the company in the position they are at today.

Yes, it is a very inviable situation indeed. He11, I could have done that, but they saw my resume and thought I was overqualified. They also resented the fact that I think liquidating the retirement plans is fine as long as management loses theirs as well.

Again, if we flew airplanes the way they ran a company, there would be alot of smoking holes in the ground out there.
 

skykid

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Yes, it is a very inviable situation indeed. He11, I could have done that, but they saw my resume and thought I was overqualified. They also resented the fact that I think liquidating the retirement plans is fine as long as management loses theirs as well.

blzr, Maybe you can reread my post and show me where I said it is an enviable (not inviable) situation. I'm talking about the CEO job starting with the mess he got in 2002 and the situation now, after the war, SARs, oil prices, no loan guarantee, and multiple negotiations with all United's unions.

Since you could have done the job so easily and also keep the defined benefit retirements, perhaps you can go ahead and post how you would line up exit financing and keep those pensions. I would like to see that. The potential providers of that exit financing have made it clear that U, United, and the other legacy carriers headed for bankruptcy aren't coming out with defined benefit retirement plans. You can look at the numbers along with the retirement plans of airlines doing well today, and see why very quickly.

Management at United did lose their pensions (more accurately - had them turned over to the PBGC which means a fraction of what they had). That is a fact. Tilton would not leave his former job without getting his ChevronTexaco retirement equivalent provided up front at United. That is also a fact. You can make judgements on his negotiating skills in getting his compensation package if you want. I would hope in a similar situation I would negotiate the best possible deal for myself as well. When management pensions went, his was not included, because he doesn't have a United pension. That was the cost to get him. In order to decide if this is worth it, you would have to be capable of looking at the situation objectively, which I will continue to do on a regular basis.
 
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Big Duke Six

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YOU are looking at this objectively? Are you freaking kidding me?

QUOTE:
"Your're right, he could have given everybody a raise and still be sucsessful with exit financing."

He robbed your company! I guess if you are a blind UAL employee, you'd think he was doing a good job. If you're the rest of us, you'd see the COMPLETE lack of integrity, ethics, character and leadership this man has shown. You'd see the damage he has done to not only the rest of the industry but to the rest of the country as well as a result of these shortcomings.

You apparently do not know what "lack of integrity" means, judging from your responses to the posts above. Understand that his degree of sharing in the suffering that resulted from his decisions is exactly ZERO. He robbed everyone else, all of you, and laughs quietly all the way to the bank. This behavior does not show integrity.

QUOTE:
"The potential providers of that exit financing have made it clear that U, United, and the other legacy carriers headed for bankruptcy aren't coming out with defined benefit retirement plans."

And to top it off, you blame the "providers" of the potential exit financing for eliminating the pensions? You mean they have all come together and collectively decided that NO LEGACY CARRIER IN THE US WILL EMERGE FROM BANKRUPTCY WITH A DEFINED BENEFIT PLAN? That's rich, and delusional. I don't doubt it is the future of our industry, but don't try to tell me it was a banker who decided it for United AND will now impose it on ALL other companies trying to reorganize.

QUOTE:
"I would hope in a similar situation I would negotiate the best possible deal for myself as well."

To the expense of everyone else, you'd demand a fortune to ensure your own financial well-being, then ruin hundreds of thousands of jobs (industry-wide) to "save" 90,000? That tells us everything we need to know about your character.

Any unethical hack could have come in and done what he did. It does NOT take a special person to first completely insulate himself from the ramifications of his actions then wage a war on labor that will reverberate for decades and affect hundreds of thousands of people before the dust settles. Tilton has changed business ethics forever, and I don't think that is anything to be proud of.
 

capt. megadeth

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skykid said:
I bet you're wrong. United spent a lot of money to get Tilton away from ChevronTexaco, and we could argue all day it was worth it or not. I am convinced there are very few who could have gotten the company in the position they are at today. The board went after Tilton specifically for his past experience in successful dealings with unionized labor, and whether you like it or not he did what no one thought was possible in respect to the many unions at United. I wish Tilton would work for free, that is not the reality of the situation.

OMG, I wish we were in the same room right now.
 

skykid

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He robbed your company! I guess if you are a blind UAL employee, you'd think he was doing a good job. If you're the rest of us, you'd see the COMPLETE lack of integrity, ethics, character and leadership this man has shown. You'd see the damage he has done to not only the rest of the industry but to the rest of the country as well as a result of these shortcomings.




Duke, I'm guessing you are a Frontier pilot. Good for you if you are. It is a little tiresome for LCC pilots to get upset when the legacy carriers are forced to slim down to compete. I believe I have the big picture on what is happening in this industry and don't blame anyone. For you to point at United for damaging the industry, coming from my perspective, is a joke. However I'm able to step back and see the inevitable changes in the industry. All you see is what is good for you. As far as robbing the company, that is not the case. The guy was making a mint in another job, he negotiated his compensation in advance, and the United board thought it was worth it to bring him on. We'll see. Maybe you could give some specifics on the lack of integrity, ethics, character and leadership and I could respond in kind. I suppose you are talking about "robbing" the pensions. I don't think you have to be super sharp to see United can't compete with Frontier, Southwest, Jetblue, and Airtran and keep pensions. It would have worked, briefly in my opinion, with a loan guarantee, but not at all possible with conventional exit financing.

And to top it off, you blame the "providers" of the potential exit financing for eliminating the pensions?

No I don't blame bankers for eliminating pensions. If you were considering financing any legacy carrier out of Ch11, you would be a fool to provide the money for them to cover their pension shorfalls. Before that, you'd get fired. Here's the extra cash to cover your pensions, our study shows Frontier, Southwest, Jetblue, and Airtran will soon have defined benefit plans too so you will be able to compete. I don't blame the "providers" or anybody, but I can see the reality of the situation.

To the expense of everyone else, you'd demand a fortune to ensure your own financial well-being, then ruin hundreds of thousands of jobs (industry-wide) to "save" 90,000? That tells us everything we need to know about your character.

You obviously don't know anything about my character. No I would not leave my present job (I'm not talking about United, I've got a few jobs) without having a better deal, with the exception of going back on active duty full time if needed. You wouldn't either. Its business! You think Tilton should have said "Yes, I'll save United and do it for free." No, he negotiated a package good enough to make him leave. You and a few others are hung up on the "evil mgt" bit. Ruining thousands of jobs industry wide!?! Please, drop the blame game, because if you were capable of looking at the big picture, you might change your mind.
 
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blzr

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Thanks for jumping in Duke. Couldn't have said it better myself. Skykiddo is drinking some serious lav juice.

Oh, here's an idea. If we want to save our company, lets get rid of all our pention obligations. That's just criminal. How about go back to every bean counter and CEO that United has had in the past 8 years and take back 50% of all their earnings. That would be better than taking the hard earned retirement money oout of the hands of those that EARNED it. Those people that make the decisions at the top should have seen this thing coming, in the same way you see a TS on the radar and take action before you are actually in the darn thing. The fact that they didn't is one of two things, ignorance or apathy. Which is it?
 
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