More Bankruptcy?

[hotwing]

Will other carriers chart United’s course?

Cost savings may tempt rivals to try Chapter 11 protection

Updated: 5:13 p.m. ET June 12, 2005

CHICAGO - After 2 1/2 years in bankruptcy, United Airlines is poised to emerge in the fall with an enviable cost structure that could tempt rival carriers to strive for similar cost cuts through court protection.

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United, a unit of UAL Corp., has made the most of Chapter 11, reducing yearly costs by $7 billion. Much to the chagrin of its workers, the No. 2 U.S. carrier last month even managed to jettison its burdensome defined pension plans, generating annual savings of $645 million.

US Airways Group, also bankrupt, has won more than $1 billion in annual labor savings this year, an amount that might have been impossible outside of bankruptcy.

The savings of those two carriers has put increased pressure on non-bankrupt rivals, battered by soaring fuel prices and low-fare competition, to slash costs as well.

“I’m sure United’s progress in bankruptcy court will set off a domino effect,” said Joe Schwieterman, a transportation expert at DePaul University in Chicago. “There’s no doubt that the weakest airlines are pacing the stronger airlines in cutting costs.”

Delta, Northwest on the runway?
Delta Air Lines, at risk of a bankruptcy filing, is seeking $5 billion in annual savings. Continental Airlines Inc. hopes to cut labor costs by $500 million a year. So far, the carrier has struck deals worth $418 million annually.

Northwest Airlines Corp. hopes to wring $1.1 billion from its labor force as it restructures, but has run into strong resistance from labor unions.

Experts said that if airlines are unable to match UAL’s cost cuts outside of Chapter 11, then they may well take the bankruptcy route themselves.

“The fact that this large percentage of the industry has gotten there (to greater cost savings) and operates there I think is a reflection and provides a certainty that the rest of us need to get there,” said Doug Steenland, Northwest’s chief executive, said at a conference last Tuesday.

Steenland told analysts he hopes to get the needed savings through collective bargaining and avoid a Chapter 11 filing.

Nevertheless, Steenland and Delta CEO Gerald Grinstein told the Senate Finance Committee last week that pensions covering 150,000 workers and retirees are unmanageable and could force their airlines into bankruptcy.

United’s Chief Financial Officer Peter McDonald, however, said UAL’s cost cuts during bankruptcy merely leveled the playing field with other carriers.

“The reality is we were not cost-competitive,” McDonald said. “If we didn’t change our cost position, we weren’t going to be around. We pursued the right alternative.”

Bankruptcy risky business
But experts warned that bankruptcy is not a guaranteed remedy for what’s ailing airlines. With a relatively low rate of successful restructuring, some industry leaders consider it strictly a last resort.

“It is not a place we want to be,” Delta’s Grinstein said in March.

Furthermore, airlines contemplating bankruptcy as part of a business plan must consider the unintended consequences that could derail future success, said Lowell Peterson, a labor attorney with Meyer, Suozzi, English & Klein in New York.

He noted that bankrupt companies often pay higher borrowing costs. In many cases, a bankrupt airline sees a decline in advance bookings as potential passengers begin to question the carrier’s long-term viability, he said.

“The flying public and the investment public get skittish when they think about an airline going into Chapter 11,” Peterson said.

Even if United emerges unscathed, it is unlikely competitors will stampede into bankruptcy court, said Thomas Salerno, chairman of the financial reorganization practice group at Squire, Sanders & Dempsey in Phoenix.

The government may head off filings if too many carriers try to dump their financial burdens on the public, he said.

“I would predict we’re going to see some sort of congressional action to stem bankruptcies as a tool to stem pension plan liabilities,” Salerno said.

 

[FlyBoeingJets]

Continental plots a different course--



Continental Airlines Beefs Up Pension
Tuesday June 14, 11:23 am ET

Continental Airlines Adds $50 Million to Pension Plan, Calls Pension a 'Priority'


HOUSTON (AP) -- Continental Airlines Inc. on Tuesday said it injected $50 million into its defined benefit pension plan after borrowing from a secured term facility, extending its credit line to $350 million.

The investment comes in the wake of United Airlines' default on more than $9 billion in pension commitments last month -- the largest corporate-pension default in U.S. history. In May, a federal bankruptcy judge permitted United to shift responsibility for the funds to the government's pension agency.

About 120,000 current and retired United workers are covered by the pensions, including 62,000 active employees.

In an effort to assuage its own workers, Continental injected new money into its pension plan, bringing its contribution to $180 million so far this year.

"Our employee pension plan continues to be a high priority," said Continental Chairman and Chief Executive Larry Kellner in a statement. "We are working hard to fulfill our pension obligations and keep our promises to our employees."

The company's initial $300 million borrowed under the term loan facility closed June 1, and with the closing of the $50 million amount, the facility is fully funded, Continental said. Shares of Continental rose 23 cents to $14.40 in midday trading on the New York Stock

 

[FlyBoeingJets]

American claims the benefits of flushing pensions to be meager

American Airlines Protects Pensions
Saturday June 11, 11:59 am ET
By Brad Foss, AP Business Writer

As Other Carriers Dump Pensions, American Airlines Satisfied With 2003 Decision to Protect Them


WASHINGTON (AP) -- When American Airlines teetered on the brink of bankruptcy in 2003, employees agreed to $1.8 billion worth of concessions, with one comforting condition: their pensions would be protected.

That deal, which saved the nation's largest carrier from a Chapter 11 filing, is a key factor that distinguishes American from its rivals at a time when the retirement benefits of workers throughout the industry are increasingly at risk. UAL Corp.'s United Airlines and US Airways Group Inc. have dumped their pension plans through bankruptcy restructuring, and other carriers are threatening to do the same.

"We are trying very hard to strike another path," said Tommie L. Hutto-Blake, president of the Association of Professional Flight Attendants, which represents flight attendants at American Airlines, a unit of AMR Corp.

The chief executives of Northwest Airlines Corp. and Delta Air Lines Inc. on Tuesday told senators that their companies may have to seek bankruptcy court protection unless Congress gives them a 25-year extension to meet multibillion-dollar funding gaps in the pension benefits promised to workers.

In exchange, the executives pledged to switch workers to defined contribution plans, such as 401(k)s, and freeze existing pension benefits at current levels in order to limit the financial exposure of the federal Pension Benefit Guaranty Corporation, which has its own ballooning deficit because of defaults of the defined benefit plans of United, US Airways and others.

Defined benefit plans, which pay a lifetime pension after retirement, are funded by employers, based on actuaries' calculations of employees' salaries and life expectancies; defined contribution plans are retirement savings accounts funded by employees' payroll contributions, which employers sometimes match.

Northwest CEO Douglas Steenland told senators that "defined benefit plans simply do not work for an industry that is as competitive and as vulnerable to forces -- ranging from terrorism to international oil prices -- that are largely beyond its control, as the airline industry."

Steenland's opinion may ultimately sway Congress, but it had little resonance among executives and rank-and-file workers at American.

"There are a lot of people who have hopped on this bandwagon," said Mark Burdette, vice president of employee relations at Fort Worth, Texas-based AMR. But American has been able to chart its own course, Burdette said, in part because its pension-funding deficit is not as severe as Delta's and Northwest's.

Delta tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to Standard & Poor's. Northwest is next in line with a funding deficit of $3.8 billion, while American has a shortfall of $2.7 billion.

This gives American the luxury of striving to protect its pension plans, which establishes goodwill with workers, S&P airline analyst Philip Baggaley said. "And, if all the other large airlines do convert to defined contribution plans and executives at American eventually feel they need to follow suit, they will have a better case to make with their employees," he said.

Profitable low-cost airlines such as Southwest Airlines Co. and JetBlue Airways Corp. have defined contribution plans.

American chief executive Gerard Arpey was not invited to testify at Tuesday's Senate hearing on the pension crisis but he sent a letter, co-signed by union leaders, urging the finance committee to find a solution that gives companies extra time to properly fund their pensions but does not force them to switch to a defined contribution plan. The letter also criticized a Bush administration proposal to tighten funding requirements on companies whose credit ratings are below investment grade, saying it "could have the perverse effect of forcing us to abandon our plans."

In United's case, there was a strong financial case to be made -- in the short run, at least -- for dumping the pensions and switching to defined contribution plans.

United Airlines estimated in an April 11 bankruptcy filing that the cost of establishing a defined contribution plan over the next six years would be roughly $700 million, assuming the carrier contributed a matching sum equal to 4 percent to 6 percent of salary to each employee's plan. By comparison, payments to its underfunded defined benefit plan would have exceeded $4 billion over the same period, the company said.

Still, that comparison is somewhat misleading, according to David Feinstein, a Chicago-based actuary who has done work on behalf of United's flight attendants. United's own calculations showed that after an initial period of rather large payments, the funding requirements for the flight attendants' pension would shrink immensely, assuming annual stock market returns recovered to about 8.5 percent.

"In the long run, it may not make a big difference," Feinstein said.

That is the position at American, whose executives describe the pension-funding crisis as a temporary phenomenon tied to the stock market downturn that began in 2000 and to extremely low interest rates. As the economy recovers, they say, so too will the value of their pension-related assets.

And because American's pensions are in better shape than United's, switching to a defined-contribution plan would not even offer any immediate financial savings, executives said.

Over the past two years American has contributed almost $600 million to its employees' defined-benefit plans. If the company had instead paid into a defined-contribution system at a rate of 5 percent, the costs would have been roughly $450 million.

But the economic rationale is only part of the picture at American. Underpinning the company's lone-wolf status on the pension issue is a two-year-old agreement between executives and employees to do everything they could to preserve the pensions.

During the tense labor-management negotiations of March 2003 that yielded a last-minute compromise to avoid Chapter 11 (and which resulted in the ouster of longtime CEO Don Carty), American's rank and file workers made it clear they were "not interested in touching the pension plans," Burdette said. Instead, workers negotiated steep wage cuts and operational changes that would force them to work harder for every dollar they earned.

Now, those sacrifices seem like a small price to pay at a time when flight attendants, mechanics and pilots at other major carriers are seeing their pension benefits put on the chopping block. "This is a stressful occupation," said Patrick Hancock, a 21-year flight attendant at American. "The pay is okay. But knowing that you're going to have a good pension and be able to travel when you retire ... that's what makes you willing to put up with a lot, in order to hang on to it."

 

[SWA/FO]

If these companies are able to save their pensions that will go a long way with the feelings of the current employees and maybe the customer will see better service attitudes out of it....