http://www.nytimes.com/2003/11/20/business/20AIR.html?th
United Airlines is devising a plan to postpone about $2 billion of required pension contributions over the next three years, having concluded that doing so is the only way to bring the airline out of bankruptcy.
The plan, which was described in general terms by company executives and people briefed on the deliberations, would require the federal agency that insures pensions to take on a significant risk, and the agency is expected to resist it forcefully. The plan would be subject to Internal Revenue Service approval.
Other airlines might also oppose it or insist on comparable breaks in their pension contributions. Slowing contributions to any pension plan can put workers' benefits at risk.
United officials say the airline does not have enough cash to make the required payments to its pension funds and finance its business operations at the same time.
They say resolving the pension issue is the biggest hurdle to obtaining federal loan guarantees, which would allow the airline to emerge next year from more than a year of operating under bankruptcy protection. If United fails to get some type of break from its pension contributions, it would be forced to try to renegotiate contracts with its unions, which have already granted significant concessions. If the unions balked, United would have few options but to ask the bankruptcy court to cancel its pension plans and replace them with less generous retirement programs. Only severely distressed companies can qualify for such a cancellation in bankruptcy court.
A United official said the airline did not want to change its pension plans — just stretch out its required contributions.
United has disclosed in court documents that it has to contribute $4.8 billion to its pension plans over the next five years, but much of that is due in the first two years. The official indicated that United was seeking instead to pay about $1 billion annually over the next four years, and about $500 million in the fifth year.
"We aren't looking for a silver bullet; we're looking for combinations of things that deal with the challenge," Frederic Brace III, United's chief financial officer, said in an interview yesterday. He said that the airline did not want to foist additional obligations onto the pension agency.
Pension contributions are a matter of law, and companies are allowed to request up to three exceptions in any 15-year period. But such waivers are granted sparingly, and only to companies that can demonstrate a "temporary, substantial business hardship." It is unprecedented for a company to request all three waivers at the same time, or to use them over three consecutive years, as United hopes to do.
Companies are also required to post business assets as collateral to secure what is, in effect, a debt to the pension plan. United, however, does not have assets that are not already promised to other creditors. It would be unusual for the government to bend the rules on collateral for a waiver of this size.
The I.R.S. is supposed to consult with the pension agency on what type of collateral is adequate, but it alone has the power to approve requests to waive pension contributions.
The I.R.S. declined to comment on United's request.
United officials said the airline has requested waivers for four pension plans, covering benefits for pilots, flight attendants, unionized ground workers and employees who have contact with the public. It said the waivers for the plans would be staggered, but declined to specify the order in which they might be made.
The agency that insures pensions, the Pension Benefit Guaranty Corporation, would almost certainly oppose a special break for United because it would require the government to assume considerable risk. As of last April, United's pension plans were $7.5 billion short of the amount needed to cover all promised benefits, according to documents filed in bankruptcy court. If the airline made smaller contributions and then defaulted on all its pensions, the agency would add obligations of more than $5 billion to its balance sheet, Steven A. Kandarian, its executive director, said.
That would eclipse the $3.7 billion in pension obligations that the agency assumed in December 2002, when it took over Bethlehem Steel's failed pension plan — by far the largest pension default.
United Airlines is devising a plan to postpone about $2 billion of required pension contributions over the next three years, having concluded that doing so is the only way to bring the airline out of bankruptcy.
The plan, which was described in general terms by company executives and people briefed on the deliberations, would require the federal agency that insures pensions to take on a significant risk, and the agency is expected to resist it forcefully. The plan would be subject to Internal Revenue Service approval.
Other airlines might also oppose it or insist on comparable breaks in their pension contributions. Slowing contributions to any pension plan can put workers' benefits at risk.
United officials say the airline does not have enough cash to make the required payments to its pension funds and finance its business operations at the same time.
They say resolving the pension issue is the biggest hurdle to obtaining federal loan guarantees, which would allow the airline to emerge next year from more than a year of operating under bankruptcy protection. If United fails to get some type of break from its pension contributions, it would be forced to try to renegotiate contracts with its unions, which have already granted significant concessions. If the unions balked, United would have few options but to ask the bankruptcy court to cancel its pension plans and replace them with less generous retirement programs. Only severely distressed companies can qualify for such a cancellation in bankruptcy court.
A United official said the airline did not want to change its pension plans — just stretch out its required contributions.
United has disclosed in court documents that it has to contribute $4.8 billion to its pension plans over the next five years, but much of that is due in the first two years. The official indicated that United was seeking instead to pay about $1 billion annually over the next four years, and about $500 million in the fifth year.
"We aren't looking for a silver bullet; we're looking for combinations of things that deal with the challenge," Frederic Brace III, United's chief financial officer, said in an interview yesterday. He said that the airline did not want to foist additional obligations onto the pension agency.
Pension contributions are a matter of law, and companies are allowed to request up to three exceptions in any 15-year period. But such waivers are granted sparingly, and only to companies that can demonstrate a "temporary, substantial business hardship." It is unprecedented for a company to request all three waivers at the same time, or to use them over three consecutive years, as United hopes to do.
Companies are also required to post business assets as collateral to secure what is, in effect, a debt to the pension plan. United, however, does not have assets that are not already promised to other creditors. It would be unusual for the government to bend the rules on collateral for a waiver of this size.
The I.R.S. is supposed to consult with the pension agency on what type of collateral is adequate, but it alone has the power to approve requests to waive pension contributions.
The I.R.S. declined to comment on United's request.
United officials said the airline has requested waivers for four pension plans, covering benefits for pilots, flight attendants, unionized ground workers and employees who have contact with the public. It said the waivers for the plans would be staggered, but declined to specify the order in which they might be made.
The agency that insures pensions, the Pension Benefit Guaranty Corporation, would almost certainly oppose a special break for United because it would require the government to assume considerable risk. As of last April, United's pension plans were $7.5 billion short of the amount needed to cover all promised benefits, according to documents filed in bankruptcy court. If the airline made smaller contributions and then defaulted on all its pensions, the agency would add obligations of more than $5 billion to its balance sheet, Steven A. Kandarian, its executive director, said.
That would eclipse the $3.7 billion in pension obligations that the agency assumed in December 2002, when it took over Bethlehem Steel's failed pension plan — by far the largest pension default.
