United gets OK to dump pension plans
A federal bankruptcy judge approved United Airlines' plan to terminate its employees' pension plans yesterday, clearing the way for the...
The Associated Press
CHICAGO — A federal bankruptcy judge approved United Airlines' plan to terminate its employees' pension plans yesterday, clearing the way for the largest corporate-pension default in American history.
The ruling, which carries broad implications for U.S. airlines and their workers, shifts responsibility for United's four defined-benefit plans to the government's pension agency.
That will save cash-strapped United an estimated $645 million a year, part of the $2 billion in annual savings it says it needs to line up enough financing to emerge from Chapter 11 bankruptcy as soon as this fall.
But the cost will be painful to its employees, who stand to lose thousands of dollars annually off their pensions when they are assumed by the Pension Benefit Guaranty Corp.
The PBGC, the government's pension insurer, initially opposed United's plan. But it agreed to drop that resistance last month in exchange for up to $1.5 billion in notes and convertible stock in a reorganized UAL, United's holding company.
United's pensions are underfunded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion.
The previous largest U.S. pension default was Bethlehem Steel's $3.6 billion in underfunding in 2002.
Judge Eugene Wedoff said the settlement, while disputed, does not violate any law or United's collective-bargaining agreement. He noted that employees at companies such as United could end up with fewer or even no benefits if no arrangement is made and the company goes broke.
"The least bad of the available choices here has got to be the one that keeps an airline functioning, that keeps employees being paid," Wedoff said.
"The important thing to keep in mind is, in a bankruptcy proceeding no one ever is able to come out with everything they would have had had there not been a bankruptcy," Wedoff said in his ruling.
United Chief Financial Officer Jake Brace said the ruling is crucial for United to exit bankruptcy.
"It's not a good outcome. It's unfortunately a necessary outcome," he said. "This is not in any way a joyous day. It is an important step in our restructuring and in making our airline successful and viable for the long term."
United's move risks provoking action by employees who already have agreed to sharp cuts. Unions have raised the possibility of striking if United dumps the pensions.
The Association of Flight Attendants, which threatened unspecified labor actions if the pensions were struck down, is considering legal options regarding an appeal, said AFA spokeswoman Sara Nelson Dela Cruz.
"Today's decision is upsetting but our fight is far from over," she said.
She declined to respond directly when asked if the flight attendants would follow through with their labor threats.
United's effort to dump its pensions has been watched closely by the rest of the airline industry, where record fuel costs, the lowest fares since the early 1990s and stiff competition have caused network carriers to lose billions of dollars.
Yesterday's ruling, after a step taken successfully by US Airways Group in February, clears the way for similar actions elsewhere.
Today, flight attendants for American Airlines will gather in Washington to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish underfunded plans.
It also would provide relief to airlines that seek, through collective bargaining, to preserve rather than terminate their pension obligations.
An overflow crowd of current and former United workers showed up at bankruptcy court yesterday, with more than 100 packing the courtroom and dozens more listening to piped-in proceedings in a separate courtroom.
Unions representing United's flight attendants, mechanics and ramp workers have expressed their ire at the airline and are angry at the PBGC for agreeing to drop its opposition to United's plan last month.
Robert Clayman, an attorney for the Association of Flight Attendants, drew loud applause and cheers yesterday with an emotional appeal to preserve the pensions and workers' secure retirements.
"Without equity there is no justice," he said.
United has proposed providing new retirement plans that would make contributions to individual retirement accounts for workers instead of promising fixed amounts for the future, as the current plans do.
The unions in their filings contended that the agreement unilaterally cancels pension provisions in their labor contracts and skips negotiations required under bankruptcy law.
Information from Bloomberg News is included in this report.