Posted on: Saturday, December 18, 2004

United pilots ease stance on pensions

By Mark Skertic and Barbara Rose
Chicago Tribune

CHICAGO — The leaders of United Airlines' pilots union have agreed to accept a 15 percent pay cut and not oppose the elimination of their pension plan, setting a precedent both for ongoing negotiations with United's other unions and for rival airlines that also are trying to slash labor costs.

In exchange, United will make bigger contributions to a new retirement plan and will issue the pilots $550 million in convertible notes once the carrier emerges from bankruptcy.

The union's 6,400 members, who accepted a 30 percent pay cut last year, could begin voting on the latest concessions before the end of the month.

Other labor groups distanced themselves from the deal, and the federal agency that would have to take over United's pension blasted the agreement because it would strengthen the airline's effort to walk away from its obligations.

Until now, the pension was the single non-negotiable item for the Air Line Pilots Association. Members sacrificed pay and other benefits, but never allowed the elimination of their lucrative retirement plan to become a negotiating chip.

But Stephen Presser, the union's investment banker, said helping United get out of bankruptcy requires unprecedented moves. The airline filed for Chapter 11 protection in December 2002.

In November, the airline told pilots it needed $191 million in annual savings as part of an effort to cut $725 million in costs a year. The new concessions would save United $180 million a year.

The pilots also said they would give up extra pay for late-night flying. The concessions are difficult, but the union was willing to work with the carrier because United has shown a willingness to cut costs in other areas, said Mark Bathurst, chairman of the union's governing council.

"They've given us a series of non-labor cost savings across the company," he said. "We're going to continue to push them as hard as we can in every area, because that's been one of our cornerstones. They had to demonstrate a willingness and ability to save costs in other areas before they came to us."

The airline is negotiating with all its labor groups. If savings can't be found through labor talks, the airline has said it will ask a bankruptcy judge to throw out existing contracts.

"Pilots at United Airlines have a choice," Presser said. "They could try to litigate and essentially fight until the last person is left, or work constructively and aggressively with the company in order to solve some of our pension challenge."

The convertible notes could be distributed to the pilots and sold in the capital market. The cash would be intended to soften the blow of losing defined-benefit pensions. Pilots are the carrier's highest-paid union members. In addition, United would increase its contribution to a new retirement plan to 15 percent of a pilot's earnings from 9 percent,

United is encouraged by the tentative deal, Jake Brace, the airline's chief financial officer, said after a bankruptcy court hearing yesterday.

"We think the agreement we struck with the pilots meets our needs to produce a viable business plan," he said.

If United demonstrates in court that its $8.3 billion pension debt must be erased for the company to survive, the obligation for the plans will fall to the Pension Benefit Guaranty Corp

But the federal agency, created 30 years ago as a safety net for workers, slowly is running out of money, and its deficits threaten to skyrocket because of problems in the steel and airline industries. It said last month its deficit for single-employer plans had doubled in the last fiscal year, to a record $23.3 billion, even as underfinancing of pensions nationwide climbed to $600 billion.

The PBGC pays pensions for workers whose former employers have abandoned plans, but typically at a reduced rate. If their pensions are taken over by the agency, many pilots would receive less than half what they expected for an annual pension.