Posted on: Wednesday, May 11, 2005

Pension ruling favors United

By Dave Carpenter
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 Corp., United's holding company.

United's pensions are underfinanced by an estimated $9.8 billion, of which the PBGC would guarantee about $5 billion. The previous largest U.S. pension default was Bethlehem Steel's $3.6 billion in underfinancing in 2002.

Judge Eugene Wedoff said the settlement, while disputed, does not violate any law or United's collective bargaining agreement and 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.

Jake Brace, United's chief financial officer, said the ruling is crucial for United to come out of 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 controversial 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, 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 would not respond directly when asked if the flight attendants would follow through with their labor threats.

"We're going to look to replace this management team with a team that can lead our airline out of bankruptcy," Dela Cruz said. "Either they go, or we go."

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 Inc. in February, clears the way for similar actions elsewhere.

United's biggest competitors would be under the most pressure to follow suit. American Airlines, the largest U.S. carrier and a unit of AMR Corp., has said it will keep its pension plans but is concerned about No. 2 United gaining a financial advantage with the elimination of its pensions.

Flight attendants for American are scheduled to gather in Washington today to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish underfinanced plans and provide relief to airlines that seek, through collective bargaining, to preserve rather than terminate their pension obligations.

No. 3 Delta Air Lines Inc., which has said it is in danger of being forced to file for Chapter 11 bankruptcy, faces $3.1 billion in pension payments over the next three years.

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.