- The Washington Times - Tuesday, August 17, 2004

United Airlines agreed yesterday to appoint an independent overseer to manage its pensions after the federal government objected to its proposal to halt payments to the plans.

The move is one more sign United and other major airlines steeped in pension debt are not likely to emerge from their financial problems anytime soon, according to industry analysts.

“United Airlines’ decision to stop funding its pension plans made clear the need to appoint an independent fiduciary to represent the interests of workers and retirees,” said Labor Secretary Elaine L. Chao. “This agreement ensures that workers’ interests are protected.”

Under terms of the agreement, United can select an overseer but the Labor Department must approve the choice.

The overseer is supposed to review the funding policy of the plans, assert claims on behalf of employees and file litigation if it is necessary to force United to comply with its obligations.

“It’s indicative of the cash flow predicament United finds itself in right now,” said Bill Warlick, an airline industry analyst for the credit rating service Fitch Ratings. “It’s something that’s going to take months to sort this out in the bankruptcy court.”

Major airlines blame pension payments as part of the reason they have difficulty keeping costs low enough to compete with low-fare airlines, which do not offer pensions.

About 35 percent of airlines’ costs involve employee expenses, according to David Swierenga, an airline industry economic consultant in Vienna, Va.

“Pension expenses are a big part of the pay package,” Mr. Swierenga said.

Industrywide, employees earned an average of $79,356 last year in total compensation, he said. Of that total, $19,166 was benefits and pensions.

Low-fare competitors, such as Southwest Airlines and JetBlue Airways, typically use 401(k) plans to provide for their employees’ retirements.

With 401(k) plans, the employer sets up a tax-deferred fund for employees and usually matches employee contributions. With pensions, the employer is contractually obligated to pay a specific amount into a retirement fund.

“It contributes to the cost gap,” Mr. Warlick said, referring to the cheaper ticket prices often charged by low-fare airlines.

In addition to United planning to stop pension payments, US Airways is seeking to restructure its pensions and Delta Air Lines is negotiating with its pilots to reduce its pension debt.

Meanwhile, United is trying to emerge from the bankruptcy protection it sought in December 2002. US Airways, which exited bankruptcy in March 2003, and Delta acknowledge they are close to bankruptcy.

UAL Corp., the parent company of United Airlines, failed to make a required $72 million contribution July 15 to three of its four pension plans. The pensions cover about 120,000 employees.

On July 23, the company announced that it would not make any of its legally and contractually required contributions to the plans while still in bankruptcy. Another payment of $400 million is due Sept. 15.

US Airways is in a similar predicament.

On Monday, the Arlington carrier said it would ask the Internal Revenue Service for authority to reschedule its pension debt to its mechanics and flight attendants’ unions.

The airline is supposed to contribute a total of $67.5 million this fiscal year to the pension funds. The contributions are due by Sept. 15, but US Airways has contributed only $28.6 million so far.

“Rescheduling these payments will help US Airways to conserve its cash so that we have sufficient liquidity to operation the airline,” said Jerry Glass, US Airways’ vice president of employee relations.

Delta Air Lines, the third-largest U.S. carrier, told pilots last month it may revise their pension plans to reduce costs and avoid bankruptcy.

The company is seeking $1 billion in concessions from its unions.

Representatives from its pilots union and the company are negotiating daily.

However, before airlines can terminate any pension obligations, they must overcome any objections by the Pension Benefit Guaranty Corp., a government insurance program that takes over failed pension plans.

The PBGC said last week it opposes UAL’s proposal to skip pension contributions.

Agency spokesman Jeffrey Speicher estimates underfunding of all pensions by airlines nationwide at $31 billion. Of that amount, United owes $8.3 billion, he said.

About the only options for airlines are to pay off the debt or have it discharged by court order, he said.

“These are promises they’ve made to their employees over time,” Mr. Speicher said.

Both the Association of Flight Attendants and the International Association of Machinists and Aerospace Workers have filed objections to United’s motion that the bankruptcy court approve its requested discharge of pension debt.

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