- The Washington Times - Tuesday, June 14, 2005

When American Airlines teetered on the brink of bankruptcy in 2003, employees agreed to $1.8 billion worth of concessions, with one comforting condition: Their pensions would be protected.

That deal, which saved the nation’s largest carrier from a Chapter 11 filing, is a key factor that distinguishes American from its rivals at a time when the retirement benefits of workers throughout the industry are increasingly at risk. UAL Corp.’s United Airlines and US Airways Group Inc. have dumped their pension plans through bankruptcy restructuring, and other carriers are threatening to do the same.

“We are trying very hard to strike another path,” said Tommie L. Hutto-Blake, president of the Association of Professional Flight Attendants, which represents flight attendants at American Airlines, a unit of AMR Corp.

The chief executives of Northwest Airlines Corp. and Delta Air Lines Inc. earlier this month told senators that their companies may have to seek bankruptcy court protection unless Congress gives them a 25-year extension to meet multibillion-dollar funding gaps in the pension benefits promised to workers.

In exchange, the executives pledged to switch workers to defined-contribution plans, such as a 401(k), and freeze existing pension benefits at current levels in order to limit the financial exposure of the federal Pension Benefit Guaranty Corporation, which also has a ballooning deficit because of defaults of the defined-benefit plans of United, US Airways and others.

Defined-benefit plans, which pay a lifetime pension after retirement, are funded by employers, based on actuaries’ calculations of employees’ salaries and life expectancies; defined-contribution plans are retirement savings accounts funded by employees’ payroll contributions, which employers sometimes match.

Northwest Chief Executive Officer Douglas Steenland told senators that “defined-benefit plans simply do not work for an industry that is as competitive and as vulnerable to forces — ranging from terrorism to international oil prices — that are largely beyond its control, as the airline industry.”

Mr. Steenland’s opinion might sway Congress, but it had little resonance among executives and rank-and-file workers at American.

“There are a lot of people who have hopped on this bandwagon,” said Mark Burdette, vice president of employee relations at Fort Worth, Texas-based AMR.

But American has been able to chart its own course, Mr. Burdette said, in part because its pension-funding deficit is not as severe as Delta’s and Northwest’s.

Delta tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to Standard & Poor’s. Northwest is next in line with a funding deficit of $3.8 billion, while American has a shortfall of $2.7 billion.

This gives American the luxury of striving to protect its pension plans, which establishes good will with workers, S&P; airline analyst Philip Baggaley said.

“And, if all the other large airlines do convert to defined-contribution plans and executives at American eventually feel they need to follow suit, they will have a better case to make with their employees,” he said.

Profitable low-cost airlines such as Southwest Airlines Co. and JetBlue Airways Corp. have defined-contribution plans.

American Chief Executive Officer Gerard Arpey was not invited to testify at the June 6 Senate hearing on the pension crisis, but he sent a letter, co-signed by union leaders, urging the Finance Committee to find a solution that gives companies extra time to properly fund their pensions but does not force them to switch to a defined-contribution plan. The letter also criticized a Bush administration proposal to tighten funding requirements on companies with credit ratings below investment grade, saying it “could have the perverse effect of forcing us to abandon our plans.”

In United’s case, there was a strong financial case to be made — in the short run, at least — for dumping the pensions and switching to defined-contribution plans.

United Airlines estimated in an April 11 bankruptcy filing that the cost of establishing a defined-contribution plan in the next six years would be about $700 million, assuming the carrier contributed a matching sum equal to 4 percent to 6 percent of salary to each employee’s plan. By comparison, payments to its underfunded defined-benefit plan would have exceeded $4 billion over the same period, the company said.

Still, that comparison is somewhat misleading, said David Feinstein, a Chicago-based actuary who has done work on behalf of United’s flight attendants. United’s calculations showed that after an initial period of rather large payments, the funding requirements for the flight attendants’ pension would shrink immensely, assuming annual stock market returns recovered to 8.5 percent.

“In the long run, it may not make a big difference,” Mr. Feinstein said.

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