US Air seeks to delay $67m in pension payments
By Caroline Daniel in Chicago, FT
Published: August 16 2004 23:13 | Last updated: August 16 2004 23:13

US Airways, which faces the prospect of a second bankruptcy, is seeking to conserve cash by asking the Internal Revenue Service for a waiver to delay pension payments of $67.5m.

The move marks the latest attempt by a struggling airline to find ways of meeting the ongoing costs of defined benefit pension plans. On Friday, a decision by United Airlines to cancel the payment of $500m in pension contributions was legally challenged by the Pension Benefit Guaranty Corporation, the federal body that oversees retirement benefits.

In 2003, as part of its exit from bankruptcy, US Airways terminated its pilots' pension plans. The cost of these plans, which represented two thirds of its pension liabilities, was shifted to the PBGC. It retained its defined benefit plans for the Association of Flight Attendants and the International Association of Machinists.

These remaining pension plans could come under pressure unless the IRS agrees to allow the airline to reschedule the payments over five years, not the current 18 months. Jerry Glass, senior vice-president of employee relations, said: gThis is an important step as we work to ensure our survival and future prosperity.h

The need to shore up liquidity was underlined in a report prepared by Glanzer & Co, an investment bank. The confidential report for the pilots union said the company would be forced to file for bankruptcy in mid-September unless new labour agreements were reached.

Although the pilots have agreed to talks, the machinists union has resisted efforts to make further concessions, which could undermine efforts to get agreements in place by early September. Even if US Airways were able to secure its proposed $1.5bn cost cuts, the report highlights a number of uncertainties about the viability of the new business plan.

The report warned that the plan did not currently include current fuel prices. It also depended on finding new investors to provide ga significant amount of moneyh. gFew private equity or institutional funds are capable of providing this size investment,h it noted.

There is also uncertainty about the role of the Airline Transportation Stabilisation Board, which guaranteed a $1bn loan to US Airways in March 2003. In March 2004, the ATSB's exposure was reduced by $225m to $675m, as part of an agreement to revise the loan covenants.

The airline has already warned it would breach these new covenants next month without cost cuts. gIt is not clear that the ATSB will agree to finance the company in a bankruptcy proceeding,h the report said.