United Says Pension Plan Termination 'Likely'

By Dave Carpenter
AP Business Writer
Thursday, August 19, 2004; 4:01 PM

CHICAGO -- Cash-strapped United Airlines said in a bankruptcy court filing Thursday that it "likely" will be necessary to terminate and replace its employee pension plans.

The carrier cited the size of further cost cuts and the need to find bankruptcy-exit financing as reasons for such a drastic move.

The filing came a day before a federal bankruptcy court hearing on United's pension plans, which the company announced last month it would no longer contribute to while in Chapter 11. That action has been assailed by United's unions and challenged by the government's pension-protection agency as violating federal pension law.

In its court filing, United cited the government's recent decision to reject its bid for a $1.6 billion loan guarantee along with sky-high jet fuel prices. The Elk Grove Village, Ill.-based airline said it "must have the cash flow and liquidity that the financial markets are willing to finance."

"We have taken every effort to restructure our business without affecting accrued pension benefits, and will continue to explore every other option," the company said in the 26-page filing. "However, given the magnitude of further cost reductions needed to create a viable business plan and attract exit financing, termination and replacement of all our defined benefit pension plans likely will be required."

If United ends its four employee pension funds, it would represent the largest pension default ever by an airline. The action would dump billions of dollars in future pension obligations onto the already-strapped Pension Benefit Guaranty Corp.

The agency said last week that United's pension plans are underfunded by $8.3 billion.

The possibility of such a move surfaced last month when United, facing $725 million in 2004 payments to the funds alone and more than $4 billion by 2008, defaulted on a payment and announced the cutoff in contributions.

The company did not outline possible replacements for the defined-benefit pensions in its court filing.

"No final decisions have been made," spokeswoman Jean Medina said. "We are still in the process of reviewing that."

Unions have bitterly opposed the halt in contributions, which other financially ailing carriers are watching closely as they consider their options while spiraling fuel costs worsen huge losses.

The International Association of Machinists and Aerospace Workers, representing more than 20,000 ramp workers and customer-service agents at United, sued its top three executives in federal court, accusing them of a breach of fiduciary duty. And both the IAM and the Association of Flight Attendants have filed objections in bankruptcy court to the company's proposed new interim bankruptcy financing, which they claim is predicated on United halting its pension contributions.

"Management's decision to skip pension payments is what put the pension plans in jeopardy," said Sara Nelson Dela Cruz, spokeswoman for the Association of Flight Attendants, United flight attendants union, in response to the latest filing.