By DAVE CARPENTER, AP Business Writer1 hour, 30 minutes ago
With scores of its concerned employees and retirees looking on, United Airlines told a judge Tuesday it has no choice but to shed billions of dollars of pension obligations in order to emerge successfully from bankruptcy.
At a packed hearing with broad implications for U.S. airlines and their workers, United asked a federal bankruptcy judge to approve an agreement shifting responsibility for its defined-benefit plans to the government's pension agency. The funds are underfunded by an estimated $9.8 billion.
Unless rejected by Judge Eugene Wedoff, it will be the largest corporate-pension default in U.S. history, topping Bethlehem Steel's $3.6 billion in underfunding in 2002.
The deal would be a blow to airline employees. Only three-fourths of the total owed would be paid out, with pensions shifted to the oversight of the federally backed Pension Benefit Guaranty Corp.
"It was not our first choice," said United's chief bankruptcy attorney, James Sprayregen. "But this deal, if approved by the court, solves any number of issues."
"We don't see an alternative to what we're proposing today and tomorrow," he said, referring to a separate hearing starting Wednesday at which United is proposing to overhaul its labor contracts over its unions' objections in order to impose lower pay and benefits.
United, which has been unprofitable since 2000, says terminating the pensions and replacing them with defined-contribution plans would save it $645 million per year, part of the $2 billion in annual savings it needs to secure exit financing to end its 29-month stay in Chapter 11 bankruptcy.
The effort to dump its pensions is being 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. A successful move by United to get out from under its pension obligations, following a step taken successfully by US Airways Group Inc. in February, would clear 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.
On Wednesday, flight attendants for American will gather in Washington to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish underfunded plans and provide relief to airlines that seek, through collective bargaining, to preserve rather than terminate their pension obligations.
Such pension reform has the support of executives at AMR, as well as those at No. 3 Delta Air Lines Inc., which has said it is in danger of being forced to file for Chapter 11 bankruptcy because it faces $3.1 billion in pension payments over the next three years. On Tuesday, Delta warned that it will record a substantial loss for the remainder of the year, and said it will need to file for bankruptcy if its cash reserves fall too low or some of its lenders demand immediate payment of its debts.
An overflow crowd of current and former United workers showed up at bankruptcy court Tuesday, with more than 100 packing the courtroom and dozens more listening to piped-in proceedings in a separate courtroom.
Unions representing United's flight attendants, mechanics and ramp workers have expressed their ire at both the airline and the Pension Benefit Guaranty Corp. for agreeing to drop its opposition to United's plan last month. In exchange for that settlement, the PBGC would get as much as $1.5 billion in notes and convertible stock in a reorganized UAL Corp., United's holding company.
Attorney Jeffrey Cohen said the PBGC, which might have been unable to halt United's plan in any case, made the agreement as "a matter of last resort." Disputing the flight attendants' contention that the deal violated its mission, he said the agency concluded that cutting a deal was in the best interest of not only those with pensions at United and other companies but also for taxpayers who fund the pension insurer.
In addition, he said, "We think it helps clear a path to the exit door" for United to leave bankruptcy.
Union attorneys lined up to oppose the agreement later Tuesday, with a ruling possible afterward.
Before the hearing, United Chief Financial Officer Jake Brace said the carrier has no choice but to seek the difficult action.
"All the work we have done and continue to do is about ensuring a healthy United for all our employees and our customers," Brace said. "That work enables competitive jobs and a successful future for our company."
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 terminates the pensions and has its labor contracts overhauled.
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On the Net:
www.united.com
www.delta.com
www.aa.com
www.pbgc.gov