AMR Under Pressure to Preserve Pensions

January 13, 2012 - Wall Street Journal

New Tensions Over AMR's Pension Plan: Company Says Retiree Benefits Could Be Cut

By MICHAEL CORKERY And MIKE SPECTOR

The head of the federal agency that oversees corporate pensions is ratcheting up pressure on the parent of American Airlines to preserve the pension plans of the airline's 130,000 workers and retirees as it seeks to restructure in bankruptcy court.

A lawyer for AMR Corp., which filed for Chapter 11 bankruptcy-court protection in late November, has suggested publicly that the airline's pensions are too costly, and may need to be cut.

On Thursday, Pension Benefit Guaranty Corp. director Josh Gotbaum fired back, stressing that American has benefited from congressional breaks that have reduced its pension expenses.

"American has more than $4 billion in cash; some of that money should already have been paid into its pension plans," Mr. Gotbaum said in a statement. "However, Congress, hoping to preserve plans, allowed American to defer the payments. It would be a tragedy if American repaid Congress's generosity by turning around and killing the plans anyway."

In 2007, Congress passed a law aimed at easing the mounting financial strain American Airlines faced as fuel costs surged and competition for passengers remained cutthroat. Continental Airlines, which later merged with United Airlines, and other carriers also benefited from the break.

The law allows those airlines to use a "discount rate" of 8.25% to calculate pension funding obligations and how much cash they need to set aside.

The higher the rate, the less cash a company must contribute to the pension fund. Many other companies are typically required to use an interest rate based on certain corporate bond rates, currently below 5%.

The tussle over American's pension plan comes as a lobbying effort for additional pension relief from Congress is set to rev up later this month.

In American's case, PBGC officials and actuaries say the funding relief contributed to a shortfall in the pension's coffers that could lead to benefits being cut back.

The PBGC puts the funding level of American's pension plans at about 45%, with about $8.3 billion in assets covering $18.5 billion in liabilities. American calculates that its pensions are about 80% funded. Part of the discrepancy can be traced to the funding relief Congress granted in 2007.

"It allowed them to make promises they knew would be difficult to keep," Ethan Kra, a former actuary at pension fund consulting firm Mercer, says of the 2007 measure. "It's not fair to the employees."

An American Airlines spokesman said "had we not received the funding relief, it would have negatively impacted our liquidity during a period of high fuel prices and a weak economy."

The investment losses stemming from the 2008 financial crisis were also a major cause of America's pension shortfall. The company's four pension plans lost $1.65 billion in 2008.

If the plans are terminated, some senior American pilots could lose about half of their pension payments, which total as much as $100,000, according to a person familiar with the matter. Losses for other lower-paid workers would be less.

The Pension Protection Act of 2006 toughened rules for how much cash companies have to contribute to pensions, but gave breaks to certain airlines.

Delta Air Lines Inc. and Northwest Airlines Corp., which later merged, were allowed to use a higher interest rate for pension funding calculations.

The following year, Sen. Kay Bailey Hutchison (R., Texas) introduced a measure giving American, Continental and others interest rate relief. The measure was inserted into the 2007 Iraq War Funding bill. In a statement, Ms. Hutchison said the law "restored a fair, even playing field for all airlines."

On Thursday, Mr. Gotbaum said that Delta, Northwest and Continental maintained many of their employee pension plans after emerging from bankruptcy.

"Given American's plans to reduce its costs to a more reasonable level in line with industry norms, these costs and many other factors are considerations when deciding whether to continue the pension plans," a spokesman for American said in a statement.

While American is still weighing its options, the company's lawyer says pensions may have to be cut in bankruptcy. "There is going to have to be some recognition of the [lack of sustainability] of maintaining those defined benefit plans," said Harvey Miller, the veteran bankruptcy lawyer at Weil, Gotshal & Manges who is representing American.

Business groups are gearing up to lobby Congress for another round of relief this year. Supporters say historically low interest rates, which are used to calculate liabilities, are stressing companies. One proposal on Capitol Hill would peg interest rates to a long-term average.

"It's the proverbial double edged sword," says Mike MacMurdy, an active American pilot and an actuary. "It helps you through a tough spell in the near term. But when you put less money into the plan and things go south the losses are much worse."

Also, on Thursday, the PBGC filed a motion asking the judge in the AMR bankruptcy case to compel the airline to turn over detailed financial information about its pension plans. The agency said in court papers that the company had not granted the PBGC's previous requests for the documents.

AMR couldn't be reached for comment Thursday evening.

—Michael Corkery
and Mike Spector

Write to Michael Corkery at michael.corkery@wsj.com and Mike Spector at mike.spector@wsj.com