How the Pension Benefit Guaranty Corp. Enabled the American/US Airways Merger
By Ted Reed
04/21/15 - 06:45 AM EDT - The Street
NEW YORK ( TheStreet) -- The Pension Benefit Guaranty Corp., the
government agency that guarantees pension benefits, was a key player in the
successful bankruptcy restructuring of the U.S. airline industry. But it played
its most complex role at American Airlines(AAL - Get
Report),
where it helped creditors decide between two competing management teams.
For that, the Association of Professional Flight Attendants recently awarded
its Edward M. Kennedy Award for Public Service to Josh Gotbaum, PBGC director
from 2010 to 2014, and the agency's staff.
"But for the careful work of the PBGC, the merger probably would not have
happened," Gotbaum said, in an interview. "The management of American Airlines
didn't want to do the merger -- their analysis said the merger would be
terrible. The management of US Airways wanted to do the merger; they produced an
analysis that said the airline merged would do better than it would on its own.
"So who did the objective analysis?" Gotbaum asked. "The answer was the PBGC,
(which) did reliable financial work on what the airline would look like
standalone and what it would look like if merged with US Airways."
According to APFA, "Though it began as a far-fetched plan, the merger
eventually gained the support of the entire creditors' committee due in large
part to the efforts of organized labor and the PBGC." As a result, legacy
American flight attendants received equity in the new company as well as a new
contract with a strong, competitive network carrier, the union said. US Airways
flight attendants also secured an improved contract.
American filed for bankruptcy protection in November 2011. "On the day that
American filed, they announced 'we cannot afford our pension plan and we will
have to terminate it the way the other airlines did,'" Gotbaum recalled.
"I went to the finance staff of the PBGC which said: 'We have been looking at
the American situation. It used to be the case that if American went into
bankruptcy, there would be no way to reorganize without termination. But the
airline industry is more profitable now. They have choices. It's clear that
American labor costs are high and will have to come down, but that doesn't mean
they have to terminate the plan."
The agency began talks with the carrier and its unions about how to preserve
the plan by making changes elsewhere in the labor contracts. "PBGC showed the
various unions that there were ways to keep their pensions," Gotbaum said.
Step two was talking with the creditors. PBGC offered a compelling argument,
saying that American's pension plans were underfunded by about $10 billion and
that "if the plans are terminated, PBGC becomes the largest creditor," Gotbaum
said. It would then have vast influence over the bankruptcy case's outcome.
"The creditors didn't want to give up their ownership of the airline," he
said. "The company had announced it would go to court to ask for permission to
terminate, so the PBGC went to the union and the creditors and said to both 'If
the company asks to terminate, you will be worse off.'"
According to the 2014 book, American Airlines, US Airways and the
Creation of the World's Largest Airline, which I wrote with Dan Reed,
creditors' committee attorney Jack Butler told his clients, "If you terminate,
you create a $10 billion to $12 billion unsecured claim which swamps all the
other claims. PBGC becomes the controlling creditor and you deep-six the rest of
the committee."
The solution was to freeze the existing plan -- the liability was capped
and absorbed by the airline, which continues to fund the plan over time.
Freezing the plan, Butler said, was "the cornerstone" of the creditors'
committee strategy. Once that decision was made, labor negotiations became
crucial.
In April 2012, the US Airways management team, headed by Doug Parker,
announced it had signed tentative contract agreements with the American unions,
whose support enabled it to make the case to the creditors' committee that it
could run the airline more effectively.
APFA President Laura Glading was the union leader most involved in working
with the creditors' committee. In a prepared statement last month announcing the
award to Gotbaum and the PBGC staff, she said, "The men and women of the PBGC
are some of the most empathetic professionals I have ever worked
with.
"They put themselves in my shoes, and the shoes of every flight
attendant at American, and viewed the bankruptcy in terms of what it meant to
our families -- not just numbers on a balance sheet," Glading
said.