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Airline asks bankruptcy court to let it terminate program

Friday, January 31, 2003

By Frank Reeves, Post-Gazette Staff Writer

US Airways yesterday asked for court approval to terminate its pilots' pension plan, saying it must reduce pension costs to successfully emerge from bankruptcy protection in March.

Termination of the pension plan would affect about 8,000 working, retired and furloughed pilots.

US Airways Chief Executive Officer David Siegel said the airline acted only after it appeared that Congress would not approve legislation allowing the company to stretch out its pension payments over 30 years.

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Siegel said failure to reduce pension expenses could jeopardize the airline's ability to obtain $200 million in interim funding from the Retirement Systems of Alabama and $900 million in government loan guarantees. Both are crucial to the airline's survival.

But the airline pilots, who have endured furloughs and agreed to $565 million in annual wage and benefit cuts as well as reductions in pension benefits, said they will take legal action to stop the company from canceling the plan.

"We vigorously oppose this effort to steal from our pilots benefits they have already earned," said Roy Freundlich, spokesman for the Air Line Pilots Association.

The Arlington, Va.-based carrier also requested the Pension Benefit Guaranty Corp. --- a federal agency that insures the benefits of about 44 million Americans --- to assume liability for the retirement payments.

In place of the existing pension plan, the airline said it will attempt, through negotiations with the pilots union, to set up a new plan to make up for the loss of some of the benefits.

If approved by U.S. Bankruptcy Court Judge Stephen S. Mitchell, the pilots' pension plan would be terminated March 31.

Gary Pastorius, a spokesman for the PBGC, said it was unlikely the agency would oppose the judge's decision.

US Airways' unionized pilots, flight attendants and machinists are covered by separate pension plans. The airline said the plans are solvent today, meaning there is enough money in the trust funds to cover the benefits owed now.

But it has said that because of a drop in interest rates and sagging stock prices, the airline will need to contribute $3.1 billion over the next seven years to make certain there are enough funds to cover the benefits that will have to be paid out. The pilots' plan is underfunded by $2 billion, accounting for most of US Airways' $3.1 billion in pension underfunding.

US Airways has projected that it won't earn enough money over the next seven years --- even though it has obtained more than $1 billion in annual wage and benefit cuts from its unionized employees --- to pay the $3.1 billion in pension expenses.

The company sought congressional approval to stretch out the payments over 30 years, after the PBGC said it lacked the legal authority to permit the airline to do this.

By canceling the current plan and setting up a new plan, the company said, it expects to reduce its contributions to the pilots' pension over the next seven years from about $2 billion to $850 million.

Chris Chiames, a US Airways senior vice president, said a retiring captain with 30 years of service can expect to accumulate a total of $1 million from all sources after the airline sets up its new defined contribution plan.

Chiames said that between the old plan, to be taken over by the Pension Benefit Guaranty Corp., and the new follow-up plan, pilots would be able to earn "the bulk" of the benefits they would have been entitled to had the existing plan not been terminated. He did not provide any details.

He noted that the exact amount of the benefits would depend on the age of the pilot at retirement and his or her length of service.

Freundlich said that even with the proposed follow-up pension plan, pilots will face a 65 percent cut in their benefits.

Describing the company's proposed new plan as "dead on arrival," Freundlich said it was flawed in two ways: most pilots don't work 30 years and that it assumes that money invested as part of the defined contribution plan will earn 8 percent compounded over that time.

Freundlich said the pilots also object that they are being singled out to bear the brunt of the cuts in pension expenses.

The company was under pressure to file for termination by today.

Earlier this month, Mitchell cleared the way for US Airways' creditors to vote on the airline's reorganization plan.

The judge allowed the plan to go forward even though the airline had still not resolved how it would pay about $2 billion in pension obligations for its pilots' retirement plan.

Under the terms of the judge's order, the reorganization plan is scheduled to be mailed out today. If a majority of the creditors accept the plan, it will return to Mitchell for his final approval.

But US Airways officials said creditors were unlikely to approve any reorganization plan unless the pension issue was resolved.

The PBGC would become the trustee of any assets left in the pilots' current pension plan and would be required to pay up to their legal limits.

If it takes over the pilots' pension plan, the agency's liability is estimated to be about $500 million, largely because it has legal limits on how much it can pay out in benefits.

Under guidelines issued for this year, the agency may not pay more than $43,977 annually, or about $3,664 per month, to an individual who is 65 years old. The amount drops dramatically if a person retires at earlier age. For a person 60 years old, the mandatory retirement age for pilots, the limit is about $28,585.

Freundlich said most captains who retire earn about $70,000 a year. US Airways notes that some earn as much as $130,000 annually.

The US Airways strategy is reminiscent of a tack taken by LTV Corp. during the steelmaker's first bankruptcy reorganization in the 1980s.

In 1987, the Pension Guaranty Benefit Corp. assumed responsibility for four underfunded defined benefit pension plans covering LTV's salaried and hourly workers. The company then set up four defined contribution plans -- 401(k) plans are the prime example -- to cover the employees from that point forward.

The PBGC later returned responsibility for three of the four of these defined benefit plans to the company, after mounting a case to the U.S. Supreme Court. The PBGC argued, among other things, that LTV dumped its liabilities onto the federal government when it was able to fund them itself.

Last year, as LTV was liquidating during its second stint in bankruptcy, the PBGC assumed responsibility for three defined benefit plans that were underfunded by about $2.3 billion.

Post-Gazette staff writer Jim McKay contributed to this article.