Airlines Press Workers For Deeper Cost Cuts

US Airways' Termination of Pensions Could Set Example for Whole Industry

A novel tack by US Airways Group Inc. to quickly emerge from bankruptcy-court protection by terminating its pension plan for pilots could become a blueprint for other troubled companies, pension specialists say.

The nation's seventh-largest airline says that the only way it can avoid liquidation is to turn the pension obligations for its 7,000 active and retired pilots over to the Pension Benefit Guaranty Corp., a quasipublic insurance agency.

The outcome of the US Airways maneuver won't be settled, at the very least, until the conclusion of a hearing on the company's debt-reorganization plan that begins Tuesday in U.S. Bankruptcy Court in Alexandria, Va. The carrier is seeking backing for the reorganization from its creditors and the court in order to emerge from Chapter 11 on March 31. The pilots union and several groups of retired pilots have objected to the pension plan's termination and have filed a grievance with the company. Without a settlement of the dispute, the reorganization plan might receive only conditional approval from the judge.

Under the pension termination, pilots stand to see their benefits cut as much as 50%. US Airways is negotiating to create a follow-on savings plan that would help make up the shortfall between what the pilots would get from the PBGC and what they receive currently.

Other companies have voided their pension obligations, notably in the beleaguered steel industry. But in those instances, the PBGC typically took over the pension obligations of such companies as LTV Corp. as part of liquidation procedures, or because the plans were seriously underfunded. In this case, US Airways plans to remain in business. Moreover, the Arlington, Va., company is attempting to seize more control than most companies have before by not only initiating the pension termination, but also picking which of its plans it wants to terminate. The bankruptcy judge on March 1 granted US Airways the right to terminate the pilots' plan, pending union talks.

Some pension specialists worry that US Air's "terminate or liquidate" argument will become an attractive option for many financially troubled companies to explore. That is especially true now, when historically low interest rates and stock-market losses have caused pension obligations to rise steeply.

"This could set a horrible precedent by making it easier for companies to renege on the retirement promises they made to their workers by terminating their pension plan through bankruptcy without adequate outside review," says Rep. Bernie Sanders, an independent congressman from Vermont. "My concerns are only heightened because US Airways has already slashed 16,000 jobs and cut salaries and benefits by more than $1 billion."

Closely watching the situation are other troubled airlines, as well as financially distressed companies in other industries. Cheering the move are US Air's creditors, lenders and shareholders with a stake in the reorganized company, because removing the pension plan leaves one less liability to soak up cash during a reorganization.

US Airways Chief Executive Officer David Siegel said earlier this month that termination of the pilots pension plan is "the single most important hurdle for emerging from Chapter 11." He said the move was an "absolutely regrettable step," but argued that "the future of the airline is at stake."

A major proponent of the termination of the pilots' pension plan is Retirement Systems of Alabama, US Airways' lead bankruptcy lender, which intends to take a 37% equity stake when the airline emerges from Chapter 11. Earlier this month, Retirement Systems said that it would withhold the final payment of US Airways' interim bankruptcy financing, until the carrier "fully qualified" for federal loan guarantees.

US Airways has won conditional approval for $900 million in federal loan guarantees from the Air Transportation Stabilization Board, which Congress created shortly after the Sept. 11, 2001, terrorist attacks. The loan guarantees are conditioned on US Airways paring its costs and resolving its pension problem.

The company estimates that it would have to contribute $1.7 billion to the pension plan over the seven years of the loan backed by the ATSB guarantee. A US Airways spokesman says that figure is the company's estimate of the amount it must contribute to its pilots' plan to meet minimum funding requirements, as established by the Internal Revenue Service, or face liens and impaired loan covenants. The PBGC says the plan is within minimum funding requirements. In any case, a PBGC spokesman says the agency has only Dec. 31, 2001, data for the airline's pensions, so it doesn't know how big the liability is for the pilots' pension plan.