When American Airlines teetered on the brink of bankruptcy in 2003, employees agreed to $1.8 billion worth of concessions, with one comforting...
WASHINGTON — When American Airlines teetered on the brink of bankruptcy in 2003, employees agreed to $1.8 billion worth of concessions, with one comforting condition: their pensions would be protected.
That deal saved the nation’s largest carrier from a Chapter 11 filing and is a key factor that distinguishes American from its rivals at a time when the retirement benefits of workers throughout the industry are at risk. United Airlines and US Airways have dumped their pension plans through bankruptcy restructuring and other carriers are threatening to do the same.
“We are trying very hard to strike another path,” said Tommie Hutto-Blake, president of the Association of Professional Flight Attendants, which represents flight attendants at American Airlines.
Most Read Stories
- Anthony Bourdain brought 'Parts Unknown' to Seattle — here's where he ate
- Residents fight Seattle rules allowing apartment developers to forgo parking
- Seattle’s crazy restaurant boom | PNW Magazine VIEW
- Cleveland Browns waive Kasen Williams, could a return to Seahawks be in the offing?
- UW's Azeem Victor suspended indefinitely after arrest
The chief executives of Northwest Airlines and Delta Air Lines told senators Tuesday that their companies may have to seek bankruptcy court protection unless Congress gives them a 25-year extension to meet multibillion-dollar funding gaps in the pension benefits promised to workers.
In exchange, the executives pledged to switch workers to defined contribution plans — such as 401(k)s — and freeze existing pension benefits at current levels in order to limit the financial exposure of the federal Pension Benefit Guaranty Corp. Defined-benefit plans, which pay a lifetime pension after retirement, are funded by employers, based on actuaries’ calculations of employees’ salaries and life expectancies; defined-contribution plans are retirement savings accounts funded by employees’ payroll contributions, which employers sometimes match.
Northwest CEO Douglas Steenland told senators that “defined-benefit plans simply do not work for an industry that is as competitive and as vulnerable to forces — ranging from terrorism to international oil prices — that are largely beyond its control, as the airline industry.”
Steenland’s opinion may ultimately sway Congress, but it had little resonance among executives and rank-and-file workers at American.
“There are a lot of people who have hopped on this bandwagon,” said Mark Burdette, vice president of employee relations at American. But American has been able to chart its own course, Burdette said, in part because its pension-funding deficit is not as severe as Delta’s and Northwest’s.
Delta tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to Standard & Poor’s. Northwest is next in line with a funding deficit of $3.8 billion, while American has a shortfall of $2.7 billion.
This gives American the luxury of striving to protect its pension plans, which establishes goodwill with workers, S&P airline analyst Philip Baggaley said. “And, if all the other large airlines do convert to defined-contribution plans and executives at American eventually feel they need to follow suit, they will have a better case to make with their employees,” he said.
Profitable low-cost airlines such as Southwest Airlines and JetBlue Airways have defined-contribution plans.
American Chief Executive Gerard Arpey was not invited to testify at Tuesday’s Senate hearing on the pension crisis but he sent a letter, co-signed by union leaders, urging the finance committee to find a solution that gives companies extra time to properly fund their pensions but does not force them to switch to a defined-contribution plan. The letter also criticized a Bush administration proposal to tighten funding requirements on companies whose credit ratings are below investment grade, saying it “could have the perverse effect of forcing us to abandon our plans.”
In United’s case, there was a strong financial case to be made — in the short run, at least — for dumping the pensions and switching to defined-contribution plans.
United Airlines estimated in an April 11 bankruptcy filing that the cost of establishing a defined-contribution plan over the next six years would be roughly $700 million, assuming the carrier contributed a matching sum equal to 4 percent to 6 percent of salary to each employee’s plan. By comparison, payments to its underfunded defined-benefit plan would have exceeded $4 billion over the same period, the company said.
Still, that comparison is somewhat misleading, according to David Feinstein, a Chicago-based actuary who has done work on behalf of United’s flight attendants. United’s calculations showed that after an initial period of rather large payments, the funding requirements for the flight attendants’ pension would shrink immensely, assuming annual stock-market returns recovered to about 8.5 percent.
“In the long run, it may not make a big difference,” Feinstein said.
That is the position at American, whose executives describe the pension-funding crisis as a temporary phenomenon tied to the stock-market downturn that began in 2000 and to extremely low interest rates. As the economy recovers, they say, so too will the value of their pension-related assets.
And because American’s pensions are in better shape than United’s, switching to a defined-contribution plan would not even offer any immediate financial savings, executives said.
Over the past two years American has contributed almost $600 million to its employees’ defined-benefit plans. If the company had instead paid into a defined-contribution system at a rate of 5 percent, the costs would have been roughly $450 million.
But the economic rationale is only part of the picture at American. Underpinning the company’s lone-wolf status on the pension issue is a 2-year-old agreement between executives and employees to do everything they could to preserve the pensions.
During the tense labor-management negotiations of March 2003 that yielded a last-minute compromise to avoid Chapter 11, American’s rank-and-file workers made it clear they were “not interested in touching the pension plans,” Burdette said. Instead, workers negotiated steep wage cuts and operational changes that would force them to work harder for every dollar earned.
Now, those sacrifices seem like a small price to pay at a time when flight attendants, mechanics and pilots at other major carriers are seeing their pension benefits put on the chopping block.
“This is a stressful occupation,” said Patrick Hancock, a 21-year flight attendant at American. “The pay is OK. But knowing that you’re going to have a good pension and be able to travel when you retire … that’s what makes you willing to put up with a lot, in order to hang on to it.”