chris perry
Veteran
- Sep 17, 2008
- 544
- 118
If the question is whether AA could afford the pensions, then the answer is “no” they should not be at risk.
.
But companies and now governments have made it clear that they no longer want to assume the entire risk of paying someone’s retirement benefits decades in advance in a world where turbulence is the norm rather than the exception. Defined benefit (DB) plans have given way to defined contribution (DC) plans because companies want to be able to say they have given you what they said at the end of a year and know they have met their obligation. It then becomes your responsibility as an employee to invest that money – which is no longer controlled by the company – the way you see fit.
.
On the basis of the shift from DB to DC plans, it is not near as certain that AA will continue to keep its pension plans if it has a choice. A gradual phase out/grandfathering of existing employees in the current pension plans is possible but if they are given the choice of a freeze – which was received favorable well by legislators – I would bet AA would take it. Remember that AA and CO both repeatedly asked and Sen. Kay Bailey Hutchison which represents both CO and AA argued aggressively that AA and CO should get the same treatment that DL and NW got – but the answer was repeatedly that what DL and NW were allowed was because they were in BK and at the risk of default; the intention of allowing pension freezes was to prevent more plans being dumped on the PBGC who was very afraid that what happened w/ the steel industry was about ready to be repeated w/ the airlines.
.
Remember also that DL’s funding requirements are different than AMR’s because DL’s plans are frozen. DL continues to pay on its pension plans on the time payment plan even though no additional employee benefits are being accumulated. DL retains control of the pension plans, employees still get the benefits promised under the plan just based on the frozen years of service. The PBGC avoided getting involved with the plans. The creditors did not have to share equity in the reorganized DL and NW (which emerged independently) with the PBGC which became a creditor in the UA and US bankruptcies because of the pension terminations. I’m not sure if the PBGC participated in DL’s C11 since DL did terminate the pilot pension plan because of the lump sum distribution features it contained, but which the NW pilot plan did not.
.
Although everyone wants to know they have a guaranteed income coming for life, that is not realistic for most employers any more… and that will likely be one of the realities AA employees are going to have to accept in AA’s restructuring. It is also very possible that some people will do better managing their own money themselves than they could if the company managed it because some people, like myself, manage both more aggressively and with a willingness to diversify into more international/emerging as well as small cap or higher risk market investments which have done better than the larger domestic companies.
.
It is mathematically correct, though, that AA’s problem is not its pensions. As has been discussed here before, it is also not AA salaries but rather productivity and the lack of growth at the company which serves to keep labor costs down since they will naturally rise as employees move up the salary scales and become heavier users of benefits such as health care.
.
The real question then is what will AMR accomplish by going into BK if it does – and I would continue to note that it isn’t a given that they will if things turn around quickly which would have to include fairly dramatic reductions in TOTAL employee costs – which should be primarily obtained through productivity increases, some on the front end and some through promised growth – but with a notable decrease in total employee costs, benefits, headcount, and undoubtedly some paycuts just to give the company the breathing room necessary to get going again (and yes, I know AA employees did this in 2003 to no avail).
.
Which brings us to the value of bankruptcy. The whole reason why AA’s employees gave so much w/ so little return in 2003 was because the company obtained only partial benefits from its out of court restructuring and they weren’t enough to lift the company to be able to take advantage of a pretty weakened industry in 2005 that still saw UA and US getting on their feet and DL and NW heading through BK. Chapter 11 BK was designed to give companies the opportunity to RESTRUCTURE with every financial stakeholder contributing – from the caterers to the debt holders to the employees. AA’s employees bore almost the entire brunt of the 2003 restructuring even though the company did not gain all of the needed benefits. In contrast, DL employees contributed about 1/3 of the total value of DL’s restructuring, partly helped by DL’s $4B in unsecured debt, DL’s fairly new M80s which were technologically obsolete when DL went into BK, and DL’s ability to redeploy a lot of int’l capable a/c that were flying domestic routes – all of which helped to reduce the “contribution” employees had to make. Also, DL focused more on increasing productivity through growth (related to the 767/777 redeployments) than salary cutting. But the notion that BK is bad is rooted in a moral argument that isn’t used by corporate America who understands there is risk in business and AA’s debt among other things is priced based on that risk.
.
So what should AA accomplish in BK?
1. Reject leases on as many M80s and 757s and 767s as possible, reprice the leases of aircraft that are kept based on the market, and shorten the time it will take to keep the older aircraft in the fleet.
2. Deal with AE… partly an old/wrong type of airplane problem.
3. Restructure debt.
4. Increase productivity of the workforce, bring health care and pension costs in line with the industry and similarly sized companies.
5. Restructure the network including (potential) partners as necessary to maximize revenue – although AA has done a pretty good job of adapting revenue to the changing environment; but they will have opportunity to reenter some old markets or potential new ones based on having lower costs.
6. And probably a whole lot more…
It is almost a given that AA will shrink in a restructuring; you can’t reject aircraft and find replacements overnight.
This could be a good time for AA to restructure given that UA/CO’s costs are going up as they integrate their two airlines and deal w/ demands from labor for improved pay and benefits. The whole economic environment will have an effect but UA’s costs are bound to go up as Arpey has predicted. If the cost situation is reversed with AA becoming the carrier w/ lower costs, AA is in a far better position to defend its markets and expand in UA dominated markets.
Let’s continue to hope that AA can restructure outside of BK where it is a lot less painful but it can only work if everyone participates.
But if you’ve gotta go in, do what has to be done, do it quickly, and then come out ready to aggressively compete – which is what AA has long been known as doing well.
