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TheStreet.com
April 5, 2005 Tuesday 10:08 AM Eastern Time
MARKETS; Ross Snel
Airlines Seek Way Out of Pension Squeeze
By Ross Snel, TheStreet.com Staff Reporter
Some U.S. airlines are hoping spring will bring relief for the industry's looming pension crisis in the form of government reform.
But while House and Senate committees could take up pension proposals this month, it remains to be seen whether they'll offer the specific industry help for which several carriers have been lobbying vigorously.
American Airlines' parent AMR (AMR:NYSE), Delta Air Lines (DAL:NYSE) and Northwest Airlines (NWAC:NYSE) have been asking lawmakers for more time -- in Delta's case, the request is for as long as 30 years -- to meet unfunded pension obligations. Delta, which has been particularly aggressive in its efforts, argues that such relief would allow airlines to meet their obligations, thus keeping promises to workers and saving government insurers from having to pick up the tab.
Handicapping the odds is tough, according to observers. "One would think that delegations from cities and states with large airline hubs would be most sympathetic," said Stuart Klaskin, a partner at KKC Aviation Consulting in Miami. "Not only do they have those companies as constituents, but also thousands of pension-deserving airline employees as voters." On the other hand, some lawmakers may wish to avoid the perception they're again extending special help to an industry that has already been offered billions of dollars of aid from the government after the Sept. 11, 2001, terror attacks.
"I'm getting a sense that Congress made a major move a couple of years ago to assist the industry and that they have reservations about doing further reform," said John Kasarda, a professor of management at the University of North Carolina's Kenan-Flagler Business School who specializes in aviation issues. "There's a growing sense that we have excess capacity in the airline industry and that market forces need to play themselves out."
Network carriers face a huge gap between the value of their defined-benefit pension plans -- in which workers are promised specific payment amounts when they retire -- and future obligations. The Pension Benefit Guaranty Corp., the government's pension insurer, estimates that the industry's under-funding totaled $31 billion in 2003. (The agency is calculating 2004's number.) That's up from under-funding of only $3 billion in 2000.
During the 1990s technology boom in the stock market, investments in airline pension portfolios soared in value, allowing airlines to go without making fresh contributions, noted Robert Mann, founder of R.W. Mann & Co., an independent airline industry consulting firm. But the market decline that began in 2000 eroded the gains. Worse yet, the Fed's ensuing program of interest rate cuts only served to increase the amount of money airlines needed to set aside to meet future obligations.
Some airlines aren't facing such burdens because they don't have defined-benefit plans. For example, JetBlue Airways (JBLU:Nasdaq) and Southwest Airlines (LUV:NYSE) provide employees with profit-sharing, stock purchase and 401(k) plans.
For the large network carriers, pension under-funding is just one of several factors causing turbulence. Crude oil prices, which surged to record highs in October, have rallied again in recent weeks, setting new records, and analysts warn the rally is far from over. At the same time, individual airlines have found it difficult to raise fares to cover higher fuel costs because of overcapacity and fierce price competition.
Of the airlines seeking pension relief, Delta may need it the most, and that may explain the aggressiveness of its lobbying efforts. The Atlanta-based airline warned last month of a liquidity crisis if oil prices fail to decline significantly from recent levels. It expects to have to pay $450 million into its pension plan this year.
Scott Yohe, Delta's senior vice president of government affairs, characterizes the airline's proposal as a "solution" that would simply give the airline more time to meet obligations, not shirk them.
"The employees would realize benefits earned and accrued under their plans, and we would avoid the situation of other carriers in the industry of pushing those liabilities to the PBGC," Yohe said.
He was referring to network rivals US Airways (UAIRQ:OTC) and UAL's (UALAQ:OTC) United Airlines. Both have used the Chapter 11 bankruptcy process to try to terminate their pension plans and rid themselves of the accompanying obligations.
Earlier this year, the PBGC took over the last of US Airways' pension plans, leaving the government insurer with $3 billion in obligations, its second largest claim ever behind Bethlehem Steel's $3.7 billion one in 2003. The PBGC is also trying to take over plans for pilots and ground employees at United, which has said it wants to terminate its pension plans in order to help it exit bankruptcy.
United's pension obligations are even greater: $8 billion, of which the PBGC would likely be forced to cover $6 billion.
If it rids itself of all its pension plans, then United would have a significant competitive cost advantage over rivals such as Delta and Northwest. "If United walks out on $8 billion, it pretty much forces everybody else to consider walking out, too," Mann said.
If other airlines terminate their pension plans, that would simply increase the deficit of the PBGC, which faces a crisis of its own. The federal agency, which functions like an insurance company and receives premiums from companies providing defined-benefit plans, ended its fiscal year last September with a deficit of $23.3 billion. (This number accounts for US Airways' claims, but not United's.)
The airlines' woes prompted Bradley Belt, the PBGC's executive director, to call the industry the "most immediate threat" to the pension insurance program in congressional testimony in February.
The Bush administration has recognized the problems facing the federal program and has submitted a proposal to shore it up. Among other things, the White House would like to see companies' premiums rise to $30 for each covered employee from the current $19. Companies considered credit risks would have to pay an even higher, unspecified premium. The administration would also allow companies to contribute to their plans during good times, but companies would only have seven years to make up their funding gaps.
"The administration's proposal would be very damaging to the airlines," said Delta's Yohe, explaining that it would require contributions to be made in an unreasonably short period of time.
Congressional committees that will shape coming pension reform legislation include the Senate's Health, Education, Labor and Pensions Committee; the House Committee on Education and the Workforce; and the House Committee on Ways and Means.
A spokesman for the chairman of the Senate committee says committee members have yet to decide what ultimate reform they will propose.
A spokesman for Rep. John Boehner (R., Ohio), chairman of the House Committee on Education and the Workforce, said Boehner is preparing comprehensive pension reform legislation but "there are no plans to have airline-specific relief in that bill," the spokesman said.
Still, observers say lawmakers may end up helping the airlines as part of a broader package. "If you look at what's historically been the path of steel or automobiles or airlines, they're very capital-intensive and energy-intensive, with aging workforces and lots of competition," said Mann. "So the issue is, 'Why are we doing this just for the airlines?' Maybe an approach that would be less industry-specific would be to address the issues facing mature industries with lots of foreign or low-cost competition."
April 5, 2005 Tuesday 10:08 AM Eastern Time
MARKETS; Ross Snel
Airlines Seek Way Out of Pension Squeeze
By Ross Snel, TheStreet.com Staff Reporter
Some U.S. airlines are hoping spring will bring relief for the industry's looming pension crisis in the form of government reform.
But while House and Senate committees could take up pension proposals this month, it remains to be seen whether they'll offer the specific industry help for which several carriers have been lobbying vigorously.
American Airlines' parent AMR (AMR:NYSE), Delta Air Lines (DAL:NYSE) and Northwest Airlines (NWAC:NYSE) have been asking lawmakers for more time -- in Delta's case, the request is for as long as 30 years -- to meet unfunded pension obligations. Delta, which has been particularly aggressive in its efforts, argues that such relief would allow airlines to meet their obligations, thus keeping promises to workers and saving government insurers from having to pick up the tab.
Handicapping the odds is tough, according to observers. "One would think that delegations from cities and states with large airline hubs would be most sympathetic," said Stuart Klaskin, a partner at KKC Aviation Consulting in Miami. "Not only do they have those companies as constituents, but also thousands of pension-deserving airline employees as voters." On the other hand, some lawmakers may wish to avoid the perception they're again extending special help to an industry that has already been offered billions of dollars of aid from the government after the Sept. 11, 2001, terror attacks.
"I'm getting a sense that Congress made a major move a couple of years ago to assist the industry and that they have reservations about doing further reform," said John Kasarda, a professor of management at the University of North Carolina's Kenan-Flagler Business School who specializes in aviation issues. "There's a growing sense that we have excess capacity in the airline industry and that market forces need to play themselves out."
Network carriers face a huge gap between the value of their defined-benefit pension plans -- in which workers are promised specific payment amounts when they retire -- and future obligations. The Pension Benefit Guaranty Corp., the government's pension insurer, estimates that the industry's under-funding totaled $31 billion in 2003. (The agency is calculating 2004's number.) That's up from under-funding of only $3 billion in 2000.
During the 1990s technology boom in the stock market, investments in airline pension portfolios soared in value, allowing airlines to go without making fresh contributions, noted Robert Mann, founder of R.W. Mann & Co., an independent airline industry consulting firm. But the market decline that began in 2000 eroded the gains. Worse yet, the Fed's ensuing program of interest rate cuts only served to increase the amount of money airlines needed to set aside to meet future obligations.
Some airlines aren't facing such burdens because they don't have defined-benefit plans. For example, JetBlue Airways (JBLU:Nasdaq) and Southwest Airlines (LUV:NYSE) provide employees with profit-sharing, stock purchase and 401(k) plans.
For the large network carriers, pension under-funding is just one of several factors causing turbulence. Crude oil prices, which surged to record highs in October, have rallied again in recent weeks, setting new records, and analysts warn the rally is far from over. At the same time, individual airlines have found it difficult to raise fares to cover higher fuel costs because of overcapacity and fierce price competition.
Of the airlines seeking pension relief, Delta may need it the most, and that may explain the aggressiveness of its lobbying efforts. The Atlanta-based airline warned last month of a liquidity crisis if oil prices fail to decline significantly from recent levels. It expects to have to pay $450 million into its pension plan this year.
Scott Yohe, Delta's senior vice president of government affairs, characterizes the airline's proposal as a "solution" that would simply give the airline more time to meet obligations, not shirk them.
"The employees would realize benefits earned and accrued under their plans, and we would avoid the situation of other carriers in the industry of pushing those liabilities to the PBGC," Yohe said.
He was referring to network rivals US Airways (UAIRQ:OTC) and UAL's (UALAQ:OTC) United Airlines. Both have used the Chapter 11 bankruptcy process to try to terminate their pension plans and rid themselves of the accompanying obligations.
Earlier this year, the PBGC took over the last of US Airways' pension plans, leaving the government insurer with $3 billion in obligations, its second largest claim ever behind Bethlehem Steel's $3.7 billion one in 2003. The PBGC is also trying to take over plans for pilots and ground employees at United, which has said it wants to terminate its pension plans in order to help it exit bankruptcy.
United's pension obligations are even greater: $8 billion, of which the PBGC would likely be forced to cover $6 billion.
If it rids itself of all its pension plans, then United would have a significant competitive cost advantage over rivals such as Delta and Northwest. "If United walks out on $8 billion, it pretty much forces everybody else to consider walking out, too," Mann said.
If other airlines terminate their pension plans, that would simply increase the deficit of the PBGC, which faces a crisis of its own. The federal agency, which functions like an insurance company and receives premiums from companies providing defined-benefit plans, ended its fiscal year last September with a deficit of $23.3 billion. (This number accounts for US Airways' claims, but not United's.)
The airlines' woes prompted Bradley Belt, the PBGC's executive director, to call the industry the "most immediate threat" to the pension insurance program in congressional testimony in February.
The Bush administration has recognized the problems facing the federal program and has submitted a proposal to shore it up. Among other things, the White House would like to see companies' premiums rise to $30 for each covered employee from the current $19. Companies considered credit risks would have to pay an even higher, unspecified premium. The administration would also allow companies to contribute to their plans during good times, but companies would only have seven years to make up their funding gaps.
"The administration's proposal would be very damaging to the airlines," said Delta's Yohe, explaining that it would require contributions to be made in an unreasonably short period of time.
Congressional committees that will shape coming pension reform legislation include the Senate's Health, Education, Labor and Pensions Committee; the House Committee on Education and the Workforce; and the House Committee on Ways and Means.
A spokesman for the chairman of the Senate committee says committee members have yet to decide what ultimate reform they will propose.
A spokesman for Rep. John Boehner (R., Ohio), chairman of the House Committee on Education and the Workforce, said Boehner is preparing comprehensive pension reform legislation but "there are no plans to have airline-specific relief in that bill," the spokesman said.
Still, observers say lawmakers may end up helping the airlines as part of a broader package. "If you look at what's historically been the path of steel or automobiles or airlines, they're very capital-intensive and energy-intensive, with aging workforces and lots of competition," said Mann. "So the issue is, 'Why are we doing this just for the airlines?' Maybe an approach that would be less industry-specific would be to address the issues facing mature industries with lots of foreign or low-cost competition."
