Bankrupt United Airlines reached an agreement with US pension insurers on Friday to terminate four employee retirement plans which are underfunded by nearly USD$10 billion.
Under the deal, which requires court approval, the federal Pension Benefit Guaranty Corp. will assume plans covering 120,000 current and former employees and retired workers at United. These include pilots, flight attendants, mechanics, ground workers and other employees. If approved by the bankruptcy court, the termination would be the largest in PBGC history.
"We think this is a very important agreement," said Jake Brace, United's chief financial officer. "We wanted to resolve (the pension issues) mutually with the unions. The door remains open if there are other pension solutions."
Also on Friday, a federal judge said United and the union representing the carrier's flight attendants must resolve their contract disputes through an arbitrator. That deal heads off a move by the Association of Flight Attendant this month to void a labor contract reached with United in January.
The AFA had threatened to terminate their current contract, which saves the airline USD$131 million annually, and revert to a previous contract unless United proved that its management was meeting a cost savings target of USD$112 million a year for its salaried employees.
Brace said the airline believes it is meeting its costs savings burden on the management level.
The deal also caused UAL to halt an effort to terminate the flight attendants' contract and have the court replace it with a new pact. UAL is set to argue at a trial in May that it should be allowed to terminate labor contracts and pensions of employee group that have not agreed to deals that satisfy the airline's cost savings needs.
United, which has been in bankruptcy since December 2002, has said it needs USD$725 million in annual labor savings to emerge from Chapter 11 protection. Replacing its pensions with cheaper plans would save United an average of USD$645 million a year over five years.
Earlier in the day, United won court approval to extend until July 1 its right to file its bankruptcy reorganization plan without interference from other parties. The current exclusivity period is due to expire on April 30.
UAL has said it needs more time to push through cost-cutting initiatives. The airline industry in general has been battered by soaring fuel costs, weak revenues and competition from low-cost rivals.
United has sought to cut huge costs by eliminating its traditional pensions and negotiate cheaper deals. US Airways, also bankrupt, dumped its remaining union plans on the PBGC earlier this year and other big airlines are exploring options to cut pension costs.
The pension agency said the difference between promised benefits and assets in the four United plans is USD$9.8 billion. The government will guarantee retirement benefits totaling USD$6.6 billion.
In return for assuming the plans, the pension agency would withdraw from United's bankruptcy case as an unsecured creditor. Judge Eugene Wedoff set May 4 to rule on United's deal with the PBGC.
The agreement met with scorn from the flight attendants union, whose pensions had not previously been targeted for elimination by the PBGC.
"United Airlines single-minded actions have forced the PBGC to pursue the termination of all employee pension plans," said Greg Davidowitch, AFA executive council president at United.
"For months we have worked closely with the PBGC to avoid termination of the Flight Attendant pension plan," he added.
The PBGC insures corporate plans for 44 million workers and ended fiscal 2004 more than USD$23 billion in debt. Although its financial problems have been aggravated by struggling airlines, the PBGC sought to assume at least two of United's pensions months ago when the underfunding amount was less.
"We believe that this agreement, under the circumstances, is in the best interests of the pension insurance program and its stakeholders," said Bradley Belt, the PBGC executive director.
