Court Clears United To Terminate Pensions
A bankruptcy judge on Tuesday approved a deal between United Airlines and the government that will let the carrier terminate its pension plans in potentially the largest corporate pension default in US history.
United, which filed for protection from creditors in December 2002, said it would save about USD$645 million annually over five years under the plan, which executives called crucial to completing a restructuring.
United will grant the federal Pension Benefit Guaranty Corporation up to USD$1.5 billion in securities to settle the agency's main claims in bankruptcy court and clear the way for it to assume control of four plans.
If carried out as planned by United, it would be the largest corporate pension default in US history. Bankrupt US Airways has also terminated its union pension plans to save money.
Judge Eugene Wedoff of the US Bankruptcy Court for the Northern District of Illinois ruled after a day long hearing on the unique settlement opposed by United's unions, especially flight attendants and mechanics.
Workers claim the agreement violates their contract and have vowed to strike if their pensions are terminated.
But Wedoff said United met the legal test in bankruptcy to terminate the pensions, and said the agreement, however painful, improves the chances that United can survive and employees can keep their jobs.
"It involves choosing the least bad of the unfortunate choices," Wedoff said of the pension deal.
Eliminating pension plans covering 120,000 current, former and retired workers is crucial to United's effort to restructure its costs and attract financing needed to step out of court protection.
The four pension plans are underfunded by nearly USD$10 billion, which is the difference between assets and promised benefits. The government will guarantee USD$6.6 billion in benefits.
The airline has been in Chapter 11 since December 2002 and says it needs to save USD$725 million from labor. United says replacing pension plans with cheaper ones would save the carrier an estimated USD$645 million a year over five years.
Jake Brace, United's chief financial officer, said Wedoff's decision was a significant step.
"The judge ruled that we did not violate the contract, so we did not violate the law and they (unions) have no right to strike. We're doing what we need to do to make United successful for the long term," Brace said.
Sara Nelson Dela Cruz, spokeswoman for United's unit of the Association of Flight Attendants, said the union would review the decision but lashed out at executives. "What is clear is we need to replace this management," she said.
The International Association of Machinists and Aerospace Workers, which represents United ramp workers, plans to appeal Wedoff's ruling, spokesman Joseph Tiberi said.
"Thousands of retirees will be severely impacted by the ruling," Tiberi said. "They have already seen their retirement medical costs skyrocket because of United's bankruptcy... and now will have reduced pensions. It's a devastating blow."
United and its unions on Wednesday are scheduled to begin a trial on the airline's bid to reject labor agreements with ground workers and mechanics and impose wage and benefit cuts.
The IAM plans to release the results of a member strike vote Wednesday and resumes talks with United later this week, Tiberi said. If the talks don't lead to a deal or the agreements are terminated than the vote results will guide the union's next steps, he said.
Under the agreement approved on Tuesday, federal pension insurers will drop their primary claims against the company to make minimum pension contributions in exchange for up to USD$1.5 billion in notes and convertible stock that the government would receive on United's exit from bankruptcy.
The PBGC is running a USD$23 billion deficit.