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120 thousand united airline employees lose pensions { May 11 2005 } Original Source Link: (May no longer be active)
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U.S. judge lets United default on pensions
Retirees will take big hit, but how much is unclear as airline fights to exit bankruptcy
- George Raine, Chronicle Staff Writer
Wednesday, May 11, 2005
A federal bankruptcy judge approved the largest corporate pension default in the nation's history Tuesday, freeing United Airlines from responsibility for pensions covering 120,000 employees and retirees.
If the ruling holds up under appeal, it would create the structure through which the world's second-largest airline can ultimately emerge from bankruptcy, perhaps as early as autumn.
In a packed and emotional courtroom in Chicago, Judge Eugene Wedoff approved an agreement reached last month between United and the federal government's pension insurer, the Pension Benefit Guaranty Corp., which will take over the pensions in exchange for up to $1.5 billion in notes and convertible stock in UAL Corp., United's parent company.
It will save United an estimated $645 million a year and significantly shrink pension payments to retirees. The level of reduction in pension payments is unclear and is likely to vary from person to person.
Frustration was felt by many of those retirees Tuesday.
"I was very proud to say I worked for United Airlines,'' said Gary Brauch, 62, of Los Altos Hills, who retired two years ago after flying for 39 years. "I gave my whole life to them, and my younger brother and son are pilots today. But it is outrageous that the laws of this country allow companies like United to walk away from their obligations and continue as a going concern. Why don't they have to repay those obligations when they're healthier?''
Tuesday's court ruling comes at a time when many large corporations are buckling under the pressure of huge pension obligations. Finance experts say United's ability to pass on its pension debt could set a precedent for other major airlines and maybe even other struggling industries in the United States.
Pensions are fixed retirement payments guaranteed by some companies that have become increasingly unpopular with corporations, replaced by 401(k)s and other investment vehicles tied to financial investments. Social Security payments are yet another form of retirement income, paid by the federal government and unrelated to pensions.
United filed for bankruptcy in 2002, after the entire airline industry struggled mightily from a drop in passengers following Sept. 11 as well as competitive pressures from low-cast carriers such as Southwest and JetBlue. Even in bankruptcy, United continues to lose money and has not significantly changed its business model, critics say.
Just the same, United was heartened by Tuesday's ruling, saying in a statement that the "settlement agreement is a crucial step forward for the future of United, as it strengthens the financial platform this company needs to attract exit financing and compete effectively."
"At the same time, we clearly recognize that the court's decision is difficult for our retirees and our employees, who have been doing extraordinary work throughout this restructuring process," the firm said.
Today, United begins a second critical phase of its bankruptcy exit strategy when, before the same judge, the company argues that its collective bargaining agreements with 41,000 workers be nullified so they can be rewritten, with workers receiving less in wages and benefits despite their objections. To date, United's workers have given back $2.5 billion a year to the troubled carrier since December 2002.
The International Association of Machinists and Aerospace Workers resumes negotiations with United later this week, and the union will push for replacements for the pensions and also seek to overturn Wedoff's ruling in district court, said a spokesman, Joe Tiberi.
In anticipation of efforts failing and its contract potentially abrogated, "we will be guided by the results of a strike authorization vote,'' said Tiberi, results of which are to be announced today.
The Aircraft Mechanics Fraternal Association, which represents United mechanics, including 3,800 at the carrier's San Francisco International Airport maintenance center, voted overwhelmingly in January to approve a strike if its contract is nullified.
At the Association of Flight Attendants, spokeswoman Sara Dela Cruz said Tuesday's ruling reinforces the union's will "to take steps to remove United management.'' She added, "One thing is clear, that management has got to go. Today's ruling is certainly upsetting, but the fight is not over.''
Jean Medina, a United spokeswoman, said the company anticipated that transitioning the pensions to the federal agency would save $645 million a year. Four pensions cover 120,000 employees and retirees who are flight attendants, pilots, union ground workers and management and workers who are in contact with the public.
"We need to reduce our costs by an additional $2 billion annually if we are to be a sustainable, viable company and to attract exit financing,'' said Medina. "We understand these decisions are difficult, but they are nonetheless necessary.''
United's pensions are underfunded by $9.8 billion, of which the Federal Pension Guaranty Corp. would guarantee perhaps $5 billion, although estimates for reduced payments to retirees are still in flux. The previous largest U.S. pension default was Bethlehem Steel's, with $3.6 billion underfunded, in 2002.
United defended its effort to terminate the pensions in a filing in bankruptcy court Monday, saying it was a necessary step that would save billions of dollars -- $4.4 billion of funding contributions over six years and $1.7 billion in potential claims against it.
At the packed hearing in Chicago Tuesday, Robert Clayman, an attorney for the union flight attendants, drew loud applause and cheers from employees and spectators in both the courtroom and auxiliary court, where an overflow crowd gathered, with an emotional appeal to preserve the pensions and workers' secure retirements.
"Without equity there is no justice,'' he said.
Before the hearing, United Chief Financial Officer Jake Brace said the carrier had no choice but to seek the difficult action.
"All the work we have done and continue to do is about ensuring a healthy United for all employees and our customers,'' Brace said. "That work enables competitive jobs and a successful future for our company.''
Pension ruling
What happened: A federal bankruptcy judge approved United Airlines' plan to terminate its pension plans, the largest such default in U.S. history.
Who is affected: About 120,000 United employees and retirees.
What's next: If appeals from United employee unions fail, the Federal Pension Guaranty Corp., the government's pension insurer, will administer the pensions.
The big picture: Many large U.S. corporations are struggling to honor their pension obligations, with some of the worst cases ending up in bankruptcy court defaults.
Source: Chronicle Research
The Associated Press contributed to this report. E-mail George Raine at graine@sfchronicle.com.
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