United Airlines announced today it would not contribute to employee pension plans while it remains in Chapter 11. This is the first in a number of bold moves that Chicago-based United must take in order to save the struggling airline billions in cash and make it more attractive to the private investors it needs to emerge from bankruptcy protection now that its request for federal subsidies has been rejected.
The action came a week after United skipped a $72.4 million pension payment that it owed to three of its four pension plans, and only a month or so before United faces baking hundreds of millions more in pension payments in September and October. Until that missed payment, United had met all of its pension obligations since filing for bankruptcy in December 2002.
Although difficult, United should go ahead and simply terminate the plans. The plans have enough assets to keep paying benefits to retirees in the short term, but none of the four plans has enough to assure that employees will receive future benefits they have already earned. If the airline abandons the plans, billions of dollars in liabilities for those future benefits will fall on the Pension Benefit Guaranty Corporation, a government-sponsored agency whose finances have already been heavily tapped by the collapse of pension plans at other bankrupt companies in the airline, steel and other industries.
As one would expect, leaders of United’s unions reacted with outrage over United’s decision but, as usual, offered no alternative to the probable liquidation that United faces if it kept making the pension payments. Greg Davidowitch, president of the flight attendants’ union local at United, demanded the following explanation: “Current management should explain to us why the flight attendants should continue to support their restructuring, if this is the best they could do.”
I can answer that one: “So that United can stay in business and provide you and the other flight attendants a job.”
In all likelihood, United’s action was probably a condition of the renewal of its bankruptcy financing (called “DIP financing”), which United advised its Chicago bankruptcy court yesterday that it had arranged. Private lenders and investors will not be willing to invest in United unless the pension obligation was either terminated or dramatically modified. United currently owes its pension plans an estimated $4.1 billion over the next five years.
United is big and many financial institutions have an interest in seeing that it continue as a going concern. However, United is in dire financial trouble, and at substantial risk of liquidation. Even with this latest move, it is not at all certain that United can — or should — make it.