Following this earlier post regarding United Airlines‘ decision to default on its obligations to its employees’ pension plans to attract capital to fund its chapter 11 reorganization plan, this NY Times article reports on some experts’ concern that the Federal Pension Guaranty Corporation that insures company pensions is facing a string of possible airline industry bankruptcies and pension defaults that could lead to another multibillion-dollar taxpayer bailout similar to the S&L bailout of the 1980’s.
This raises a rather interesting phenomenom. If United is not able to obtain a federal subsidy of its poor business practices in this way, then it will nevertheless obtain a federal subsidy through foisting a large part of its obligation to pay unrealistically large pension benefits on the federal government. Although not particularly creative, you have to admire United’s persistence.
As as Warren Buffett pointed out several years ago, if one tabulates all of the airline industry’s finances since the day the Wright Brothers in 1903, one would discover that, cumulatively, there has not been a single penny of profit? Mr. Buffett suggested famously that, in hindsight, shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.
United has abot $13 billion in pension obligations that is secured by only $7 billion in assets. Inasmuch as the private capital that would fund United’s reorganization plan will almost certainly require that United terminate its pension plans in connection with that plan, United’s pension liabilities and related collateral will be assumed and administered by the Federal Pension Guaranty Corp. Absent a government bailout, United’s retirees will probably receive around a 50% dividend on their claims against United’s pension plans.
Although I have empathy for United retirees who thought that they were going to receive more in retirement than they will, there simply is no productive business purpose to be facilitated by the government contributing anything to United’s underfunded pensions.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Warren Buffett was apparently trying to be a comedian. Alas, I hope he isn?t planning to give up his daytime job. The reality is that the airline industry is in harm?s way almost solely because of the government?s earlier protectionist policies. The present sad state of affairs likely would have never occurred in a more laissez faire environment. Even half-humorously blaming the Wright brothers is senseless. Then again, Buffett is a Democrat and supports John Kerry. The dude doesn?t have it completely together.