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PENSION PROTECTION
PENSION PLANS PENSION FACTS SERVICES |
Repercussions of Northwest’s pension freeze continue to complicate the company’s relations with the airline’s 4,500 pilots. However, the two sides joined December 11 in a federal lawsuit to gain approval of the airline’s restructured benefit plan. The action pits some longer-serving pilots against pilots with shorter service, and involves how benefits are allocated and the terms under which future benefits can be earned. Northwest took the option of freezing plans instead of terminating them, and claims it was thereby able to preserve over $2 billion in pension benefits. Shorter-service pilots claim they are being short-changed and have contested the restructuring plan. * * * On Aug. 8, Virgin America’s first flight took off from New York’s John F. Kennedy International Airport to Virgin's new hub in San Francisco. Virgin Group Chairman Richard Branson and Virgin America CEO Fred Reid were both on board. The greeting in San Francisco was enthusiastic. In his speech, Branson touched on the declining quality of service offered by US Airlines and the need for “new blood” in the industry. Analysts predict downward pressure on ticket prices as other airlines scramble to match Virgin’s rock bottom fares. Also, more flights into already crowded major airports may increase delays and cancellations this summer, but more seats may mean stranded passengers will have additional options. * * * Southwest is changing the business model that long set it apart from other airlines. Back in 1971, the feisty upstart began as a short-haul carrier offering cut-rate fares in highly traveled and – at that time – overpriced markets. It kept its costs low, its operations lean and efficient, and shunned some of the benefit packages that had come to define legacy airlines. But now with market shifts and fuel cost increases, Southwest’s model and margins have been battered just as the airline is confronted with competition from a new generation of airlines that are themselves leaner and much more cost efficient. So Southwest finds itself running longer flights and having to adopt modes of business it previously avoided. For instance, the airline long avoided participating in broad-based reservation systems. But with more and more tickets being booked through corporate travel departments, last month Southwest announced it will be participating in the Galileo reservation system. Southwest’s moves – and responses of its competitors – will bear watching in the months ahead. * * * The Iraq war funding bill, which passed in May, contains a pension funding victory for American Airlines and Continental Airlines, the result of heavy lobbying and protracted negotiation between the White House and the airlines. In the 2006 pension reform bill, American and Continental were denied the aid formula which was given to other airlines. The two now have “parity” funding with other airlines in that they can use an 8.25 percent annual discount rate in calculating their outstanding pension obligations. That percentage, 2.25 percent higher than what they currently use, will reduce their reported obligations. Reduced pension expenses, in turn, strengthen the airlines’ financial positions, crucial in gaining financing to weather restructuring and competition * * * In what has become an ongoing exchange, Northwest employees expressed their outrage that the company’s senior management was getting “sweetheart” deals in compensation and options. The airline responded that some 25 percent of its executives have left the company since 2005 to take higher-paying jobs, mostly outside of the airline industry. Northwest’s management equity plan, revealed last week, sets aside 4.9 percent of the stock in the newly reorganized company for about 400 senior executives. That plan was approved by Northwest’s committee of unsecured creditors. Northwest filed for bankruptcy in September 2005. The airline also makes the argument that other airlines – United and US Airways – set aside even higher percentages of stock for officers and directors. Observers say the stock options cause the managers to run the companies so that stock prices go up -- making management options, and stock of all investors, worth more. But employees say the gains come at the expense of workers. * * * On April 2, startup Skybus Airlines announced it had teamed up with financial giant Nationwide to create the nation’s first “branded” airplane. The airline’s new Airbus A319 was unveiled in a Columbus airport with the Nationwide tagline and logo dominating the exterior of the aircraft. Port Columbus-based Skybus has now raised some $160 million in financing and expects to start flying later this spring. The money is said to come from large institutional portfolios. Destination cities have not yet been announced, but the buzz is that Skybus will offer nonstop flights on A319 jets to cities on the East and West coasts, the Southeast, the Midwest, and the Pacific Northwest. The business model is said to accommodate fares that will be well below anything now available out of Port Columbus. Some say it’s the next generation of low-fare airlines in the United States. * * * Potential competition for U.S. airlines continues to complicate airline futures in the United States. Aggressive entrepreneurs are seeking to build ultra-low-cost airlines in the United States or import business models developed in Europe into U.S. airspace. Virgin Airlines, Ryanair and niche players like Hungary’s Wizz Air might all be potential rivals for big U.S. airlines. U.S. airlines have geared up to block such competition by pressuring U.S. regulators on several fronts. Meanwhile, a preliminary agreement reached a week ago by negotiators for a U.S.-EU “open skies” agreement remains hugely controversial in Europe, and unlikely allies such as British Airways and Virgin Atlantic have mobilized to block it. Europeans contend that the agreement gives U.S. airlines more options to grow in the lucrative transatlantic crossover market, without giving foreign airlines the ability to carry passengers within the U.S. or to invest more than token amounts in U.S. carriers. They hope to pressure EU member states to unite in a veto of the agreement. * * * Of all the major U.S. airlines, only American still retains traditional pension plans for most of its employees. Company management says it intends to continue these plans, which according to the airline are approximately 78 percent funded and worth a total of $7.8 billion at the close of 2005. American recently announced it was going to take an additional $100 million from its unrestricted cash reserves – which are said to total roughly $5 billion – and put the money into its pension pool, even though not required to do so this year. Such early funding would help relieve pressure on future outlays since, without the $100 million payment, American would face a payment of more than $1 billion in required pension funding next year. United Airlines and Delta Air Lines have already shed their pension obligations in bankruptcy court and, as a result, retirement income for company employees in most cases has gone down significantly. * * * The government’s pension insurer gave its final approval Dec. 20 for a plan to terminate the pensions of Delta Air Lines pilots, a key step for the carrier to resolve a multi-billion-dollar issue in its bankruptcy case. Approval of the plan means the Pension Benefit Guaranty Corp. would take over pensions and pay pilots a portion of the benefits they had expected to receive from Delta. Meanwhile, U.S. Rep.Geoff Davis (R-KY) has called for the federal government to conduct "a full and careful review" of US Airways' proposed hostile take-over of Delta, which operates its second-largest hub at Cincinnati/Northern Kentucky. The hub and the Northern Kentucky headquarters for Comair -- a Delta subsidiary -- provide an estimated 10,000 jobs and help bring nearly $4 billion a year in commerce to the Cincinnati region. Davis said he has been contacted by a number of his constituents who are Delta employees and are concerned about what a proposed merger could mean for their pensions * * * Merger speculation is in the air following US Airways’ $8.8 billion hostile bid to take over bankrupt Delta Air Lines. That move could trigger additional mergers across the industry. Airlines are looking over their shoulders. And analysts are anxiously waiting for Delta to file its plan to emerge from bankruptcy, which is expected to happen in mid December. Experts differ on the chances of a US Airways-Delta merger getting through the thicket of creditors, regulators and politicians who would have a say. US Airways pitched its plan directly to Delta's creditors -- and Delta management has hunkered down in Atlanta working on counter strategy. Unions were also caught off-guard. Currently among U.S.-based airlines, Delta has 12.2 percent of the market when measured by the number of miles flown by passengers. American dominates with a 17.4 percent share. United comes next at 14.5 percent and Continental has 9.4 percent. US Airways itself is still consolidating its own merger with America West. The company, under court protection, has slashed employee pay and benefits, canceled pensions, and torn up leases to cut costs. US Airways machinists and pilots unions have issued statements warning that the current labor negotiations need to be settled before any serious talks with Delta can begin. The takeover bid also casts new uncertainty over the pensions of roughly 90,000 Delta employees and retirees, just months after a new law was supposed to have assured their future. A merger would have to mesh overlapping operations at multiple U.S. airports and could well lead to additional layoffs. Meanwhile, as profit numbers begin to brighten for the so-called “legacy airlines,” observers are predicting a resurgence of demands from their labor unions. Workers made deep concessions to keep legacy airlines flying when they were losing share to lower-cost upstarts. Now the unions are expected to insist on major wage and benefit givebacks. * * * On Oct. 31, Northwest Airlines reported a third quarter net loss of $1.2billion. This compares to a third quarter 2005 net loss of $475 million. However, the company is moving towards modest success in its restructuring plans. Doug Steenland, the airline’s president and chief executive officer, said, "Our third quarter results are a significant improvement over last year's results and demonstrate further that we are making steady progress in restructuring Northwest Airlines. However, our September loss indicates that we still have work to do in order to reach our goal of sustained profitability." In other news, unions and companies alike await the impact of the Democratic Party's seizure of Congress in Tuesday's nationwide elections. Many crucial committee chairs will now go to Democrats. The longer term prospects for further pension reform and regulation of corporate pensions remain to be seen. * * * The International Association of Machinists and Aerospace Workers has begun a nationwide campaign to unionize Delta’s 6,000 ramp workers. Delta today operates as a largely non-union airline. IAM organizers think Delta's 6,000 ramp workers will feel safer with a labor contract if the airline merges with another carrier, as well as with retirement benefits from the union's pension plan, which currently has a considerable surplus. In 2000 the rampers rejected representation by the Transport Workers Union by a wide margin. Flight attendants also turned thumbs down on unionization in 2002. The airline's only big unionized group is its roughly 6,000 pilots, represented by the Air Line Pilots Association. Delta pilots were at one time the highest-paid in the industry, but their pay has been halved and their pensions are slated for termination under concession deals the union reached in the past two years. The IAM has about 100,000 mechanics, flight attendants, ramp workers and other members at United, US Airways, Northwest and other airlines. * * * This week, Northwest Airlines flight attendants took the legal step of requesting a release from federal mediation after a federal judge said they couldn’t walk off the job. Release from mediation would allow the attendants to strike after a 30-day countdown if the National Mediation Board declares an “impasse” in contract negotiations between the Association of Flight Attendants-CWA and the airline. If both sides reject arbitration, a failure to reach an agreement after 30 days would mean workers could strike or the company could start a lockout. Pension issues are at the heart of the dispute. * * * In the wake of devastating pension freezes and new pension rules, companies are rethinking their strategies for investing pension assets. Until recently, most pension managers invested in a broad mix of stocks and shorter-term bonds. But pension projections remain extraordinarily sensitive to changes in interest rates, resulting in huge swings in projected pension liability. At G.M., for example, a mere quarter-point rate decline increased pension obligations by $2.3 billion! When companies are forced to factor these huge overhanging liabilities into their financial statements -- and reveal them to investors -- it becomes much more difficult, and much more expensive, to raise the capital they need to stay in business. Way back in 1987, American Airlines was one of the few companies whose pension managers didn’t respond to the siren song of the rising stock market. Instead it protected assets against changes in interest rates by hedging with long-term bonds timed to future pension obligations. It was inexpensive then. Today, American is virtually the only airline whose traditional pension structure in reasonably intact. Other airlines with failed pensions are now contemplating using bond hedge strategies. The only problem is that today ’s interest rates make the transition much more expensive. But there may be few alternatives if traditional pension plans are to be stabilized.
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