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United Airlines Cleared to Shed Pension Plans

A bankruptcy judge allows the carrier to transfer $6.6 billion of liabilities to a U.S. agency. Some retirees' benefits may be affected.

May 11, 2005|James F. Peltz | Times Staff Writer

A bankruptcy judge Tuesday approved United Airlines' historic plan to dump its underfunded pension plans on a federal agency, a move United said it needed to survive but one that could trigger a damaging strike against the airline.

At a hearing in Chicago packed with scores of United employees and retirees, union officials and lawyers, U.S. Bankruptcy Judge Eugene Wedoff said United could shift all four of its major pension plans -- and their combined $6.6 billion of liabilities -- to the Pension Benefit Guaranty Corp.

The ruling clears the way for the largest corporate pension default in the 31-year history of the nation's pension insurer, and it added to the massive financial problems that the PBGC itself is grappling to contain.

The ruling fueled speculation that other major airlines -- which also are suffering huge losses -- might try to ditch their pension plans to avoid being at a competitive disadvantage to United, the second-largest U.S. carrier, behind American Airlines.

For The Record
Los Angeles Times Thursday May 12, 2005 Home Edition Main News Part A Page 2 National Desk 1 inches; 35 words Type of Material: Correction
United Airlines -- An article in Wednesday's Section A about United Airlines' pension plans said the air carrier had 4,000 active employees living in California. In fact, about 15,200 active United employees live in California.

Wedoff's decision was an immediate blow to United's 121,500 active and retired employees, many of whom are likely to see their retirement checks reduced because federal pension laws cap how much the PBGC pays out.

Wedoff said that transferring the pension plans to the federal agency didn't violate any law or United's union contracts, and that reduced benefits were better than having the airline go under.

"The least bad of the available choices here has got to be the one that keeps an airline functioning, that keeps employees being paid," Wedoff said.

United, based in suburban Chicago, is the busiest airline at the Los Angeles and San Francisco airports, and about 4,000 of its 61,000 active employees live in California, along with thousands of United retirees.

United has lost nearly $10 billion since the Sept. 11, 2001, terrorist attacks, including $1.6 billion in 2004. The carrier, like many other older so-called legacy airlines, has been hurt by soaring fuel costs, widespread fare cutting, relatively high operating costs and the growth of low-cost discount airlines such as Southwest Airlines and JetBlue Airways. It filed for Chapter 11 bankruptcy protection in December 2002.

United's unions say that missteps by airline management over the last several years also are to blame, and that they've been asked to make excessively steep concessions.

But United Chief Executive Glenn Tilton -- a former oil industry executive who took United's helm in September 2002 -- has pushed hard for the labor concessions and the pension plan switch, saying they're the only way the airline can climb out of bankruptcy.

Jake Brace, the airline's chief financial officer, said Wedoff's ruling was "not a good outcome [but] it's unfortunately a necessary outcome. This is not in any way a joyous day."

United and the PBGC announced their pension plan agreement April 22. The airline said it needed to shed the plans to save more than $4 billion in payments over the next six years and secure the capital it needs to leave Chapter 11 protection.

But the pact has outraged some United unions, and the airline's employee situation "has become extraordinarily volatile," said Ron Kuhlmann, vice president of Unisys R2A Transportation Management Consultants in Oakland.

The Assn. of Flight Attendants has threatened random, unannounced strikes against United flights if the pension plans were transferred. The association represents about 15,500 United flight attendants. United warned them last week that they could be fired if they walked off the job.

Association spokeswoman Dianne Tamuk said, "We feel sold out" by the ruling, and said that the union would meet to decide its next step.

"A strike is a real prospect if that agreement is approved," Jack Carriglio, a lawyer for retired United pilots, said at the hearing. "Also, this will have a grave impact on United employees' morale."

Under federal pension law, the PBGC pays no more than $45,613 a year to a worker who retires at age 65; it's less for those retiring at an earlier age.

As a result, United's pilots are expected to take the greatest hit to their pension benefits. They commonly earn six-figure salaries while working, but under federal law they must retire at age 60.

Moreover, United and most of its union employees have another battle to wage. United also is asking Wedoff to throw out the airline's wage-and-benefit contracts with most of its employee groups, so it can secure the more than $3 billion in annual labor savings -- aside from the pension costs -- that United says it needs to survive.

A hearing on that request begins today, and some United employees have threatened to walk out if the carrier wins that contest as well.

They include 19,500 ramp workers and other ground employees represented by the International Assn. of Machinists, which was scheduled to release the results of a strike vote before today's hearing.

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