Pressure on airlines to seek pension relief

updated 7:26 p.m. ET May 11, 2005

WASHINGTON - Now that United Airlines and US Airways have been granted bankruptcy court approval to terminate their pension obligations, competitive pressure is mounting on other struggling carriers to seek relief.

Industry officials and analysts said they don't expect other carriers to file for bankruptcy merely to shed the cost of underfunded pension plans. But they warned that airlines facing severe financial troubles may be more inclined to seek a Chapter 11 reorganization, given the precedent established by US Airways Group Inc. and United's parent company, UAL Corp.

"It could help tip the scales," said Phillip Baggaley, Standard & Poor's airline analyst.

A bankruptcy judge on Tuesday authorized UAL to dump four pension plans and shift $6.6 billion in pension obligations to the Pension Benefit Guaranty Corp. The government agency previously agreed to pick up $3 billion in pension obligations from bankrupt US Airways.

Several airlines that hope to avoid bankruptcy are already lobbying Congress for pension law changes that would allow them to freeze their current obligations outside of Chapter 11, while giving them more time to meet large _ and growing _ funding shortfalls. On Wednesday, flight attendants at American Airlines, a unit of AMR Corp., gathered in Washington to lobby for such reform.

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Even though passenger traffic is rising, the bulk of the industry is suffering in a big way due to soaring fuel prices, unprofitably cheap fares and fierce competition from low-cost carriers. Losses have exceeded $30 billion since 2001 and U.S. carriers are on pace to lose another $5 billion in 2005, analysts estimate.

Delta Air Lines Inc. tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to S&P. The funding deficit is $3.8 billion at Northwest Airlines Corp., $2.7 billion at American Airlines and $1.6 billion at Continental Airlines Inc.

By contrast, profitable low-cost airlines such as Southwest Airlines Co. and JetBlue Airways Corp. have defined contribution plans, such as 401(k)s, meaning they don't have pension funding gaps. They also run operations that are vastly more efficient in terms of how employees and aircraft are deployed.

"The Southwests and JetBlues are the industry benchmark," said John Heimlich, chief economist at the Air Transport Association, a Washington-based industry group. By shedding its pension obligations, "United has found one way to get closer to that benchmark."

Heimlich said he expects non-bankrupt carriers to take a hybrid approach, lobbying Congress while working simultaneously with employee groups. Continental Airlines, for example, was able to reduce its pension burden during contract negotiations with pilots, who agreed in March to have their benefits frozen as part of a package of cuts totaling $213 million.

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