Pressure on airlines to seek pension relief

No matter what tack airlines pursue, some constituents are bound to be unhappy. On one side are shareholders, who don't want to see their stock become worthless in a Chapter 11 reorganization, and workers, whose monthly retirement checks would likely be cut in bankruptcy. On the other side are debtholders and management, who want to see the company survive, even if it requires a trip to bankruptcy court.

For its part, Delta is being punished on all sides. Its borrowing costs are rising, its shares are plummeting even after its workers agreed to wage and benefit cuts. Delta's stock fell to a multi-decade low of $2.73 on Wednesday, just one day after the company warned yet again of a possible bankruptcy fililng if its cash reserves fall too low or if lenders seek immediate payment of debts.

There is nothing in the federal law that covers pension benefit plans, the Employee Retirement Income Security Act, that says a company must file for Chapter 11 in order to freeze a pension plan and hand over the obligations to the PBGC. But as a practical matter it isn't likely to happen any other way, lawyers and benefits specialists said.

William J. Rochelle, a bankruptcy lawyer with Fulbright and Jaworski in New York, said Congress needs to devise some way for airlines and other businesses, such as automakers and truckers, to lighten their pension burden outside of bankruptcy court, where workers' retirement benefits are quite likely to be gutted at the hands of banks and other creditors.

The current system isn't fair to retirees, Rochelle said, in that they lose their pensions and any money they had invested in the company's stock, which typically becomes worthless during the bankruptcy reorganization. Investors, on the other hand, often are able to snap up debt at pennies on the dollar and then profit if the company recovers and their debt is converted into equity in the new company.

"Right now our system is creating a transfer of wealth from retirees to junk bond investors," he said.

But James F. Hendricks, a senior partner at the law firm Fisher & Phillips LLP in Chicago, said he expects airline executives to work very hard for some kind of compromise from Congress so that they can avoid handing over their fates to creditors, who might just seek liquidation.

"I don't think any airline wants to go into bankruptcy," said Hendricks, who represents companies negotiating with labor groups. "The question is, will they be forced to?"

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