Auto industry rocked by Delphi bankruptcy

John W. Schoen Senior producer • Profile • E-mail

First came the U.S. steel industry. More recently, money-losing airlines have landed themselves in bankruptcy court to cut labor costs. Now, Saturday's filing by auto parts maker Delphi signals that the U.S. auto industry has arrived at the same crossroads with its work force: agree to out-of-court concessions, or face the prospect of court-ordered cuts in wages, benefits and pensions.

Delphi, a $29 billion industrial giant, has been struggling to make a profit since General Motors spun off its parts subsidiary in 1999. Last year, Delphi lost $4.8 billion; it lost nearly $750 million in the first half of this year.

A tougher new bankruptcy law effective Oct. 17 may have accelerated Delphi’s move to seek refuge in federal court in Manhattan to reorganize its money-losing operations. Among other provisions, the new law makes it harder to pay bonuses to keep managers and imposes tighter deadlines on filers to either exit bankruptcy or liquidate faster.

But the forces that pushed Delphi into bankruptcy court have been building for years. As the auto industry has gone global, U.S. automakers — saddled with high-cost labor contracts negotiated in more prosperous times — now find themselves pitted against leaner overseas rivals.

Delphi's bankruptcy filing, which became more likely as the Oct. 17 deadline loomed, nonetheless sent shockwaves through the industry. The company’s management has said operations won’t be affected. And the complicated three-way talks between Delphi, the United Auto Workers and  General Motors will continue. At stake is billions of dollars owed Delphi’s work force, including wages, benefits and pension payments — some of which GM agreed to take on when it spun off Delphi to fend for itself.

The most immediate impact will be on Delphi’s 185,000 workers. The company wants to cut wages to less than half of current levels and eliminate a "jobs bank" that gives full pay to 4,000 laid-off workers.

Delphi's retirees face similar cuts if the company follows the lead of steel companies and airlines that have successfully used the bankruptcy courts to offload their pension obligations to the federal Pension Benefit Guaranty Corporation, an agency set up in 1974 that is funded by contributions from premiums paid by companies. Once the agency takes over a pension plan, workers receive only part of their benefits.

The PBGC itself is on a rocky financial footing, in part because of chronic under-funding of older, so-called "defined benefit" pension plans in favor of pay-as-you-go 401(k) retirement savings plans, which don't leave employers with long-term obligations to pay retirees.

As of the start of this year, the PBGC was under funded by some $23 billion. A report last month by the General Accountability Office estimated that gap will swell to $87 billion over the next decade. If the PBGC continues to shoulder the cost of more failed pension plans dumped by ailing companies, those liabilities could hit $119 billion in 15 years and $142 billion within two decades, the GAO report said.

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