Bankruptcy

United Given OK to Dump Pensions

The termination will saddle the Pension Benefit Guaranty Corp. with an additional $5 billion in obligations.
Stephen TaubMay 11, 2005

United Airlines got the go-ahead from the bankruptcy judge to terminate four pension plans, according to the Associated Press. The emotionally charged decision paves the way for the embattled airline to exit from Chapter 11 later this year.

The termination will saddle the Pension Benefit Guaranty Corp. with an additional $5 billion in obligations, according to the report. The decision has prompted several employer groups to threaten a strike and several members of Congress to warn that the government eventually may have to bail out the PBGC.

“Taxpayers had better buckle up because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the PBGC,” said Rep. Jan Schakowsky (D-Ill.), according to the wire service. (Senior editor Marie Leone observes, however, that the thorny issues surrounding the UAL bailout should not unfairly taint legitimate bankruptcy law.

The AP reported that the United pensions cover 120,000 workers, including 62,000 active employees.

Under the arrangement, the PBGC will receive $1.5 billion in notes and convertible stock in a reorganized UAL Corp., United’s parent company.

“Approval of the PBGC settlement agreement is a crucial step forward for the future of United, as it strengthens the financial platform this company needs to attract exit financing and compete effectively,” the airline said in a statement, according to the AP. “At the same time, we clearly recognize that the court’s decision is difficult for our retirees and our employees, who have been doing extraordinary work throughout this restructuring process.”

Now that United won’t be saddled with its pension costs, its rivals feel they will be put at a financial disadvantage. (Senior writer Kate O’Sullivan wonders whether Delta will be next.) For its part, American Airlines has publicly pledged to retain its pension funds, but it will no doubt re-evaluate this policy in light of the United deal.

Of course, there is the stark reality that old-line airlines with huge cost structures and legacy pension obligations may be put into a position of choosing between terminating pensions and surviving, or keeping their pension promise and going out of business. It’s a dilemma uniquely faced by a number of old-line industries, such as autos and steel.