The Newshour with Jim Lehrer : UAL and PBGC

May 11th 2005

The day after a bankruptcy judge approved United Airlines' proposal to shed its employee pension plan, the company announced on Wednesday that it lost more than $1 billion in the first three months of this year. Analysts discuss United Airlines next move and the state of the airline industry.


TOM BEARDEN: Last night's landmark ruling may result in slashing retirement funds for some United employees.

DEMONSTRATORS: This management's gotta go!


TOM BEARDEN: And many who protested outside of the federal court in Chicago weren't happy about it.

DIANE TAMUK: It's such a disappointment it's just mind boggling how this could have happened.

TOM BEARDEN: Since a federal bankruptcy judge approved United's plans to terminate its four employee pension programs, the airline can shift responsibility for them to the federal government and the Pension Benefit Guaranty Corporation, or PBGC, which Congress created in 1974.

The PBGC protects nearly 35 million workers and retirees in more than 29,000 pension funds. United's employee pensions are under funded by an estimated $9.8 billion. The PBGC would only guarantee some $6 billion of that total. That means some of the airlines' workers could have their pensions cut. And for some of the highest-paid pilots, the cuts could be even steeper.

The airline's parent company, UAL Corporation, has been in bankruptcy protection since December 2002, and has been pushing to end its pensions since it lost a bid for a federal loan package last year. Company officials said yesterday's ruling means it can save jobs and $645 million a year, a matter of survival for the airline.

JAKE BRACE: We fought for 18 months to try to preserve our pension plans. We were unfortunately unable to do that. Terminating the plans is necessary for the long-run success of United Airlines. And as the judge said, that is, after all, what is the best outcome for the most stakeholders is that United Airlines be successful financially and competitively for the long run.

TOM BEARDEN: Since United first floated its plan to scrap pensions, employees who've already agreed to wage cuts to save the carrier have threatened to strike.

Sara Cruz

SARA NELSON DELA CRUZ: And we will strike using chaos actions, which are surprise, intermittent strikes known only to the union. It can come in the form of an all-out strike across the system. It could be that we shut down a city for a day. It could be that we strike a random flight in a remote location.

TOM BEARDEN: No airline labor group has ever gone on strike while its carrier has been in bankruptcy.

JAKE BRACE: The strike would be absolutely illegal. And we will take whatever action, both in court and disciplinary, that we need to, to prevent such an occurrence.

REPORTER: Firings?

JAKE BRACE: We will take all disciplinary actions up to and including terminations.

TOM BEARDEN: But United isn't the only airline that's been struggling. Several in the industry have fallen victim to rising oil prices, low-cost carriers, and a weakened economy after Sept. 11, more than $30 billion lost in the last five years.

In January, U.S. Airways, in bankruptcy for the second time since 2002, shed its pensions. The move left the government paying for some $3 billion in benefits. And yesterday Delta Airlines hinted it may follow suit soon, and seek bankruptcy protection.











Were there other options?

MARGARET WARNER: So what's the likely impact of the bankruptcy judge's decision on United, its workers, and other Americans currently enjoying or expecting to enjoy retirement pensions?

To explore all that we turn to: Julius Maldutis, president of Aviation Dynamics, a consulting firm that advises institutional investors on the aviation industry; Harley Shaiken, professor of labor and the global economy at the University of California at Berkeley; and Douglas Elliott, president of the Center on Federal Financial Institutions , a think tank that studies government insurance and lending.

Welcome to you all. Mr. Maldutis, let me start with you. You heard the vice president of United just saying this was absolutely necessary. From the perspective of the company and the bankruptcy judge was it?

Julius Maldutis

JULIUS MALDUTIS: Yes, it was for the very simple reason that United owes about $645 million in payments and the financial institutions on Wall Street have said we are not going to provide you with $2.5 billion for you to come out of bankruptcy so it was a classical Catch-22 situation, but United management had no choice but to take this action.

MARGARET WARNER: No choice, Professor Shaiken?

HARLEY SHAIKEN: Oh, I think there were some choices here. I think what we're looking at is basically some broken promises on behalf of the management and some shattered dreams, even shattered lives, on behalf of the workers at United. You're talking people who've worked for twenty, thirty years, played by the rules, built a great company, and promised something, that they could retire with some security. That promise has been broken and that raises a very large question. Is this the kind of society we want to see?

Specifically in this case were there other alternatives? I think there were, and I think the company and the union were exploring other alternatives perhaps not to preserve these plans per se but to preserve the benefits they pay, because at the heart of this pensions aren't simply just any benefit; they're really the heart and soul of the social contract in the workplace. If you abandoned your workers here, it's not simply a decision that lacks a certain morality, but it's also something that doesn't make economic sense in the long-term.

harley Shaiken

You can gain, as Mr. Maldutis has said, some important financial benefits immediately. That $600 million is key, but long-term you erode the loyalty and moral of the work force. And in a service company that's the difference between success and failure. So, in short, I think there were some unexplored options here.

MARGARET WARNER: Mr. Maldutis, what about that point? Will this solve United's financial problems in the short-term, medium term or long term, or was Professor Shaiken right, it also invites further problems?

JULIUS MALDUTIS: The U.S. airline industry today is in a massive financial crisis. The situation at United is particularly fragile because the employees now have taken two massive wage cuts. They have lost all the spirit in it. And keep in mind that what happened at USAir in December when the employees also went through such enormous pain basically said enough is enough and they started a job action. This very well could lead to United's liquidation if enough passengers see an action by labor and United could end up being liquidated. So we are at a very major crisis

MARGARET WARNER: So are you saying that you think this might have been short sighted on the part of United management, that they looked at the short-term financing crunch they were in but didn't think about even the medium term, whether they would be able to continue to deliver?

JULIUS MALDUTIS: Well, it's a risk that they have taken. And as I have said, if enough employees act in their own self-interest, call in sick or take job action, they could very well bring about that very thing that United is trying to avoid.

The federal agency's pension plan

MARGARET WARNER: Professor Shaiken, why would it be in the interest of United employees to engage in a job action now that this decision's been made by a judge? I mean, presumably a judge is not susceptible to that kind of pressure the way management would be in a classic labor-management dispute.

HARLEY SHAIKEN: Oh, I think judges actually are susceptible to all kinds of pressure not directly perhaps, but in a certain investment environment where this seems to be what Wall Street's calling for, what management says is inevitable. The employees at United I think are very professional and very dedicated. And no one has a greater interest in seeing this company succeed than them. Their livelihood, their families, their communities are all at stake here. That said, they're all being pushed into a corner.

I think Mr. Maldutis has got some excellent points here. It's not too late, but we're not too far from when it's going to be too late. They have been given a set of alternatives where they're bleeding to death. They may want to hasten the process if that's all that they see. What they need to be is included, feel included in the entire process of restructuring so it isn't an abstract set of dollars and cents, but it's something that involves real human beings and successful companies, which United can still be. But if the alternatives given are simply that they are victims rather than the beneficiaries of restructuring, then we could see Mr. Maldutis' worst case scenario.

MARGARET WARNER: Mr. Elliott, let me turn to you. Explain to us why, is it automatically that if this federal pension agency takes over that benefits are always cut or is there something peculiar about the United situation?

DOUGLAS ELLIOTT: It's really both. It's automatic that there are guarantee limits that the law has in place. That's not a PBGC choice. The two key limits here are: There's about a $45,000 a year cap on the pension payments. The thing is pilots in particular, but airline workers in general are very well paid, so more of them than in most industries cross that cap.

The second thing is that there's a significant early retirement subsidy at most companies like United. If you retire early, they don't cut back your payment very much. PBGC by law has to cut back quite a lot and pilots have to, by law, retire at 60, so they're heavily hit by this.

MARGARET WARNER: And does this PBGC have the money to actually even deliver on these United pensions? We read that they are, what, $20 billion in the hole?

DOUGLAS ELLIOTT: Yeah -- $23 billion. There's good news and bad news. The good news is they have plenty of cash. The bad news is it's going to run out in maybe 16 years. And they've got a lot more years of payments to make after that. So --

MARGARET WARNER: Sort of like Social Security.

DOUGLAS ELLIOTT: Exactly. United makes the problem a third worse, but it doesn't really create a cash problem. We still have years to work that out.

The risks of terminating pensions

MARGARET WARNER: Let me ask you this: Do you think -- what do you think are the chances that we're going to see copycat, other airlines at least if not more broadly, companies trying to do the same thing?

Douglas Elliott

DOUGLAS ELLIOTT: I think they're fairly high. I don't know if copycat's the right word. It's rather that in the environment that we've seen, where a company is close to bankruptcy anyway, such as Delta might be, there's a lot of pressure if other airlines are shedding their pension liabilities and becoming lower cost, at least in the short run.

MARGARET WARNER: Do you agree with that, Mr. Maldutis, that other airlines will be tempted or maybe feel forced to do the same?

JULIUS MALDUTIS: Absolutely. Particularly in a situation that if United succeeds in coming out of bankruptcy, then the other carriers will have no choice but to repeat the very same process because they owe so much money as well.

MARGARET WARNER: And Professor Shaiken does the American labor movement understand this, do you think?

HARLEY SHAIKEN: Oh, I think so. I think millions of Americans understand this all too well. This is the United Airlines story tonight. It is an airline industry story tomorrow. And the day after tomorrow, it is the story of the American economy.

General Motors could be much more competitive against Toyota if it dumps its retirees. Delphi with 175,000 employees worldwide, one of the largest parts makers, is looking very closely at this. What United has done here is they've set a new standard for competitiveness and it's hardly what I would call a gold standard. Essentially they've said, if you want to compete, cut costs by throwing overboard your promises to your retirees among the most vulnerable people at a critical moment in their lives.

So I think we're looking at something that goes well beyond American labor -- that is the union movement -- and affects the 20 percent or so of Americans who receive pensions. At risk isn't the pensions of United workers; at risk is the concept of the pension and the bargain, the social contract that employees have in a workplace. I think that's an important, important set of concerns for all Americans.

MARGARET WARNER: Julius Maldutis, do you agree with that?

JULIUS MALDUTIS: Yes, but I think there's also another story as part of this United story and that's the bankruptcy court process. This bankruptcy court process has just been abhorrent, 29 months in Chapter 11 bankruptcy. This judge has maintained exclusivity, which has prevented outsiders from coming in and I think there are at least three groups that would be interested in making a bid to take over United and reorganize it. This court has also prevented the owners of the airplanes until yesterday from repossessing the airplanes, so the bankruptcy laws have to be looked at as they apply.


Will other airlines follow suit?

MARGARET WARNER: Do you see any of the big so-called legacy carriers that might be able to resist the competitive pressure to do the same, to essentially shed their pensions, Mr. Maldutis?

Margaret Warner

JULIUS MALDUTIS: Yes, I think they're all looking at the issue except for American Airlines where Gerard Arpey, the chairman, has been very successful in changing the classical confrontation culture at American to be one of cooperative. I see a new sense at American where management and labor are beginning to work, and they could avoid which other carriers such as Northwest, Delta and maybe even Continental, are forced to seek Chapter 11.

MARGARET WARNER: So, Mr. Elliott, tell us a little more now about how the PBGC would handle it if, let's just say, most of the major airlines were to emulate United -- I mean how much more difficult -- or would that advance the year at which it would become insolvent or whatever the word is?

DOUGLAS ELLIOTT: Interestingly, it probably wouldn't change the timing that much because these pension plans come with assets. But it makes the hole much deeper. So once we fall off the cliff, it's a very long way down.

MARGARET WARNER: And why is this pension agency under funded isn't this an insurance -- don't the companies pay premiums?

DOUGLAS ELLIOTT: It's an insurance company, but Congress sets the premium rates and sets the rules by which companies operate their pension funds. And there's a structural imbalance between those premiums, which academic studies have shown range anywhere from one-sixth to half of what they should be for the current rules. So you either have to tighten the funding rules or raise the premiums or both and I think we'll see both.

MARGARET WARNER: And why hasn't Congress done that before now?

DOUGLAS ELLIOTT: Well, they don't like to make anybody feel pain. And it's a little bit like Social Security. We're talking about a long ways off. Our estimates are that in 2021 the cash would run out. That's a lost faster than Social Security, but it's still 16 years from now.

MARGARET WARNER: And so what do you think are the prospects in even the medium term that the taxpayers may have to do, kind of bailout of this agency, a la the S&L scandal?

DOUGLAS ELLIOTT: I think there's a serious risk in medium to long-term that the taxpayers will pick up a big chunk of the bill. And our financial analysis suggests if the rules stay the way they are, that could be a $78 billion bill. I'm very hopeful we'll do some things to reduce that, but it could still be a big number when we get there.

MARGARET WARNER: All right. Mr. Elliott, Professor Shaiken and Mr. Maldutis, thank you.

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