Ezra Klein: A Day In The Life

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May 11, 2005

A Day In The Life

A bankruptcy judge last night approved United Airlines' request to terminate its pension plans, clearing the way for the largest corporate pension default in history and setting the stage for a possible strike by the airline's flight attendants.

The federal Pension Benefit Guaranty Corp. will take over the airline's $645 million in pension payments and receive in exchange up to $1.5 billion in securities in the reorganized airline.
...
United's parent, UAL Corp., has been in bankruptcy protection since December 2002, and United executives have said the airline would have difficulty emerging unless it was able to eliminate its employee pensions. The decision means that employees could lose between 20 and 50 percent of the value of their pensions, according to estimates by labor leaders.
...
No airline labor group has ever gone on strike while its carrier was in bankruptcy. By eliminating the pensions, United has in effect nullified part of the workers' contract, but a question exists whether the law permits airline workers without a contract to go on strike while the company is reorganizing in bankruptcy.

United made a commitment to those workers that if they played by the rules, worked hard, and stayed with the company, they'd enjoy a livable pension in old age. The shareholders got no such guarantee, they knew their profits uncertain, that the company they were dealing with could go bankrupt. And the company, unfortunately, did poorly and is now in tough straits. But corporations should not be ripping pensions away from their employees, that simply shouldn't be allowed. And the idea that the workers can't go on strike at the very moment their retirement funds are being raided is nothing less than twisted.

Anyway, just another day in the life of the modern middle class.

May 11, 2005 in Labor | Permalink

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Comments

agreed, although at this point I just hope my 7pm flight on friday from O'Hare to LaGuardia actually takes off.

Posted by: Goldberg | May 11, 2005 12:53:53 PM

I'm not sure how the pensions would be treated in a liquidation scenario. I think they would be screwed then too. Plus, the damned airline and its "going concern value" would be entirely lost.

I'm sure the bankruptcy judge wasn't too pshyched to be signing off on this plan, but maybe its the only way out. Tough when you accept a garuntee from what appears to be an institution, then find out it is no more permanent than any fly by nighter out there.

Posted by: Neil Paul | May 11, 2005 1:29:29 PM

The loss of the pension could just be the results of the economy reorganizing its assets as the airlines adjust to maturity or it could be really big. If it’s the first, then really feel sorry for the United Airline people and hope it never happens to me. If it’s the second, then it will affect me.

If the pension loss is symptomatic of the previously biggest buyout, Bethlehem Steel, then the industry will be affected and the rest of us will go on, but it may be more of an example of the coming trend in the whole American economy.

Stay tuned.

Posted by: scou29c | May 11, 2005 1:32:20 PM

Anyway, just another day in the life of the modern middle class for now!

Unbelievable!

Posted by: The Heretik | May 11, 2005 1:45:35 PM

hey, just wait until Delta and GM follow!

Posted by: praktike | May 11, 2005 2:01:31 PM

"I'm not sure how the pensions would be treated in a liquidation scenario. I think they would be screwed then too."

It is possible that some people would have been slightly less screwed in a voluntary termination. When a pension plan terminates insolvent, as this one would have, ERISA provides a methodology for calculating termination liabilities which favors existing retirees over retirement-eligible employees over vested employees in proportions way out of line with ongoing liabilities. Usually, vestees are lucky to get a dime on the dollar. The methodology is similar to the PBGC termination scenario except for the cap that PBGC applies to everyone's annual payments.

The truth is, PBGC premiums have been too low for about 10 years, but raising them would have killed the private pension plan dead.

PS -- GM is more likely to kill health benefits first since they are unfunded....

Posted by: diddy | May 11, 2005 2:09:27 PM

It's a good thing United filed before the Bankruptcy Reform they just passed takes effect. Pretty soon they'd have to live up to their responsibilities and pay their bills. Oh wait a sec...that's just the rest of us.

Posted by: Mr Furious | May 11, 2005 2:39:29 PM

So, what are you suggesting? That pension liabilities shouldn't be dischargeable in bankruptcy? That the pension fund should own the airline? That the stock should be taken away from the shareholders and sold to the highest bidder, with the proceeds given to the pension fund? What about the other creditors who may be on the hook? The whole point of bankruptcy is to get you out of "commitments" you can't pay. Not that the current system couldn't be better.

Posted by: Ugh | May 11, 2005 2:56:06 PM

I was waiting for someone to blog on this... and I agree the precedent is terrible, but Ugh's onto something - the company is bankrupt. It will likely not survive it's reorganization in its current form. If the government takes over the pension plan, at least some money will get distributed. I'm not sure I see that alternatives. Force United to pay their pensioners? with what? I know I should shy away from saying it, but the problem for United - and Delta, and AA - is a bloated cost structure that makes it all but impossible to turn a profit. If they can't restructure a major cost, I'm not sure what alternatives they have.

Posted by: weboy | May 11, 2005 3:05:28 PM

Ugh, weboy

I agree that there needs to be cost restructuring, but not knowing how to run a business is distinctly NOT your average employee's problem. It's the CEO's, the managers, all the people who can more than afford to lose their pensions. But they are getting out of jail free, while those who had little or no say in the business structure are losing a significant portion of their future livelihood. That's completely unfair, and I can't imagine there's not at least one other way to do this.

Posted by: Kate | May 11, 2005 3:25:40 PM

I should put on my actuary hat here for a second to remind the latest commentors that UAL does not "own" the pensions. The pensions belong to a trust. UAL funds the trust. There are very specific rights, responsibilities, and rules pertaining to pension trusts, and they are enumerated in ERISA. It so happens that UAL is going down the pooper AND its pension plan is kaput, but they aren't necessarily two sides of the same coin. UAL's creditors don't have a claim on the pension fund, so everyone can just back off there. UAL's creditors do however have a claim on the cash that UAL should be putting into the pension fund to keep it solvent. That's why UAL has to ask a bankruptcy judge to let them avail themselves of PBGC protections: because their creditors want that cash too, and cash is just as good as money. (FWIW, pension recipients have no claim on the corporation. They have to go to the plan administrator.)

I also have to say that, no matter what the promises you think UAL made, their employees knew what might happen to their pensions. It's all in the plan document. Most if not all beneficiaries don't read it, but that's just too damn bad, because that is where their rights are. Not in some Clintonesque "fair play" doctrine, but in the law where they have been since 1974.

Posted by: diddy | May 11, 2005 3:34:49 PM

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