US airlines seek exemption from pensions top-up

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US airlines seek exemption from pensions top-up

By Caroline Daniel and Demetri Sevastopulo, Financial Times

July 14, 2003

Washington - The US Congress will consider this week allowing big US airlines to defer for five years the requirement to make hefty cash contributions to make up for growing deficits in their pension plans.

The proposal, which has been widely supported by the airline industry and trade unions, is part of a bill that is expected to be introduced by Congressman David Camp from Michigan in the House of Representatives either today or tomorrow. It is then likely to be referred to the House Ways and Means committee.

The bill marks the big airlines' first response to the plan set out last week by President George W Bush to make pension funds hold assets matching their liabilities. It reflects the view of many airlines that the Bush plan does not go far enough to solving their needs.

"The administration's approach is dead on arrival," said one Washington-based airline executive.

Airlines have been trying for months to come up with a legislative solution to their ballooning pension deficits, which rose to $22bn (€19.4bn, £13.4bn) at the end of 2002.

The bill will call for airlines to be granted exemption to the requirement - dubbed the "deficit reduction contribution" - that companies whose pension plans are less than 90 per cent funded, make up the gap with accelerated contributions within five years.

After two years of losses, airline balance sheets are severely stretched.

Even the healthiest carriers, such as Delta and Northwest, could struggle to generate enough cash to meet these demanding pension obligations and reduce debt.

American Airlines alone is expected to have to make contributions of between $500m and $1bn in 2004, according to Standard & Poor's. United Airlines, the world's second largest carrier, has the largest under funded defined benefit contribution plan, with a deficit of $6.4bn.

The issue is seen as one of its biggest challenges to resolve before it can emerge from bankruptcy protection. Delta Airlines has pension liabilities of $4.9bn, followed by Northwest with $3.9bn.

However, there are significant doubts whether the airline industry will be able to drum up enough political support to get special treatment.

The industry is widely seen in Washington to have received enough aid, most recently securing about $2.9bn of reimbursements for security charges imposed since September 11 2001.

Some airlines are also reserving their diminishing political capital for other issues, such as reducing security fees, rather than make pension reform a priority.

The initiative has the support of the airline unions and is being led by the Air Line Pilots Association, the largest pilots union, whose concerns have been driven by the experience of US Airways. Executives at the airline were forced to terminate some of its defined benefit pension plans, cutting benefits for some pilots by more than a third, as a condition of getting out of bankruptcy.

Unions are worried that if relief is not granted, United could be forced to follow US Airways and default on some of its plans.

Air Canada, which is also in bankruptcy, said this week it would ask federal regulators in Canada for an extension of up to 10 years to make up its pension deficit.