U.S. to Allow Northwest Air to Use Stock in Pensions

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U.S. to Allow Northwest Air to Use Stock in Pensions

By MICHELINE MAYNARD, New York Times

August 19, 2003

The Labor Department issued a rare exemption to federal pension rules yesterday, allowing the Northwest Airlines Corporation to use the stock of a regional airline subsidiary to help cover the $1 billion shortfall in its employee pension plans.

The action, approved by the department's Employee Benefits Security Administration, allows Northwest to contribute up to 100 percent of the stock of Pinnacle Airlines, based in Memphis, to its three plans to fund a $223 million pension obligation for 2002.

Federal rules generally bar companies from contributing the stock of subsidiaries to their pension plans. In January, Northwest had contributed $44 million in Pinnacle stock to its pension funds, but the amount was not large enough to require a federal waiver.

Pinnacle is wholly owned by Northwest of Eagan, Minn. The stock of Pinnacle is owned by Northwest and is not publicly traded. Operating as Northwest Airlink, Pinnacle flies from Northwest's hubs in Minneapolis, Detroit and Memphis to smaller cities.

Northwest had pension fund assets of $4.4 billion in January 2001, about $1 billion below what would be needed to fully fund its programs, which cover nearly 73,000 retired and current employees. The assets have deteriorated significantly since then, because of the decline in the stock market and the industry's own problems, and Northwest has been on an aggressive program to cut costs.

The exemption was opposed by some of Northwest's labor unions, which argued that it would permit other financially weak airlines to follow suit, letting them hoard cash that rightly belonged to pension plans. But the department said it was convinced that enough safeguards were in place to protect the pension assets of employees.

Specifically, the department said Northwest's plans would be overseen by an independent fiduciary, who would determine a value for the Pinnacle shares at the time that Northwest decides to contribute them. The financial overseer, from Fiduciary Counselors, would decide whether the shares would be a prudent investment for the plans. The fiduciary would sit on the Pinnacle board, and would be able to direct Northwest to repurchase the stock, department officials said.

Labor Secretary Elaine L. Chao, a former director of Northwest, recused herself from the deliberations over the exemption.

The department has issued only about a half-dozen such exemptions in the past, notably to the General Motors Corporation, which contributed $6 billion in stock from its Electronic Data Systems subsidiary to its pension plan in 1994.

Federal officials also granted an exemption to Pan American World Airways in 1989. Pan Am ceased flying in the early 1990's, however, and its pension plan is still the subject of lawsuits.

Not long after applying for the exemption, Northwest's chief executive, Richard H. Anderson, had warned that the carrier was in danger of following US Airways and United Airlines into bankruptcy, and he asked unions to grant nearly $1 billion in wage and benefit cuts. But analysts said that Northwest's financial situation was not as dire and that its cash position was better than that of United or of American Airlines, which won union cuts by also threatening to seek Chapter 11 protection.

Earlier this month, Mr. Anderson said he did not think a bankruptcy filing would be necessary, although the airline is still seeking reductions in wages and benefits.

The airline said in a statement that it was "pleased by the decision," and called it "another step in our overall strategy to ensure that the airline has sufficient liquidity during the current economic downturn."

Alan D. Lebowitz, a deputy assistant secretary at the Labor Department, said the airline did not say what the effect of a cash contribution would be on its financial situation, nor did the department ask whether it would weaken the company.

"Having come to us, it's our job to determine whether the statutory criteria for granting of exemptions shall be met. After a fairly long and arduous process, we have determined that it is," Mr. Lebowitz said.

The ruling drew a mixed reaction from Northwest's unions. The pilots agreed to support the application, even though their pension plan had previously barred the use of stock as a funding mechanism.

"The structure of the negotiated agreement minimizes the downsize risk; it does allow Northwest to preserve liquidity while allowing Northwest to make contributions to the employee pension plan," said Will Holman, a spokesman for the Air Line Pilots Association at Northwest.

Jim Atkinson, the local president of Northwest's mechanics union, the Aircraft Mechanics Fraternal Association, said he was "disappointed and surprised" by the ruling. "When you're talking about a pension fund, you have to be very careful," Mr. Atkinson said. "Part of our fear is that this will open the door for other airlines and we will see this go like an infectious disease through the industry."

But Mr. Lebowitz said he knew of no other pending applications for exemptions. He added each would be rigorously examined, as was Northwest's application, which triggered thousands of letters from airline employees. "I wouldn't expect this to be the norm," he said. "These are fairly unusual, very fact-specific cases."