NWA president tells federal panel pension proposal is crucial

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NWA president tells federal panel pension proposal is crucial

By Greg Gordon

Star Tribune Washington Bureau, May 6, 2003

WASHINGTON, D.C. -- Northwest Airlines President Doug Steenland told a federal panel Monday that the company faces escalating pension fund obligations just when it needs cash "to weather the current economic crisis."

As skeptical employees listened, he urged the five-member Labor Department panel to approve Northwest's controversial request to cover more than $220 million in pension fund shortfalls with yet-to-be tradeable stock in a subsidiary, Pinnacle Airlines.

Steenland called the proposal "crucial" to the firm's turnaround strategy. A representative of Northwest's pilots union gave conditional support for the plan, but more than 15 other Northwest labor representatives and workers who traveled from as far away as Honolulu, Hawaii, and Anchorage, Alaska, voiced suspicion, bitterness and distrust.

Northwest is seeking permission for a tactic used only twice before -- by Pan Am in 1989, shortly before that airline's collapse, and successfully by the General Motors Corp. in 1994.

During an unusual, daylong session, executives, union members and retirees of Northwest -- a company with a history of tumultuous labor relations -- squared off in public.

Steenland said the plan to transfer Pinnacle stock to three of its pension plans would help the airline preserve its $2 billion in cash and thus would be "in the interests of the Northwest pension plans and our workers and retirees."

He said Northwest has already obtained a waiver from the Internal Revenue Service allowing it to pay about $450 million in 2003 pension obligations over five years.

Steenland described Pinnacle, which flies smaller passenger jets between outlying cities and Northwest's three hubs in Minneapolis, Detroit and Memphis, as one of the fastest-growing regional airlines. None of the three pension plans for pilots, salaried employees and Northwest's other contract unions would exceed the federal limit of having 10 percent of its assets invested in Pinnacle stock, he said.

The exemption is needed, he said, only because of technical rules: Federal law requires that people independent of a company own at least 50 percent of any employer stock held by a pension plan. Northwest plans to take Pinnacle's stock public, he said, but it currently owns all of the stock.

Tom Goebel, a Seattle-based Northwest co-pilot representing its Air Line Pilots Association (ALPA) unit, said the union sees the industry's current malaise as "a temporary impediment."

"We want Northwest to be able to preserve its liquidity," he said. "A strong Northwest is the best protection for the pension funds."

But he said the union and company are negotiating "extra protections" to protect ALPA members if Northwest files for Chapter 11 bankruptcy protection.

Paul Volker, a Northwest mechanic who drew applause from dozens of employees in the room, characterized the arrangement as "a house of cards."

"Pinnacle would be eliminated if Northwest were to cease to exist," he said.

Robert Duke, a 35-year veteran ground worker represented by the International Association of Machinists, told the board: "If they can pay the bonuses to management, why can't they fund my pension plan?"

The proposed stock arrangement calls for an outside "fiduciary" to monitor the Pinnacle stock and Northwest's financial performance. Each pension plan would have a "put option," in which it could require Northwest to buy back the stock in the event Northwest's fortunes turned sour.

Dan Kasper, an airline industry consultant hired by Northwest to assess Pinnacle's prospects, told the board that Northwest has a thin route system "that would be quite amenable to a regional jet service."

And he said that Northwest "stands in a very weak industry right now in a very strong position."

Testimony at the hearing drew attention to the mixed messages that airline executives can give and communications challenges they face as they scramble for cash to survive an unprecedented crisis. Industry losses for the years 2001 through 2003 could reach $30 billion.

Officials of several unions noted that Northwest executives have warned, in demanding $950 million in annual compensation cuts from workers, that the Eagan-based carrier is near bankruptcy. At the same time, they noted, company executives have assured the government that waivers from pension plan obligations would enable Northwest to navigate a temporary cash-flow squeeze.

"There are a lot of bitter people out there who . . . cannot begin to square what Northwest Airlines has told the Department of Labor with what they are being told," said Lee Seham, a lawyer for the Aircraft Mechanics Fraternal Association. "They are frankly furious that Northwest is trying to be both fish and fowl."

"Northwest's contradictory position gives every appearance that employees will be victimized twice over -- with the rejection of their collective bargaining agreements and the funding of their pensions with stock of questionable value," he said.

Northwest's chief financial officer, Bernie Han, responded that those perceptions depend on "whether we're talking about absolute performance or relative performance."

He said Northwest has the lowest unit cost of any of the network airlines, losing 8 cents of every dollar of revenue, and is "absolutely doing better" than its rivals, which are losing an average of 13 cents.

But, he said, all hub carriers are in crisis in the current climate. Airline business has suffered from terrorism fears in the wake of the Sept. 11 attacks, the war in Iraq, soaring security costs and competition from low-fare carriers.

The public record in the Labor Department proceeding will remain open until May 16. After that, the panel of department lawyers and pension specialists will make its decision. Labor Secretary Elaine Chao, a former Northwest director, has recused herself from the panel.