June 7, 2005
ALPA President: More Bankruptcies Unless Pension Rules Are Reformed
WASHINGTON, D.C.---The head of the airline pilots union today told Congress that more airline bankruptcies may occur unless the government’s outdated pension rules are reformed.
“Under current law, the only way an airline can avoid burdensome pension costs is by entering bankruptcy and terminating the plans. But if more and more airlines choose to shed their pension liabilities in bankruptcy, it sets up the potential for the ‘domino effect,’ in which all the other legacy carriers are incentivized, or even forced, to file bankruptcy, in order to achieve the same cost savings and ‘level the playing field,’ ” said Capt. Duane Woerth, president of the Air Line Pilots Association.
Woerth was testifying at hearings by the Senate Committee on Finance on the current pension crisis (read the testimony).
Outmoded pension rules, combined with the recent collapse of stock market values, historically low interest rates, and the worst economic downturn in airline history, have generated the “perfect storm” of conditions that have forced two legacy airlines to act to terminate their pension plans. According to Woerth, other bankruptcies may be on the horizon unless S. 861, introduced by Senator Johnny Isakson (R-GA) and Senator Jay Rockefeller (D-WVA) and its companion bill in the House, H. R. 2106, are enacted to reform the outmoded pension rules. The principal features of the bills are an extension of the period that airlines would have to catch up on deficit payments, and allowing them to use more realistic interest rate assumptions.
“We believe the current pension funding crisis is only temporary. Given sufficient time, we believe that interest rates will rise, stock market performance will improve, and airline profitability will return. Sound retirement policy should not allow an employer to break its pension promise to employees, just because of negative economic and financial conditions expected to last only a few short years,” Woerth said.
Enacting these reforms would be a win for airline workers, who would have a greater likelihood of receiving the benefits they already have earned under their defined benefit contribution plans. It would be a win for the Pension Benefit Guaranty Corporation (PBGC), which would have to cover unfunded liabilities if a plan is terminated. Airlines would be clear winners, too, because it would allow them to better manage their cash flow and prepare feasible business plans without being sabotaged by unpredictable deficit reduction contributions. A feasible business plan will, in turn, unlock the door to long-term capital financing of the airlines’ business needs and endeavors, and should, in the case of some legacy carriers, help them avoid bankruptcy altogether.
“Allowing airlines additional time to fund employees’ accrued benefits will also give the parties time to step back, review and in some cases completely alter the design of their retirement program--all without the threat of a distress plan termination hanging over their heads. Given the sufficient breathing room made possible by longer amortization of the defined benefit plan liabilities, airlines and employees can craft creative solutions that may provide secure alternatives to pure defined benefit plans. Each airline and employee group must create an individual solution to their individual pension challenge. For some groups, but by no means all, the solution may lie in gradually shifting away from excessive reliance on defined benefit plans as the primary sources of retirement benefits, either by replacing them, or by devising combination plans with a larger defined contribution plan component,” Woerth said.
Woerth also called for enactment of S. 685, the “PBGC Pilots Equitable Treatment Act,” which would apply the PBGC’s normal retirement age guarantee limit to pilots at their mandatory retirement age of 60.
For more information, view ALPA's issue brief on the web.
ALPA represents 64,000 airline pilots at 41 airlines in the U.S. and Canada. Its website is at www.alpa.org.
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ALPA CONTACTS: John Mazor, Linda Shotwell, (703) 481-4440, firstname.lastname@example.org.