CAPTAIN DUANE E. WOERTH, PRESIDENT
AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
BEFORE THE U.S. SENATE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION
ON S. 119
JANUARY 14, 2003
The Air Line Pilots Association, International (ALPA), represents 66,000 airline pilots who fly for 42 U.S. and Canadian airlines. We appreciate the opportunity to present this statement in support of S. 119, which would provide a special pension funding rule for US Airways.
ALPA firmly believes that passage of this bill is the only solution remaining to prevent termination of the pilots' defined benefit retirement plan. Without this relief, the plan will terminate, and the pilots will lose significant retirement benefits. In addition, significant liabilities under the plan will be transferred to the Pension Benefit Guaranty Corporation (the "PBGC"). Plan termination would also create new doubts and uncertainty surrounding this airline's effort to reorganize, despite the enormous reductions in pay, benefits, and employment that all the unions at US Airways have reached voluntarily in negotiations with management.
The US Airways Pension Funding Problem
Having achieved unprecedented contract concessions by ALPA and the other labor groups, US Airways is in the final stage of obtaining approval of a $1 billion seven-year loan guarantee from the Air Transportation Stabilization Board ("ATSB") and approval of a plan of reorganization under which US Airways would emerge from Chapter 11 bankruptcy. A hearing on the adequacy of the disclosure statement accompanying the Company's plan of reorganization is scheduled for this Thursday. Further action by the ATSB is expected shortly.
As a result of the unions' concessions and management's efforts, US Airways is in a position to emerge from bankruptcy by the end of March 2003, following confirmation of its plan of reorganization, but only if the issue that brings us here today can be resolved. The US Airways pilots have agreed to a 33% pay cut and significant reductions in their work rules, retirement plan and other benefits, all of which save the Company $643 million per year. These concessions actually have reduced the cost of employing a US Airways pilot by nearly 46%. Despite this, over seventeen-hundred US Airways pilots are out of work, with another 80 expected to be furloughed next month. This actually includes pilots who are far from being new hires, and who have up to 15 years of service with the Company.
As part of the restructuring, the US Airways pilots have also agreed to significant reductions in the accrual of benefits under the pilots' retirement plan, which effectively freezes the plan for most pilots. This means that a significant percentage of pilots will not accrue any additional retirement benefits while they continue to work for US Airways. The danger now is that even benefits that pilots have already earned over many years of service will be slashed dramatically due to a potential plan termination. A plan termination would result in pilots losing up to 75% of their anticipated retirement benefits, because they exceed the PBGC guarantees. We are here today asking your help to protect the US Airways pilots' retirement benefits that have already been earned.
In order to obtain the loan guarantee from the ATSB and to emerge from bankruptcy, US Airways must restructure the pension contributions that would otherwise be required over the next seven years under ERISA and the Internal Revenue Code. If it cannot do so, it will seek plan termination. US Airways sponsors defined benefit plans for its pilots, flight attendants, mechanics and other employees. The Company is facing estimated pension contributions of $1 billion in 2004 and $800 million in 2005 for its defined benefit plans. The pilot pension obligation alone is estimated to be $575 million for 2004, and $333 million for 2005.
These large obligations did not result from the Company's failure to fund the plan in accordance with minimum legal requirements. Rather, the precipitous decline in the equity markets combined with the very low current interest rates have driven up the Company's funding obligations to unacceptable levels.
Nor have these enormous obligations resulted from increases in retirement benefits. As stated, the pilots have agreed to substantial reductions in their benefit accruals, and the large pay cuts they have agreed to also reduce their benefits under the defined benefit plan. The Company cannot make these large pension payments, at least not on the schedule required by current law. Additionally, the ATSB has advised the Company that it will not approve the loan guarantee if the Company cannot restructure these large pension funding obligations coming due over the seven-year loan guarantee period. Without the loan guarantee, US Airways cannot continue to operate.
Present law contains two methods of allowing employers to restructure their pension obligations. However, neither of these methods will help US Airways. The traditional funding waiver permitted under the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) will not solve the pension funding problem for US Airways. The extension of the amortization period for certain unfunded liabilities permitted under the Internal Revenue Code and ERISA likewise will not help US Airways. Both the PBGC and the IRS have said that they do not have the authority to help US Airways in restructuring the pension obligation in a manner that would provide adequate relief short of plan termination.
In 1999, the US Airways pilots' retirement plan had enough assets to cover approximately 97% of the pension benefit liabilities under the plan. In 2000, the plan was more than fully funded, with assets covering 104% of benefit liabilities. By 2002, however, the level of funded benefits dropped to 74% and it is estimated that, as of January 1, 2003, the plan is only 50% funded. Because the benefit funding level is less than 80%, so-called "deficit reduction" funding laws kick in, requiring the Company to make extraordinary additional pension contributions.
US Airways is not alone in facing astronomical increases in pension contributions this year. In 1999 and 2000, the defined benefit plans sponsored by other airlines were also at or in excess of 100% funding, but by the end of 2002, saw their funding levels drop significantly. In one plan, for example, the funding level exceeded 140% in the year 2000, but is now less than 80%. It is important to point out that all of these plans, including the US Airways pilots plan, met the minimum funding requirements set forth in ERISA and Internal Revenue Code. In fact many of these plans, including the US Airways pilots plan, had significant credit balances in their funding standard accounts at the beginning of 2002. This is an indication that they had been funded in excess of the minimum funding requirements in prior years.
However, current low interest rates and abysmal market performance have combined to create a pension funding crisis in our country, as reported in the lead story on the front page of the New York Times yesterday. Interest rates are at levels not seen since the 1960s, and stocks are experiencing their longest and deepest bear market since the Great Depression. Employers, and in particular airline carriers, are now required to contribute additional funding to pension plans when they can least afford to pay.
We are confident that Congress ultimately will enact long-term relief. However, US Airways does not have time to wait for such long-term relief. Given the time constraints of the ATSB and the bankruptcy proceeding, the pension funding issue at US Airways must be resolved within a matter of a few weeks.
There has been much discussion lately about whether traditional defined benefit plans are the best retirement vehicles from many of America's workers. In a country where most workers change jobs on a regular basis, airline pilots are somewhat unique. They tend to work for the same employer their entire career, making traditional defined benefit plans the ideal mechanism for providing a major portion of their retirement benefits. While other workers need portability, airline pilots need a pension promise they can count on from their one and only employer.
ALPA strongly encourages the Senate to pass S. 119. Congress has historically recognized the unique circumstances of certain employers and has enacted special funding rules for certain employers and certain plans. This has been done in the past for LTV, for Greyhound and for TWA due to the unique circumstances involved in each case. We feel that US Airways is in a unique and deserving situation also. US Airways is the largest air carrier east of the Mississippi. It was significantly impacted by the events on 9/11 and the resulting extended closure of Reagan National Airport. US Airways has successfully positioned itself to emerge from bankruptcy within weeks. The ATSB is requiring US Airways to resolve its pension funding problem prior to loan approval, which would permit the Company to emerge from bankruptcy. Although other airlines face high pension contributions in the coming year or years, US Airways does not have enough time to wait for a long-term solution to this national crisis.
S. 119 would provide a special minimum pension funding rule for US Airways. Under S. 119, the US Airways defined benefit plans would be treated as if they had been terminated and then restored as of January 1, 2003, with the plans' unfunded accrued liability and unfunded current liability amortized over a 30-year period. The 30-year amortization period is the period currently allowed in the law for plans that are terminated and later restored to their sponsors. Such a 30-year amortization would permit the Company to, in effect, refinance, not eliminate, its funding obligations to the plans. This would allow US Airways to continue to maintain and fund a significantly less expensive retirement plan for its employees.
Enactment of S. 119 would protect the retirement benefits of US Airways pilots, who would lose hundred of millions of dollars in pension benefits that are not guaranteed by the PBGC if the plan is terminated. It also protects the solvency of the PBGC by providing substantial funding for a plan that if terminated, would leave the PBGC with billions of dollars in liabilities that will not be recovered in bankruptcy.
In conclusion, ALPA urges the Senate to enact S. 119.