ORAL STATEMENT OF
CAPTAIN DUANE E. WOERTH, PRESIDENT
AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
BEFORE THE U.S. SENATE COMMITTEE ON COMMERCE
THE IMPACT OF FEDERAL PENSION AND BANKRUPTCY POLICY
ON THE FINANCIAL HEALTH OF THE AIRLINE INDUSTRY
October 7, 2004
Good morning. I am Captain Duane Woerth, President of the Air Line Pilots Association, International, which represents 64,000 airline pilots who fly for 43 U.S. and Canadian airlines. On behalf of ALPA, I want to thank the Committee for giving us the opportunity to present our views about the pension funding crisis facing the U.S. airline industry.
As little as three years ago, few observers would have predicted the extent to which airline worker pensions would be devastated by a "perfect storm" of low interest rates, a diminished stock market, and airline operating losses.
For example, the US Airways pilotsí plan, which had been in excellent shape just two years before the company initially filed for bankruptcy, went from being funded at more than 100% in 2000, to just 74% in 2002.
Active and retired pilots of US Airways lost $1.9 billion in accrued benefits that were not funded by the plan and not insured by the PBGC. This loss amounts to just over one-half of the $3.7 billion in total benefits that pilots had already earned, at the time the plan terminated.
At United Airlines, pilots have negotiated changes to their pension plan, the net effect of which is a temporary freeze on accrued benefits for all pilots, and a permanent freeze on accrued benefits for some pilots, including those who already had at least 27 years of service under the plan.
Both of these blows came while the airlines were in bankruptcy. Because of a potential domino effect, we face the prospect of one or more additional bankruptcy filings, and there is no doubt in my mind that if that happens, those pension plans will be put into play as well.
The irony of all this is that to a large extent, this situation could have been avoided. But that is history now. Our duty today is to avoid airlines dumping billions in pension obligations onto the PBGC, which is what we all fear the most because everyone gets hurt under that scenario. I believe that avoiding disaster is possible, if we apply creative solutions, and if the Congress takes swift, effective action now.
Congress granted temporary relief to the airlines and the steel industry for certain deficit reduction contributions, or DRCs, as part of the Pension Funding Equity Act of 2004. What I am calling on Congress to do is enact a permanent solution by allowing airlines to use a longer amortization period to fund their pension plansí unfunded liabilities.
The biggest obstacle to resolving the current pension crisis is the PBGCís special rule for accelerated DRCs, which kicks in when funding drops below 80 per cent, or even 90 per cent in some cases. This creates a crippling cash flow problem for affected airlines. Instead of amortizing unfunded liability over 30 years, which used to be the rule, airlines now have three to five years for unfunded current liability, which is based on extremely low interest rates. This amounts to a balloon payment, much like forcing homeowners to pay off their 30-year mortgages over the same time span as a typical car loan.
This cash flow burden, in turn, makes it more difficult, if not impossible, for a distressed carrier to turn to Wall Street for additional financing. A carrier eventually can find itself in what we call a "coffin corner, " which is pilot talk for "Iím out of performance, Iím out of options, and unless something changes, pretty soon Iím going to be out of altitude."
The good news about the pension crisis is that it is only temporary. Already we are seeing signs that the economy is recovering, which in turn is causing interest rates and the stock market to increase as well. Eventually, the funding problems created by the "perfect storm" will subside. Our goal is to ensure that financially troubled airlines do not succumb to the storm before then.
But there is more to be done Ė and that is why pilots are working to develop innovative approaches to pension plans. In general, this means reexamining the defined benefit plans at each airline and determining whether it makes sense to move toward plans that rely more on a defined contribution component. The negotiated outcome at each airline will depend on the soundness of that carrierís finances and pension plans, but overall, I predict a trend away from the problematic defined benefit plans toward more predictable defined contribution plans.
Having said that, these solutions will mean nothing if we fail to get the DRC problem under control. An analysis performed at one legacy carrier compared the contributions that would be required over the next 15 years, under two scenarios. The first option was that the plan remained unchanged. Under the second scenario, the plan was immediately frozen. Over the ensuing 15 years, the frozen plan would require less than one-third of the contributions than the unfrozen plan... but because of the DRC rules, this entire amount would have to be paid in the first five years of the 15-year scenario.
So regardless of the sacrifices the pilots at a distressed airline might make in their pension benefits to save their company, accelerated DRCs still would present a major impediment to financial recovery.
But if Congress acts expeditiously to eliminate the accelerated DRC obstacle, everyone will benefit.
First and foremost, it is a win for workers, who will have a greater likelihood of receiving the benefits they have already earned under their pension plans. Second, it is a win for the PBGC and taxpayers, because it greatly reduces the chances of more distress plan terminations.
Finally, it is a win for the airline industry and the flying public. Airlines will be able 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 for airlines, and should, in the case of some legacy carriers, help them to emerge from or avoid bankruptcy. Airlines also will have breathing room to negotiate the appropriate changes that I mentioned earlier, to rebalance their pension mix in a way that benefits both the workers and the corporation.
In summary, we believe that our proposal to allow long-term amortization of unfunded liability will benefit workers, maintain healthy airlines, keep defined benefit plans out of the hands of the PBGC, open the doors to financial markets, and allow the industry the time it needs to undertake a strategic, deliberate restructuring that provides employees with a secure retirement. Again, Mr. Chairman, I appreciate this opportunity to appear before you, and I would be happy to answer any questions the Committee may have.