United Airlines and its unions are headed for a showdown where the options look to be bad and worse. In 2002, tripped up by accumulated missteps, the company filed Chapter 11. Last week, United announced a deal that, if approved by the U.S. bankruptcy court, would discount retiree pensions and shift responsibility to the Pension Benefit Guaranty Corp. Since the federal agency is itself strapped for funds, the pact could be a raw deal for taxpayers as well as United’s employees and retirees. Yet there may not be a good alternative.
United says it can survive only if it slashes costs and sheds pension liabilities. The unions have been unable to prove those calculations wrong. Higher fuel prices have hurt all the airlines and United results continue to lag.
For the unions, the conundrum is this: They oppose the PBGC’s takeover of the pensions because it means current retirees and today’s employees would get a fraction of the promised benefits. Flight attendants, for example, could lose a third of their retirement pay. Overall, the PBGC may cover $6.6 billion of United’s $9.8 billion in pension liabilities.
The sense of betrayal among union members can hardly be understated. Many retirees gave decades of service to United and rely on their pensions to anchor their retirement.
Predictably, two of the four big unions affected by the United plan – representing mechanics and flight attendants – have threatened intermittent strikes. Their bitterness is understandable, but work stoppages would surely set back their prospects by forcing United’s customers to flee to other airlines.
The United bailout would dwarf the previous record PBGC takeover, the $3.6 billion bailout of Bethlehem Steel’s pension in 2002. The PBGC is funded by fees, which are paid by the small percentage of U.S. companies that still offer defined benefit pensions, but those premiums aren’t covering the liabilities. So, the PBGC is running a $23.3 billion deficit as it tries to cover the 3,400 failed pension plans it has absorbed to date. The PBGC’s shaky finances, coupled with big new liabilities like the proposed United deal, raise the risk that Congress may have to rescue the agency with a taxpayer bailout.
Here’s the catch: If United can’t shed its pensions, it may go out of business, forcing the PBGC to take over the pension plans anyway. The result would be not just benefit reductions for retirees, but job losses for United’s 62,000 current employees, including 6,000 Coloradans. If unions don’t like the pension takeover, they need to offer a realistic alternative.
