Originally created 05/12/05

Airlines may go Chapter 11 route

WASHINGTON -- Now that United Airlines and US Airways have been granted bankruptcy court approval to terminate their pension obligations, competitive pressure is mounting on other struggling carriers to seek relief.

Industry officials and analysts said they don't expect other carriers to file for bankruptcy merely to shed the cost of underfunded pension plans.

But they warned that airlines faced with severe financial troub¤les might be a little more inclined to seek a Chapter 11 reorganization, given the precedent established by US Airways Group Inc. and United's parent company, UAL Corp.

"It could help tip the scales," said Phillip Baggaley, Standard & Poor's airline analyst.

A bankruptcy judge on Tuesday authorized UAL to dump four pension plans and shift $6.6 billion in pension obligations to Pension Benefit Guaranty Corp., a government agency, as a way of reducing its costs. Bankrupt US Airways previously terminated nearly $1 billion in pension obligations.

Several airlines that hope to avoid bankruptcy already are lobbying Congress for pension reform that would allow them to freeze their current obligations outside Chapter 11, while giving them more time to meet large - and growing - funding shortfalls. On Wednesday, flight attendants at American Airlines, a unit of AMR Corp., gathered in Washington to lobby for such reform.

Even though passenger traffic is rising, the bulk of the industry is suffering in a big way because of soaring fuel prices, unprofitably cheap fares and fierce competition from low-cost carriers. Losses have exceeded $30 billion since 2001, and U.S. carriers are on pace to lose an additional $5 billion in 2005, analysts estimate.

Delta Air Lines Inc. tops the list of U.S. airlines with underfunded pensions, with a deficit of $5.3 billion, according to S&P. The funding deficit is $3.8 billion at Northwest Airlines Corp., $2.7 billion at American Airlines and $1.6 billion at Continental Airlines Inc.

By contrast, profitable low-cost airlines such as Southwest Airlines Co. and JetBlue Airways Corp. have defined contribution plans, such as 401(k)s, meaning they don't have pension funding gaps. They also run operations that are vastly more efficient in terms of how employees and aircraft are deployed.

"The Southwests and JetBlues are the industry benchmark," said John Heimlich, chief economist at the Air Transport Association, a Washington-based industry group. By shedding its pension obligations, "United has found one way to get closer to that benchmark."

Mr. Heimlich said he expects non bankrupt carriers to take a hybrid approach to solving the problem, lobbying Congress for pension reform while working with employee groups.

There is nothing in the federal law that covers pension benefit plans, the Employee Retirement Income Security Act, that says a company must file for Chapter 11 in order to freeze a pension plan and hand over the obligations to the federal pension benefit agency.

But as a practical matter, it isn't likely to happen any other way, lawyers and benefits specialists said.

William J. Rochelle, a bankruptcy lawyer with Fulbright and Jaworski in New York, said Congress needs to devise some way for airlines and other businesses, such as automakers and truckers, to lighten their pension burden outside of bankruptcy court, where workers' retirement benefits are quite likely to be gutted at the hands of banks and other creditors.

James F. Hendricks, a senior partner at the law firm Fisher & Phillips LLP in Chicago, said he expects airline executives to work very hard for some kind of compromise from Congress so that they can avoid handing over their fates to creditors, who might just seek liquidation.

"I don't think any airline wants to go into bankruptcy," said Mr. Hendricks, who represents companies negotiating with labor groups. "The question is, will they be forced to?"


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