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Delta
and Northwest Seek Relief for Pension Plans
By Susan Carey and Evan Perez, Wall Street Journal
September
16, 2005
In their twin bankruptcy filings, Delta Air Lines and Northwest Airlines both omitted pension obligations from the bills they sought court-approval to pay -- and warned they would carefully weigh how to ease their multibillion-dollar commitments to tens of thousands of active and retired workers.
In first-day filings in the U.S. Bankruptcy Court in New York, the No. 3 and No. 4 U.S. airlines respectively by passenger traffic said they would continue to press for favorable pension-legislation reform. If the legislative effort fails, Northwest said it may seek to terminate its pension plans.
Delta, which had rallied workers and retirees to help win congressional aid, said it hadn't yet "initiated the process to terminate the plans" but would keep lobbying for legislation that "might make the pension plans more affordable."
Still, Delta retirees were nervous. "We are very concerned about the status of our medical and retirement benefits, especially in light of the fact that Delta has said it does not intend to meet their funding obligations for the next scheduled payment to the pension plan," said Cathy Cone, chairwoman of the Delta Air Lines Retirement Committee, which represents about 10,000 Delta retirees.
Lawmakers, airline executives and others will be watching how the carriers use the reorganization process to restructure pension obligations. If the carriers shed their plans and reduce costs, they may be able to emerge in good enough shape to cope with tough discount airlines, passengers who can search out the lowest fares with a mouse click and high jet-fuel prices. But the greater burden on the nation's pension-insurance program could raise further fears of a taxpayer bailout.
Delta says its pension plans are underfunded by $5.3 billion, while Northwest says its plans are underfunded by $3.8 billion, and both are required to make hefty payments to their plans in coming years. But the Pension Benefit Guaranty Corp., a federal pension insurer that would have to shoulder the plans if the airlines shed them, tallies the pension tab under different assumptions. It estimates it would have to pay out $8.4 billion in unfunded liabilities to Delta employees and $2.8 billion to Northwest employees if the plans were terminated, while neither group would receive the total amount owed to it.
Under intense lobbying by Delta, Northwest and the Air Line Pilots Association union, Congress has drafted several bills to overhaul pension law. The current version the airlines favor would give them 14 years to amortize their pension underfunding instead of the current three to five years.
So far, none of the bills has made it into law, and the timing remains uncertain. Earlier this summer, Northwest Chief Executive Doug Steenland said he thought the 14-year bill would be sufficient for Northwest. Gerald Grinstein, chief executive of Delta, said Wednesday that 14 years would be insufficient for his company. Atlanta-based Delta owes $135 million in pension payments to its plans by year's end. It said Wednesday that it was going to skip that payment. Creditors of both airlines could balk at such outflows of cash under any circumstances.
The pension liabilities are part of the holdover of the so-called legacy airlines, the ones born before U.S. airline deregulation. Delta and Northwest join UAL Corp.'s United Airlines and US Airways Group Inc. in seeking Chapter 11 protection to slash costs, strengthen their balance sheets and deal with the underfunded pension plans.
In its court filing, Delta said it was down to $1.2 billion at the end of August, and it blamed high fuel costs for forcing it into bankruptcy court despite cost savings from a year-old restructuring plan. And Hurricane Katrina struck refineries that supply Atlanta, Delta's main hub.
Northwest's Mr. Steenland reiterated in a court document that the airline hopes it can keep the pension plans going so employees will receive the benefits they have earned, and avoid the "trauma" that affected workers at United and US Airways when their plans were jettisoned. The PBGC assumed those liabilities and now is paying retirement benefits to those workers.
"Out of caution," Mr. Steenland noted in the court filing, "Northwest must reserve its right to seek to terminate its defined-benefit pension plans, depending on what legislation, if any, is ultimately enacted," among other factors. One reason the carrier had cited for filing for protection Wednesday was to avoid a $65 million pension payment due yesterday.
Northwest, which said Wednesday that it will shrink as it restructures, in its initial court filings said it had identified 13 planes in its 433-aircraft fleet that it wants to return to lessors, and many more that have the potential to be rejected. Its pilots union, in an email to members last night, said it was informed by management that Northwest intends to reduce the number of hours its mainline fleet operates by 13%, resulting in 400 pilot furloughs over the next eight months. Currently 500 pilots are laid off, leaving the carrier with about 5,000 active pilots. Northwest officials couldn't be reached for comment.
At a court hearing in New York yesterday, Delta got approval from U.S.
Bankruptcy Judge Prudence Carter Beatty to continue to pay key vendors. Delta attorney Marshall Huebner said Delta was planning to close today on its $1.7 billion debtor-in-possession financing from lenders led by General Electric Co.'s commercial-financing unit and Morgan Stanley, plus $350 million in additional financing from American Express Co.
Separately, a bankruptcy judge overseeing the filing of US Airways Group is expected to rule today on the carrier's reorganization plan, which includes its combination with America West Holdings Corp.
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