American Airlines, whose parent company filed for bankruptcy in November, said this week that it wants to terminate its four pension plans for 130,000 workers and retirees and ask the federal government’s Pension Benefit Guarantee Corp. to bail out its unfunded pension obligations to the tune of $9 billion. It would be the largest PBGC bailout ever. Without the congressional relief, the gap would have been smaller, the PBGC said.
The move, which needs approval from a New York judge, has angered the PBGC and labor unions representing American Airlines workers, in part because the airline had $4 billion in cash when it filed for bankruptcy and because it hasn’t yet made any proposal for restructuring its massive debt to financial institutions.
“American and other carriers have repeatedly asked Congress to give them funding relief in the last six years. More than $2 billion was diverted from their pension funds to their bankruptcy war chest,” Josh Gotbaum, director of the PBGC, said Friday. “In effect, the Congress of the United States and the employees of American Airlines provided half of the money to sustain American in bankruptcy.”
One of those congressional measures, the Pension Protection Act of 2006, gave airlines the flexibility to cut pension fund contributions for two years and spread them out in later years. PBGC analysts estimate that American Airlines was able to cut its pension fund contributions by $1.1 billion in 2006 and 2007 thanks to that legislation.
Some airlines that had already gone bankrupt received even greater leeway on contributions, which then-Sen. Barack Obama decried in 2006. He said it “will distort the market in a way that is unnecessary and unfair to the 10,000 American Airlines workers and retirees in Illinois. Both as a matter of retirement policy and aviation policy, this bill should not favor one airline over another.”
American Airlines — and its unions — kept lobbying for additional relief. In 2007, Sen. Kay Bailey Hutchison (R-Tex.) led a successful effort to tack new airline relief onto a defense appropriation for the Iraq war effort. It passed 80 to 14.
The new bill allowed American Airlines, Continental Airlines and a few others to tweak their accounting, raising assumptions for how much money its pension funds would earn from investments to 8.25 percent a year, thus again reducing the amount the companies were required to put aside. As a result, the PBGC has calculated, American Airlines saved an additional $1 billion from 2008 through 2011.
Even in good times, that would be a high rate of return compared with rates insurance companies use in calculating annuity costs. But the economic downturn made investment returns even worse — and added to the shortfall in American’s pension funds.