Continental Airlines Holdings Corp. yesterday agreed to pay $80.5 million immediately and come up with as much as $610 million in the future to guarantee that Eastern Air Lines employees and retirees will receive their full pensions.
In some respects, the agreement represents the 1983 bankruptcy of Continental Airlines coming home. That bankruptcy eliminated Continental's pensions, with the employees and federal regulators powerless to go after Continental's parent company, Texas Air Corp., for the benefits. Texas Air, which has changed its name to Continental Airline Holdings, later acquired Eastern, which it put into bankruptcy last year.
In the wake of the Continental bankruptcy, Congress changed the law to make the parent company potentially liable for the pension obligations of a bankrupt subsidiary. Yesterday was the first time in a major pension case that the parent corporation has in fact assumed that liability.
The agreement was hammered out by the federal Pension Benefit Guaranty Corp. (PBGC), Continental, Eastern and Eastern's unsecured creditors after months of intense negotiations over Eastern's unfunded pension liability, which the PBGC estimated yesterday at $720 million.
Under the deal, Eastern must pump $30 million into the pension fund. That money will come from money that has been put in an escrow account to repay Eastern's unsecured creditors. In addition, the PBGC, which provides a federal guarantee for workers' pensions, will continue to assert a claim for $565 million in bankruptcy court.
But even if the PBGC never receives a dime or receives far less than a dollar-for-dollar payback of the money it is owed, Eastern workers and retirees are fully protected under the agreement because Continental has guaranteed the total amount. Continental's obligation will be reduced if the PBGC receives further funding through the bankruptcy process.
In addition to the $80.5 million that Continental will pay immediately, the company will begin making monthly payments of up to $5 million each that will go into a trust to be created when the Eastern pension plans are terminated in October. The termination of the plans means that employees will accrue no further benefits after that date. But Jim Ashlock, a veteran Eastern employee and a spokesman for the company, said that employees were more concerned about full funding of the benefits already earned.
Continental spokesman Art Kent said that the company was pleased with the deal. Continental has estimated that it will take only $378 million -- not the $610 million that the PBGC estimates -- to make the plans whole and that the obligation might be paid off by the end of 1992. At the end of a 12-year period, if any money is still owed on the pensions, Continental will pay it off in a balloon payment. Continental's obligations also are backed by collateral.