Airlines in bankruptcy don't have competitive advantage, GAO study says

But their pension defaults are hurting federal insurer

June 23, 2005|By COX NEWS SERVICE

WASHINGTON - When airlines undergoing bankruptcy reorganization continue flying, as United Airlines and US Airways are, they don't inflict unfair competition on other carriers, a federal investigator told Congress yesterday.

JayEtta Z. Hecker, of the Government Accountability Office, told the House aviation subcommittee that investigators "found no clear evidence that, historically, airlines in bankruptcy have financially harmed competing airlines."

Since the industry was deregulated in 1978, all but a handful of the 160 airlines that filed for bankruptcy disappeared, she said.

"Airlines fail at a higher rate than most other types of companies," Hecker said. But "evidence does not suggest that airlines in bankruptcy contribute to industry overcapacity or that bankrupt airlines harm competitors by reducing fares below what other airlines are charging."

Hecker dismissed the common assertion that airlines seek bankruptcy protection as a strategy to gain a competitive advantage. "Bankruptcy involves many costs, and given the poor track record [for recovery], companies are likely to use it only as a last resort," she said.

While a carrier's trip to bankruptcy court may not hurt other airlines, it does seriously harm pension plan participants, as well as the Pension Benefits Guarantee Corp., the federal agency that insures those pensions, she said.

Airline workers whose pension plans have been turned over to the federal agency have seen sharp benefit cuts because the insurer guarantees pensions only to a certain level. The current maximum level is $45,614 a year, assuming retirement at age 65.

But workers who retire at 60 - the mandatory retirement age for pilots - have a maximum annual benefit of only $29,649, far less than what most pilots were promised under labor agreements.

The airline bankruptcies are severely straining the resources of the federal pension insurer, which already has a deficit of $23.3 billion.

The pension agency - financed by industry insurance premiums - is still able to make the payments owed to current retirees with failed pension plans, but its long-term solvency is in question.

Lawmakers fear the agency may wind up needing a bailout exceeding the one that cost the taxpayers $480.9 billion in the savings and loans scandal of the 1980s. United's parent, UAL Corp., stopped making payments to its pension plans last year. In April, the bankruptcy court approved a deal with the federal pension agency to turn over United's retirement plans, which were underfinanced by $9.8 billion.

US Airways Group Inc. also declared bankruptcy and asked the pension insurer to assume its pension plans.

Delta Air Lines Inc.'s pension plans are under financed by roughly $5.3 billion, while Northwest Airlines Corp.'s are short $3.8 billion.

Delta and Northwest are lobbying Congress to adopt legislation to give carriers 25 years to provide funding for benefits already promised. It also would freeze current pension benefits and move workers into "defined contribution" plans, such as 401(k) plans.

D. Scott Yohe, a senior vice president for Delta Air Lines, said Congress should support the legislation that "provides a narrow, targeted solution to the unique pension situation facing some of our nation's airlines as they work hard to transform themselves outside of bankruptcy."

But Bradley D. Belt, the pension agency's executive director, told the panel that giving airlines special consideration would be a mistake, because "funding rules should apply to all."

If Congress were to carve out an easier payment schedule for airlines, other troubled industries, such as in the automobile and textile sectors, would line up to ask: "What about us?" he said.

The solution to the pension financing problem would not be to "get in a deeper hole" over a longer period by allowing reduced funding, he said. Rather, "the question is how you fill the hole."

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