What I keep hearing over and over from American Airlines employees is that they’re worried about bankruptcy.
- They’re worried about what happens to their pensions
- And they’re reluctant to take a voluntary ‘early out’ retirement option, because they’re afraid the promised future payments, especially future health care payments, aren’t going to be there.
Airline Pensions Are Underfunded By Design
Airline pensions are overall underfunded, and it’s because airlines lobbied Congress for special legislative provisions that let them underfund the pensions (‘airline pension relief’). Airlines have been allowed to make lower contributions to employee pensions than a similar-situated business in another industry would have to make and they’re allowed to assume outsized future investment returns which further limit how much airlines have to pay in to fund pensions.
U.S. carriers in the past claimed that they couldn’t compete against foreign airlines with governments in their back pocket, but U.S. airlines have been subsidized by special government concessions on pensions (among many other things).
As airlines – especially American Airlines – borrowed money to buy planes and buy back stock, they also effectively borrowed money for their share buybacks from their employees’ pensions. So if an airline goes into bankruptcy and offloads its pension obligations onto the Pension Benefit Guaranty Corporation (which United, Delta, and US Airways have done), employees will get less than what’s been promised.
Retiree Obligations Aren’t Protected In Bankruptcy The Way Current Workers Are
At a meeting with flight attendants this past Wednesday, American Airlines President Robert Isom tried to comfort those considering taking early retirement that there’s not really any more risk in doing so than staying and continuing to work. He suggested everyone is in the same position, since if the airline can’t pay its bills that applies both to continuing to pay those who stay with the airline along with those who have taken early departure packages.
This simply isn’t true. In fact Isom knows perfectly well that accrued payroll is protected in bankruptcy, but retiree obligations like promised health reimbursement accounts for people offered early outs are not.
Moreover outside of a liquidation scenario, employees who stick with the company continue to work. American, United, and Delta have all flown through Chapter 11 bankruptcy before. Employees continue to be paid for their work – while unsecured creditors usually take a haircut.
Taking Early Retirement Is A Bet Against Bankruptcy
Employees choosing to accept a deal that’s “leave now, get compensation later” are betting that the airline doesn’t go into bankruptcy. And American Airlines is the carrier usually judged most likely to do so and indeed based on the price of credit default swaps for American’s unsecured debt, the market believes this is very likely to happen over the next several years.
When that does current employees could be left without some of the inducements that led them to leave, and retirees may be looking at risk to their pensions. And when that happens, it’s worth remembering that Congress made it possible for the airline to borrow money from those pensions for their stock buybacks.
U.S. Bankruptcy Law Needs Reform
Bankruptcy reform is needed in this country. If retirement funds – which are effectively just deferred compensation – aren’t treated the same way as payroll funds owed, the employees should at least see stock in any newly reconstituted company in exchange for taking their losses, rather than having commitments discharged by the court.
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