American Airlines Employees Are Worried About Losing Pensions, Health Care In Bankruptcy

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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About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Did this “pension reform” occur before or after Eastern and Pan Am folded? How are there retirees doing 30 years after the demise of their former employers?

  2. One more item should be added why employees worried about taking early retirement. Parker (CEO) cannot be trusted. In past the many retirees accepted early retirement with the promise they will continue with D2 travel. Parker came from USAIR and downgraded this promised benefit. More recently many (800) flight attendants accepted early retirement package after being told this is the “best and final” retirement offer and within 3 months a better offer was made not available to them.

  3. Ah, stock buybacks. The biggest waste of capital in American companies. Congress should cut out stock buybacks, ASAP. But Republicans love that welfare for corporations and the rich! Considering that there are $4.5 trillion worth of credit of special lines from the Federal Reserve. And companies have over $10 trillion of debt for stock buybacks. All the pigs will be back at the trough! Including AA!

  4. I can tell you from personal experience as a current employee of 34 years , when we went through BK, UA washed out our pensions and our ESOP stock and completely scr#$d us. UA had illegally not been funding our pensions for years. Our pensions have been handed off to the PBGC. AA employee’s shld be very worried.

  5. Companies and society have created a mess. Very few people still have pensions. Without pensions or stock options there is no reason for employees to be loyal since companies are loyal to the employee either.

    It is why many people will jump from company to company whenever they can get a better compensation package.

    Don’t know the solution but the current situation just compensates a few too highly and screws everyone else. Thankfully I am near retirement because I don’t envy today’s young or middle age workers.

  6. Hired in 85, retired in 17, lost our AA/US pension years ago. We now get a Gov’t Funded Pension of $69.00 per month. Top exec’s certainly didn’t loose their money.

  7. AA has a history of not honoring retiree obligations. Specifically, in the late 1990’s – before the bankruptcy – management suddenly and arbitrarily ended the retiree health benefits for Management and Clerical personnel, even though these employees paid for this funding throughout long careers. They specifically picked on this group since it was non Union and and retirees are an easy target since they are scattered all over the country with no central organization.. As for those who think they are protected by Unions, don’t kid yourselves. In bankruptcy all the Unions care about are the active employees lining their coffers with dues. You will be left out in the cold too.

  8. Somewhat misleading. Retiree “obligations” such as travel or healthcare might not be honored, but retiree pensions certainly are protected.

  9. Last weeks FR24 podcast had an interesting segment on how AA finances their planes. Essentially they pay for the planes in cash. Then they give the planes to a new entity which sells bonds against the value of the planes. American pays the new entity enough to cover bond payments. To get high ratings and pay low interest on these bonds the entities are separate from American and would not be part of a Chapter 11 filing. Therefore, American needs to pay for all these assets regardless of filing for Chapter 11. This makes bankruptcy unlikely.

  10. The only pension reform that needs to happen is to eliminate pensions completely. Shareholders and taxpayers (in case of government workers) should not have to suffer and be tied down for people who worked at a company or in the government in the past.

    Pensions don’t make sense in the 21st century. They keep people in jobs that they have no business being in and allow unions to force bad workers on companies to protect their pensions. We’d be much better off if companies and governments paid their employees a bit more in lieu of pensions. No more future liabilities. No more taxpayers 40 years from now supporting workers of today.

  11. @jackson Pensions are a contract between employer and employee. You take less money on the basis of getting money later. Its a safer form of stock options, or at least it was. If you want to argue that employees should get paid a living wage in every line of work, health care should be universal (so that a bankruptcy can’t wipe out retirement) and companies should have a responsibility to their EMPLOYEES as well as to their stock owners, we can talk about removing retirement funds. Until then, we are basically leaving retirement up to the government, because when people don’t have enough money to retire, they basically fall upon the state to cover their costs, be it in housing, medical, etc.

  12. The person above gets 69.00….I started in 83 left in 04, mine is 400.00 because I took the penalty to have it continued to my wife if I die first

  13. AA employees have good reason to fear that AA will not fulfill it’s promises. Two words, Doug Parker. He is intimately familiar with bankruptcy and will most likely be going for a “hat trick.”. Most AA current pilots know this and do not trust Isom and management’s promise. The pilots know that they may be in the same storm but they are not even close to being in the same boat!
    Compare this to SWA pilots, many who have taken the early out option. They trust management.

  14. I have never understood why people are willing to work for decades with such an unsecured promise of money to come from a leveraged company in a volatile business.


    More money now, or a vested 401(k) is the only way to go.

  15. @ toomanybooks. I agree. Employees and small business owners should be planning for their retirement by contributing to three “pots”; the traditional 401k or IRA, the Roth IRA and the Health Savings Account. These accounts are portable and NOT owned or held financial hostage by the employer. Unfortunately I learned of the importance of the mix AFTER I “retired” (Age 60 Rule) and started paying taxes on distributions and my funded Social Security “benefits.”
    Self-funded retirement programs will be a MUST if governments are ever to reduce the cost of all labor, especially in those positions that are 20 years and eligible for retirement benefits.
    The mix of employee and employer owned programs that are available to AA pilots is good but not great as only the self funded accounts may survive bankruptcy court.
    NYC, ORD, DET, SEA, PDX, AUS and all of California employees, your next in line for the courthouse.
    Just Sayin’

  16. Depends on how these are currently funded.

    If AA has funded your HRA and it’s showing as an account balance, I’d say it is probably not at risk.

    I suspect since AA is self-insured, they’re only paying actual claims and expenses as they are incurred, which means whatever was promised at definitely at risk in a filing.

  17. @John C if AA had notb taken away the great pass benefits we had at USAirways all employees would have traveled at Date of Hire. Every day we have worked for this company (me 38 years) should have the right to get on a flight before someone with six months on a first come first serve basis. Usairways always treated their retirees with respect until AA and its unions decided that seniority was not welcome. Every other airline honors length of service and retirees. Just not the NEW American.

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