The US federal government said on Friday that it had reached an agreement to take over all four of United Airlines' employee pension plans, with a shortfall of US$9.8 billion, making it the biggest pension failure since the government began insuring pension benefits in 1974.
The agreement, if approved by a federal bankruptcy judge, would remove an obstacle to the UAL Corp.'s emergence from bankruptcy protection, which it entered in December 2002; UAL owns United.
The airline has been trying to raise at least US$2 billion in financing and has said it has preliminary interest from financial institutions. But none have been willing to commit themselves without a resolution of its pension issue.
United issued a statement on Friday saying the agreement "resolves one of the major issues standing between United and its successful exit from bankruptcy."
The pilots' union had already agreed that United could terminate its pension plan. But the move angered flight attendants, who had hoped to preserve their plan.
The agreement would put new pressure on other big airlines, which also have traditional pension plans and face big deficits in them. United executives estimate the airline would need to spend only about US$200 million a year on substitute plans like a 401(k) program.
That would give it a significant cost advantage over rivals like Northwest Airlines, Delta Air Lines, Continental Airlines and American Airlines, which is owned by the AMR Corp and could lead them to try to match United's action.
The termination of United's pension plans, though long expected, will also worsen the finances of the government's Pension Benefit Guaranty Corp, which has been coping with a number of large pension failures since 2002. Some economists and analysts have warned that the agency is looking increasingly like a candidate for a taxpayer bailout.
Bradley Belt, the agency's executive director, said that the failure of United's plans "highlights the need for the comprehensive pension reform" that the Bush administration proposed this year.
"Until Congress fixes the rules that allow pension plans to become so underfunded, the insurance program and plan participants are at risk of suffering large financial losses," Belt said in a statement.
Neither the government nor the airline offered specific details of their agreement, which eliminates the need for United to persuade the bankruptcy judge that it must scuttle its pension plans. A federal official said that crucial terms of the agreement, like the timing of the pension terminations, still had to be worked out. But if the agreement goes ahead as planned, the government will take over the four pension plans and will assume the obligation of paying United's retirees.
For some retirees, that will mean reductions in payments, because the government's insurance has limits.
The government estimated on Friday that the pension agency will cover about US$6.6 billion of United's shortfall. The remainder, about US$3.2 billion, will be borne by United's retirees, in the form of benefit reductions. Different retirees will be affected in different ways, depending on their age and other factors. In general, the pilots are expected to lose the most, because they have been promised rich pensions that exceed the government's insurance limits.