By Mary Williams Walsh
A pension measure tucked into last month’s Iraq war spending bill is causing some leading members of Congress to complain that American Airlines got a break worth almost $2 billion without proper scrutiny.
The measure will allow American to greatly reduce its payments into its pension fund over the next 10 years. At the end of 2006, the fund had assets of $8.5 billion and needed an additional $2.5 billion to cover all its obligations. The new provision will allow American to recalculate those numbers, so that the shortfall disappears and the plan looks fully funded.
Continental, along with a small number of regional airlines and a caterer, will also be able to take advantage of the provision. But American, the nation’s largest airline, is by far the biggest beneficiary, according to government calculations.
Some lawmakers who would normally be involved in tax and pension measures say they were shut out of the process.
The measure was introduced by senators from Texas, where American and Continental are based, and Illinois, where American has a big hub at O’Hare International Airport in Chicago.
American sought relief, it said, because two big rivals that went into bankruptcy, Delta and Northwest, had received special breaks in sweeping pension legislation enacted last year. That gave them what American considered a competitive advantage.
The pension measure was added to the war spending bill the day before Congress began a weeklong Memorial Day recess. With the finish line in sight, few lawmakers wanted to hold things up so that they could comb through the intricacies of pension calculations.
In the last few years, American has been putting more than $300 million a year into its pension fund. It will now be able to use that money for other purposes.
The pension fund, meanwhile, has been paying out more than $500 million a year to retirees. So even before the new relief measure, American’s fund needed reliable investment earnings every year to keep from depleting its assets. Now it will need them even more.
American, a unit of the AMR Corporation, said that it had been managing its plans responsibly and that it remained committed to doing so under the new rules.
“Our obligation to fully fund our pensions remains,” a spokeswoman, Mary Frances Fagan, responded in an e-mail message. “The only thing that has changed in the new law is the timing.” She said the relief provision was intended to reduce competitive disadvantages within the airline industry.
All of the major airlines have been struggling to reshape themselves in a world of volatile fuel costs and tough competition from low-fare carriers. Dealing with huge legacy costs has been part of that struggle.
But by giving special pension relief to some airlines, Congress has allowed a handful of companies to avoid the rigorous new rules enacted last year as part of a sweeping overhaul of the federal pension law.
Senator Max Baucus, the Montana Democrat who is chairman of the Finance Committee, one of the panels that has jurisdiction over pension legislation, said that he wanted to “review in the light of day exactly what deal” American and Continental had been given.
Senator Charles Grassley, the Iowa Republican who was chairman of the Finance Committee when the Pension Protection Act was passed and serves as the ranking minority member, said the committee had “spent many months working on a pension bill that took each airline’s status into account.”
“We also took into account the taxpayers who will have to bail out any underfunded airline pension plan.”
By rushing through the new relief without proper analysis, he said, their work had been “undermined.”
Senators Baucus and Grassley wrote American and Continental this month to demand information about how much their pension contributions would fall. Some members of the committee are talking about ways to scale back or even repeal the measure.
The Allied Pilots Association, which represents the pilots at American Airlines and has had run-ins before with management over pensions, is supporting the senators’ effort. Ralph Hunter, the union’s president, said he believed that “it would be ill-advised” for American to reduce its pension contributions just because the new law allows it.
If American’s pension plans were ever to fail, the pilots would lose the most, since they earn pensions that greatly exceed the payouts from the government’s pension insurance program.
When the Pension Protection Act was passed last year, Northwest Airlines and Delta were in bankruptcy and Congress gave them the right to recalculate their pension obligations in a way that would greatly shrink them. For them, the relief will last 17 years.
But Northwest and Delta had to freeze their pension plans. This meant their workers’ benefits ceased to grow – a painful loss for workers, and a watershed change in an industry where pensions have been an important part of compensation. To avoid digging an even deeper hole, Congress decided the freezes were necessary to keep the airlines’ obligations from growing while their contributions were shrinking.
American and the other airlines, however, do not have to freeze their plans under the latest measure. That raises the risk that their plans could get into trouble at some point and have to be taken over by the federal government – the very risk the new pension law was intended to reduce.
Members of Congress who supported American said they wanted to help the airline compete, and to reward it for staying out of bankruptcy and keeping its pension plans afloat. Some of their aides said the Finance Committee had failed to take up the issue of pension relief for American and other airlines when it had time earlier this spring.
Representative Kevin Brady, a Republican of Texas, summed up the view of American’s supporters. “I think it would be hard for critics to argue,” he said, “that we should take a step to punish the airlines that have responsibly funded their plans.”
Source: NEW YORK TIMES