Full Version: Govt. possible bailout of United Airlines
Today while I was watching Washington Journal they were going over news headlines and one topic seemed to be a recurring theme in most of the papers.
Possible government bailout of United Airlines Pension Fund. Basically the stories were about United is having a hard time getting financing to help get out of Bankruptcy, because of their enormous debt that was allowed to occur to their pension fund they are short anywhere from $6 to $7.5 billion expected.
Now the problem is they have a possibility thru bankruptcy court to terminate their obligations to their employees allowing them to terminate the pension. Which means the Federal Pension Benefit Guarantee Corp. would take over the pension meaning coming out from taxpayers. Which would reduce the pension payouts employees were expecting. One of the things that worry the Federal Pension Benefit Guarantee Corp. is other airlines that are strapped will see what United is doing and go down that path as the steel industry has done.
Denver Post
Oakland Tribune
Questions: If the bankruptcy courts allow United to terminate their pension fund would this start a precedence with other carriers, when they did not set aside the appropriate funds in the first place to cover the fund?
Is their something the government should do to hold companies more responsible when it comes to pensions instead of bailing them out?
Possible government bailout of United Airlines Pension Fund. Basically the stories were about United is having a hard time getting financing to help get out of Bankruptcy, because of their enormous debt that was allowed to occur to their pension fund they are short anywhere from $6 to $7.5 billion expected.
Now the problem is they have a possibility thru bankruptcy court to terminate their obligations to their employees allowing them to terminate the pension. Which means the Federal Pension Benefit Guarantee Corp. would take over the pension meaning coming out from taxpayers. Which would reduce the pension payouts employees were expecting. One of the things that worry the Federal Pension Benefit Guarantee Corp. is other airlines that are strapped will see what United is doing and go down that path as the steel industry has done.
Denver Post
QUOTE
United said Friday that it will stop making contributions to its four pension plans while it is in bankruptcy. The federal agency responded on Monday by telling United that it was violating the law by suspending such payments.
The law does not require companies to have pension funds - but if they do have them, they must be adequately funded. Otherwise, federal taxpayers become liable when companies run out of money to meet their pension obligations.
snipet
The pension corporation estimates that United's funds are about $7.5 billion short of meeting their obligations. If the plans were terminated, the federal agency could become liable for up to $5 billion to meet that shortfall - the largest bailout in its history. The remaining $2.5 billion would come from reducing benefits to participants. Such a move by United might prompt other distressed airlines to terminate their own plans - threatening the solvency of the federal fund.
The law does not require companies to have pension funds - but if they do have them, they must be adequately funded. Otherwise, federal taxpayers become liable when companies run out of money to meet their pension obligations.
snipet
The pension corporation estimates that United's funds are about $7.5 billion short of meeting their obligations. If the plans were terminated, the federal agency could become liable for up to $5 billion to meet that shortfall - the largest bailout in its history. The remaining $2.5 billion would come from reducing benefits to participants. Such a move by United might prompt other distressed airlines to terminate their own plans - threatening the solvency of the federal fund.
Oakland Tribune
QUOTE
Now experts say they see similar forces gathering in the pension sector, with United Airlines perhaps the first to go down the path. Operating in bankruptcy, United is striving to attract the lenders and investors it needs to survive. It said last month that it would no longer contribute to its pension plans; United also seems intent on shedding some or all of its $13 billion in pension obligations as the only way to succeed in emerging from bankruptcy.
snipet
"The pension insurance program is there to protect workers' benefits," said Belt, who took over the agency in April. "It shouldn't be used as a piggy bank to help companies restructure."
snipet
By law, this debt to the work force is to be secured by the money United sets aside in its four big pension funds. But as things have turned out, United had only about $7 billion in the pension funds as of last December.
The remaining $6 billion is unsecured debt. Pension law and bankruptcy law differ on the implications of this: Pension law says the $13 billion owed to the workers cannot be taken away, while bankruptcy law says the workers are unsecured creditors with respect to the $6 billion shortfall. And unsecured creditors usually lose in a bankruptcy case.
snipet
"Things start to set a precedent," Dean, the retired Delta pilot, said. "If a bankruptcy court allows a company to terminate its pensions, then that becomes a very tempting business tool."
That is what happened in the steel industry. LTV Steel's pension fund fell to the government in March 2002, and its unencumbered assets -- steel mills, coke and lime plants, railroads and other properties -- were snapped up at once. That put pressure on other tottering steel companies to shed their pension plans as well.
Seven more failing steel plans went to the government before the year was out, including the current record-holder among pension defaults, the Bethlehem Steel plan, which cost the pension agency $3.9 billion to take over.
snipet
"The pension insurance program is there to protect workers' benefits," said Belt, who took over the agency in April. "It shouldn't be used as a piggy bank to help companies restructure."
snipet
By law, this debt to the work force is to be secured by the money United sets aside in its four big pension funds. But as things have turned out, United had only about $7 billion in the pension funds as of last December.
The remaining $6 billion is unsecured debt. Pension law and bankruptcy law differ on the implications of this: Pension law says the $13 billion owed to the workers cannot be taken away, while bankruptcy law says the workers are unsecured creditors with respect to the $6 billion shortfall. And unsecured creditors usually lose in a bankruptcy case.
snipet
"Things start to set a precedent," Dean, the retired Delta pilot, said. "If a bankruptcy court allows a company to terminate its pensions, then that becomes a very tempting business tool."
That is what happened in the steel industry. LTV Steel's pension fund fell to the government in March 2002, and its unencumbered assets -- steel mills, coke and lime plants, railroads and other properties -- were snapped up at once. That put pressure on other tottering steel companies to shed their pension plans as well.
Seven more failing steel plans went to the government before the year was out, including the current record-holder among pension defaults, the Bethlehem Steel plan, which cost the pension agency $3.9 billion to take over.
Questions: If the bankruptcy courts allow United to terminate their pension fund would this start a precedence with other carriers, when they did not set aside the appropriate funds in the first place to cover the fund?
Is their something the government should do to hold companies more responsible when it comes to pensions instead of bailing them out?
I think that any company that operates a pension fund has an absolute moral duty to maintain it's pension fund, regardless of it's financial status.
If any change to the law were made, it should be that pension funding obligations go to the head of the queue in any bankruptcy proceedings - ahead of banks, customers, suppliers, stockholders and other creditors. It is disgusting that companies can so easily wash their hands of responsibility in this way.
If United Airlines are struggling to pay their way, then they should start selling their assets to pay their debts, and, as I say, I think the most important debt they owe is to the pension fund. Current workers have an advantage over those that have retired, in that they could still find jobs if they are available.
As this might be argued to be a competitive disadvantage to United, legislation should be passed making it compulsory for all companies to make pension provision available to all employees on request. This doesn't necessarily have to be non-contributory by employees, though that would be nice!
The only other options, as I see it, are to dramatically increase state funded pensions (which would mean higher taxes), dramatically increase retirement ages (to say 75 or even 80) or even to do away with the concept of retirement altogether, none of which is especially appealing.
If any change to the law were made, it should be that pension funding obligations go to the head of the queue in any bankruptcy proceedings - ahead of banks, customers, suppliers, stockholders and other creditors. It is disgusting that companies can so easily wash their hands of responsibility in this way.
If United Airlines are struggling to pay their way, then they should start selling their assets to pay their debts, and, as I say, I think the most important debt they owe is to the pension fund. Current workers have an advantage over those that have retired, in that they could still find jobs if they are available.
As this might be argued to be a competitive disadvantage to United, legislation should be passed making it compulsory for all companies to make pension provision available to all employees on request. This doesn't necessarily have to be non-contributory by employees, though that would be nice!
The only other options, as I see it, are to dramatically increase state funded pensions (which would mean higher taxes), dramatically increase retirement ages (to say 75 or even 80) or even to do away with the concept of retirement altogether, none of which is especially appealing.
QUOTE(Julian @ Aug 2 2004, 05:21 AM)
I think that any company that operates a pension fund has an absolute moral duty to maintain it's pension fund, regardless of it's financial status.
Even if it means the company completely goes under and the pension completely goes "poof"? How exactly is an out-of-business corporation supposed to fund anything?
Let's face it, if the choice is between a pension fund and the company staying in business, the choice should be the latter.
If the bankruptcy courts allow United to terminate their pension fund would this start a precedence with other carriers, when they did not set aside the appropriate funds in the first place to cover the fund?
This may be mean spirited, but as far as the law goes, the pension fund is simply one of a series of debts that the company owes. If it can halt payments on leases (for instance), then it should be allowed to halt payments to a pension fund. Since we don't legislate morality
, seniors should not enjoy a superior moral position, should they? 
Would this set a precedent? I am sure it would. Don't get me wrong, this should be a last resort. In this case, you are talking about a company that has BILLIONS in debt because of a retirement fund. That fund was obviously set up in better times. It sucks to be in the airline industry these days if you are one of the big carriers whose debt from these types of deals is overly burdensome.
The choice here is a company who can continue to employ 63,000 people, as it does now, or employ no one and no one gets any benefits... Where is the choice, exactly? The company lost billions last year (over $2.8 billion according to Hoover's). Should we allow such a company to keep operating? I say company's like UAL have gone the way of the dodo and the government should not prop them up.
Is their something the government should do to hold companies more responsible when it comes to pensions instead of bailing them out?
Such as? As I stated, United lost over $2.8 billion last year. How can it possibly fund anything with such a horrible bottom line? Is the government going to fine them?
Let's be realistic here.
Amlord, the people to whom I think the absolute duty applies are the ones that have already retired. A company SHOULD go out of business, or sack current workers, rather than cut off its pensioners at the knees. (Unless the pensioners bought annuities on the open market with their pension funds, in which case the company has no further obligations to them.)
This is certainly preferable to ostensibly private pensions being underwritten by government, which is what UA seem to be fishing for. If nothing else, the lesson of labyrinthine tax laws is that if corporations can find a back-door way of not paying out money themselves, they will use it. Where would be the incentive for any other large corporation to be prudent with their pension funds if the government bails out UA?
The current workforce are less critical* in this context, since most of the time they clearly would rather have a job and no pension than a pension and no job. And, they can exercise their right to go work for a company that hasn't screwed up their pension rights.
Thought I'd clear that up since I don't think I did it properly last time.
*Personally I think that a company's day-to-day duty rests equally between current staff and other stakeholder groups, including stockholders and pensioners. For example, I would like to see an end of company bosses cutting jobs to maintain profits as a first resort, then awarding themselves fat bonuses to congratulate themselves for not having maximised productivity the hard way i.e. by making existing staff more productive by working smarter, rather than just sacking people and expecting the ones that are left to work harder. Any fool can do the latter - which is why 99% of companies do it the minute their profits look shaky.
The notional game I play to establish relative importance is "what would happen if a particular stakeholder group all withdrew their support at once, and assuming all other stakeholder groups were performing as expected?"
If customers all withdrew their support at once, the company could be doomed, but might struggle on for a few weeks while it tried to find new customers.
If suppliers all withdrew their support at once, the company could be doomed, but might struggle on existing stocks for a time while looking for new suppliers.
If stockholders all withdrew their support at once, the company would likely still be able to trade under new ownership (we've assumed that customers, suppliers and staff are all doing fine with the company, so it would be an attractive proposition for new owners). Life would be very uncertian while the ownership was settled, and there would be no guarantee that the new owners wouldn't shed some or all jobs in an asset-stripping exercise. But, aside from bad headlines in the financial pages, very little material change would happen straight away.
On the other hand, if staff and managers all walked permanently out one day, the company would pretty much cease to trade there and then. Nobody would be able to sell to it or buy from it, and the stockholders would be stuck with a lemon. No new staff could be recruited, because there wouldn't be anyone there to do the recruitment.
Simplistic, I know, but it illustrates my view that stockholders are the most dispensible of the essential stakeholders (if that makes any sense).
Overall, I think managers should ask themselves what is best for the business first, not what is best for the stockholder (or the staff, or customer or any other stakeholder group). If the business is healthy and productive, the stakeholders will follow.
*But this is not the debate at hand. It gives me an idea for another thread though, which I may begin later.
This is certainly preferable to ostensibly private pensions being underwritten by government, which is what UA seem to be fishing for. If nothing else, the lesson of labyrinthine tax laws is that if corporations can find a back-door way of not paying out money themselves, they will use it. Where would be the incentive for any other large corporation to be prudent with their pension funds if the government bails out UA?
The current workforce are less critical* in this context, since most of the time they clearly would rather have a job and no pension than a pension and no job. And, they can exercise their right to go work for a company that hasn't screwed up their pension rights.
Thought I'd clear that up since I don't think I did it properly last time.
*Personally I think that a company's day-to-day duty rests equally between current staff and other stakeholder groups, including stockholders and pensioners. For example, I would like to see an end of company bosses cutting jobs to maintain profits as a first resort, then awarding themselves fat bonuses to congratulate themselves for not having maximised productivity the hard way i.e. by making existing staff more productive by working smarter, rather than just sacking people and expecting the ones that are left to work harder. Any fool can do the latter - which is why 99% of companies do it the minute their profits look shaky.
The notional game I play to establish relative importance is "what would happen if a particular stakeholder group all withdrew their support at once, and assuming all other stakeholder groups were performing as expected?"
If customers all withdrew their support at once, the company could be doomed, but might struggle on for a few weeks while it tried to find new customers.
If suppliers all withdrew their support at once, the company could be doomed, but might struggle on existing stocks for a time while looking for new suppliers.
If stockholders all withdrew their support at once, the company would likely still be able to trade under new ownership (we've assumed that customers, suppliers and staff are all doing fine with the company, so it would be an attractive proposition for new owners). Life would be very uncertian while the ownership was settled, and there would be no guarantee that the new owners wouldn't shed some or all jobs in an asset-stripping exercise. But, aside from bad headlines in the financial pages, very little material change would happen straight away.
On the other hand, if staff and managers all walked permanently out one day, the company would pretty much cease to trade there and then. Nobody would be able to sell to it or buy from it, and the stockholders would be stuck with a lemon. No new staff could be recruited, because there wouldn't be anyone there to do the recruitment.
Simplistic, I know, but it illustrates my view that stockholders are the most dispensible of the essential stakeholders (if that makes any sense).
Overall, I think managers should ask themselves what is best for the business first, not what is best for the stockholder (or the staff, or customer or any other stakeholder group). If the business is healthy and productive, the stakeholders will follow.
*But this is not the debate at hand. It gives me an idea for another thread though, which I may begin later.
Julian, I think you missed the point that UAL lost $2.8 billion last year, while their revenues were just over $13 billion. They lost a dollar for every 4 they took in.
People in the pension plan are simply another stakeholder (I like that term). I would not advocate a government bail out (did I make that impression...?). I advocate responsible management.
However, when it comes to bankruptcy, what makes a pension fund more worthy of funds than say, paying the rent, or paying back salaries? It's a moral judgement, not a legal one. They should have equal footing under the law (I am not saying that the pension fund should have less of a share).
The government should not bail the company out. When I said it would set a precedent, I did not mean the government bail out (which already has been done), I meant allowing the company to stop contributing to the pension fund.
United cut somewhere around 8000-10000 jobs last year. It still lost money. It will likely cut another 10,000 this year. They must either unload their debt or go under. There really are no other alternatives. If we force them to keep the debt from this pension fund, I doubt they will ever recover since no big airlines are prospering. It simply is not the 1980s anymore.
The government should not bail them out, the pension fund should be treated like any other debt and simply lose its funding. Harsh, yes, but reality. AND the only shot that 63,000 employees of UAL could keep their jobs.
People in the pension plan are simply another stakeholder (I like that term). I would not advocate a government bail out (did I make that impression...?). I advocate responsible management.
However, when it comes to bankruptcy, what makes a pension fund more worthy of funds than say, paying the rent, or paying back salaries? It's a moral judgement, not a legal one. They should have equal footing under the law (I am not saying that the pension fund should have less of a share).
The government should not bail the company out. When I said it would set a precedent, I did not mean the government bail out (which already has been done), I meant allowing the company to stop contributing to the pension fund.
United cut somewhere around 8000-10000 jobs last year. It still lost money. It will likely cut another 10,000 this year. They must either unload their debt or go under. There really are no other alternatives. If we force them to keep the debt from this pension fund, I doubt they will ever recover since no big airlines are prospering. It simply is not the 1980s anymore.
The government should not bail them out, the pension fund should be treated like any other debt and simply lose its funding. Harsh, yes, but reality. AND the only shot that 63,000 employees of UAL could keep their jobs.
Heeeeellllllloooooooooo All.
Been watching this site for quite some time now, but never really felt compelled to jion until now, the reason - I can tell you first hand (and some second hand) about the inner workings of an airline. I USED to be employed at TWA you see, I still have many friends who are employed by other airlines, so I can offer some insight into the inner working of other airlines as well.
First off, I'll answer the questions: 1) it neither be a precedent, since this wouldn't be the first time the PBGC has had to pay the bill for a mismanaged airline - nor will it be seen industry wide as a desirable option.
2)Yes, I will elaborate later.
I got hired at TWA in early '92, buy late '92 TWA was under bankruptcy protection. When that happened the carrier and the unions banged out an agreement that they called the Turn Aroud Plan (TAP), under which all employees took a 15% pay cut (11% pay, 4% benefits), froze contributions to the pension, and in returned the employees were promised a "SNAP BACK" (reinstatement of the 11% pay cut, not sure about the benefits part) and TWA stock. By about '97 TWA had gone through 5 difference CEOs if memory serves. And by the end there had been 2 more. During that time TWA sold off many of it's international routes, closed many of it's facilities, furloughed many of it's employees, some never to return, other scattered about the country in order to maintain employment, sold off many other assests, sold many of the aircraft it OWNED, deferred a tremendous amount of aircraft maintenance, oversold MANY MANY of it's flights, shook down the city of St. Louis, MO numerous times, never did reinstate the pension contributions and cancelled our "SNAP BACK".
Well, all good and well ine course of business some of you might say, I say otherwise, and I'll tell you why. Most every one of these moves in some way, shape, form or other was a move designed to increase the amount of money that TWA had in reserve at the expense of the long term survival of the carrier. Just think about how earning were overstated at ENRON so that big bonuses could be dolled out and you've got the general idea.
Here's how it went:
New CEO steps in and cuts labor cost and benefits cost, points to the nice lump sum of money now in the bank, declares the airline "saved", a job well done for himself, gives himself a nice big bonus (OK you can blame the board for going along with that one) and announces his retirement at the end of the ...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and sells off lucrative routes, cash reserve goes up, points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and sells off/closes various facilities, cash reserve goes up,points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and defers all the maintenance on the aircraft, oversells all the flights cause he was banking statistically on them not being out of servrice, then has to pay to re-book passengers on other carriers at last minute (ever paid full price for a last minute airfare?), cash reserve goes up, statistically all flights are sold 100%, points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable. THIS TIME however the board is hip to the trick, they force him out early, no problem GOLDEN PARACHUTE written into his contract - he gets his bonus anyway.
Next new CEO steps in and has to deal with 1/3 of the fleet being down for maintenance and 1/4 of the aircfraft technicians being furloghed, most not willing to come back to a place in such shambles so he has to hire all new "green" mechanics fresh out of school(s) (not a problem in small numbers, but a hassle when it's a high percentage all at once), is left running out of things to sell, so he decides to sell the planes, old - yes, but paid for! Signs a bunch of new lease contracts for a new(er) planes wich is just more of a bill to pay, have to buy new tooling to maintain them, new training for the crews and the technicians, new support equiptment, loads of new spare parts, newer planes don't carry the as much cargo as the older ones so there goes a bunch of money there (ever known the postal service to not pay their bill). OH, and I forgot about the new livery (paint scheme) yeah, that really fills the seats. And guess where the old planes and parts went, they got sold to a company that was owned by the CEO and a partner - for pennies on the dollar.
So they finally ALMOST drive this guy out, he steps down as CEO, but keeps a position as chairman or something and the new CEO is a pilot. He manufactures a bankruptcy and brokers a deal for American to buy up TWA. He got to keep his job, pension and got a bonus out of the deal.
Most of the rest of us had to either relocated to stay employed with AA, many others weren't even given an option.
TWA would have never survived the post Sept. 11 world anyway so I have to restrain my bitterness to a degree, BUT he first big round of layoffs after AA took over came on Sept. 3, so they had no intention of doing right by us anyway.
Long enough for ya yet????
How does this relate to the topic at hand? More that you might think at this point.
United also was in banckruptcy at about the same time '93 if I remember correctly. They took a 15% salary cut in return for stock, freezing the pension contributions, I don't know about their benefits. However, they were not allowed the option of cashing in their stock like we were at TWA. Many of us at TWA cashed our stock in and put the money into IRAs or the like, at United you could only cash it in when you retired. The people at United have had to watch one bad decision after completely erode their retirment stock, and now face the possibility of having their pensions put on the block also. United also went through a livery change, but they were earning big at the time. Somewhere along the line United decided to put HUSH KITS on all their older 727 planes to comply with new federal niose requirements, keep in mind that they had to buy all these new engines $1Million each (2 on a plane) and the planes were already owned by United and they had all the tooling and spare ect for them. Where did these planes end up, in the desert for a time. Why? Because instead of flying the plnes they owned someone decided they needed a new monkey on their back in the form of lease payments for all new 777s. So what happened to those 727s? Untied sold them to an upstart carrier (one of the latest incarnations of Pan Am) I'm told, for $250K each. Oh, and I forgot to mention the huge maintenance facility the built in Inianapolis around '95, which I understand is now closed.
Now I might have some of the specifics a bit off, because all my info about United comes second hand, but I'm going to forward this thread to my friends still in the industry in the hopes that they will sign on and confirm/refute any of what I have said. I don't want to misrepresent any of what actually happened, but I want the smaller, behind the scene specifics to be better known.
Which brings me back to elaborate on the second part of the original post.
I really don't want more government in too many aspects of life, but there seems to yet have been a proven way for the "market" to enforce good business decisions, whether they are on the behalf of the stockholders and onvestors or the employees. TWA shook down St.Louis for tax breaks and other financial incentives becuase they were "keeping good paying jobs in the area", so likewise if the jobs cease to become good paying, or simply cease - shouldn't they be held accountable. I also don't like the idea of a private company passing it's burdon on to the general public such as what will happen if the PBGC has to pick up the tab for this. It's not a matter of United not having the money to pay the pension, it's a matter of them squandering it all at a time when they did have it instead of putting it where it was needed. Think of it in these terms, if a person was making a million dollars a month and spent it all at the time, then went boke, fell ill, or whatever, should the general public have to support him in his post wealth period? Those espouse (sp?) the concept of taking personal responsability and making the right decisions, well who has to accept the responsability if the PBGC has to pay for the wrong decisions of United execs? The market doesn't seem to yet have devised a way correct for this, perhaps we do need the government to force accontability.
I'm open to any better concepts.
HI All !
EDIT:
I should add that as part of the first bankruptcy arrangement 7 of the 9 seats on the board were held by TWA's various creditors, so the carriers interests were not being looked after, and many of the deals arranged were designed to benefit the creditor companies at varying times. There was rumor that some of the ex-CEOs went on to high paying positions in the employ of some of the creditor companies. I can confirm that the federal arbitrator who hashed out the terms of the merger for TWA and AA, promptly quick his low paying government job and was hired as a highly paid consultant for AA.
Been watching this site for quite some time now, but never really felt compelled to jion until now, the reason - I can tell you first hand (and some second hand) about the inner workings of an airline. I USED to be employed at TWA you see, I still have many friends who are employed by other airlines, so I can offer some insight into the inner working of other airlines as well.
First off, I'll answer the questions: 1) it neither be a precedent, since this wouldn't be the first time the PBGC has had to pay the bill for a mismanaged airline - nor will it be seen industry wide as a desirable option.
2)Yes, I will elaborate later.
I got hired at TWA in early '92, buy late '92 TWA was under bankruptcy protection. When that happened the carrier and the unions banged out an agreement that they called the Turn Aroud Plan (TAP), under which all employees took a 15% pay cut (11% pay, 4% benefits), froze contributions to the pension, and in returned the employees were promised a "SNAP BACK" (reinstatement of the 11% pay cut, not sure about the benefits part) and TWA stock. By about '97 TWA had gone through 5 difference CEOs if memory serves. And by the end there had been 2 more. During that time TWA sold off many of it's international routes, closed many of it's facilities, furloughed many of it's employees, some never to return, other scattered about the country in order to maintain employment, sold off many other assests, sold many of the aircraft it OWNED, deferred a tremendous amount of aircraft maintenance, oversold MANY MANY of it's flights, shook down the city of St. Louis, MO numerous times, never did reinstate the pension contributions and cancelled our "SNAP BACK".
Well, all good and well ine course of business some of you might say, I say otherwise, and I'll tell you why. Most every one of these moves in some way, shape, form or other was a move designed to increase the amount of money that TWA had in reserve at the expense of the long term survival of the carrier. Just think about how earning were overstated at ENRON so that big bonuses could be dolled out and you've got the general idea.
Here's how it went:
New CEO steps in and cuts labor cost and benefits cost, points to the nice lump sum of money now in the bank, declares the airline "saved", a job well done for himself, gives himself a nice big bonus (OK you can blame the board for going along with that one) and announces his retirement at the end of the ...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and sells off lucrative routes, cash reserve goes up, points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and sells off/closes various facilities, cash reserve goes up,points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable.
Next new CEO steps in and defers all the maintenance on the aircraft, oversells all the flights cause he was banking statistically on them not being out of servrice, then has to pay to re-book passengers on other carriers at last minute (ever paid full price for a last minute airfare?), cash reserve goes up, statistically all flights are sold 100%, points to the nice lump sum of money now in the bank, CEO publically declares the airline "saved", a job well done for himself, gives himself a big bonus and annouces his retirement at the end of the...(fill in the blank). But the airline is still losing money and is not profitable. THIS TIME however the board is hip to the trick, they force him out early, no problem GOLDEN PARACHUTE written into his contract - he gets his bonus anyway.
Next new CEO steps in and has to deal with 1/3 of the fleet being down for maintenance and 1/4 of the aircfraft technicians being furloghed, most not willing to come back to a place in such shambles so he has to hire all new "green" mechanics fresh out of school(s) (not a problem in small numbers, but a hassle when it's a high percentage all at once), is left running out of things to sell, so he decides to sell the planes, old - yes, but paid for! Signs a bunch of new lease contracts for a new(er) planes wich is just more of a bill to pay, have to buy new tooling to maintain them, new training for the crews and the technicians, new support equiptment, loads of new spare parts, newer planes don't carry the as much cargo as the older ones so there goes a bunch of money there (ever known the postal service to not pay their bill). OH, and I forgot about the new livery (paint scheme) yeah, that really fills the seats. And guess where the old planes and parts went, they got sold to a company that was owned by the CEO and a partner - for pennies on the dollar.
So they finally ALMOST drive this guy out, he steps down as CEO, but keeps a position as chairman or something and the new CEO is a pilot. He manufactures a bankruptcy and brokers a deal for American to buy up TWA. He got to keep his job, pension and got a bonus out of the deal.
Most of the rest of us had to either relocated to stay employed with AA, many others weren't even given an option.
TWA would have never survived the post Sept. 11 world anyway so I have to restrain my bitterness to a degree, BUT he first big round of layoffs after AA took over came on Sept. 3, so they had no intention of doing right by us anyway.
Long enough for ya yet????
How does this relate to the topic at hand? More that you might think at this point.
United also was in banckruptcy at about the same time '93 if I remember correctly. They took a 15% salary cut in return for stock, freezing the pension contributions, I don't know about their benefits. However, they were not allowed the option of cashing in their stock like we were at TWA. Many of us at TWA cashed our stock in and put the money into IRAs or the like, at United you could only cash it in when you retired. The people at United have had to watch one bad decision after completely erode their retirment stock, and now face the possibility of having their pensions put on the block also. United also went through a livery change, but they were earning big at the time. Somewhere along the line United decided to put HUSH KITS on all their older 727 planes to comply with new federal niose requirements, keep in mind that they had to buy all these new engines $1Million each (2 on a plane) and the planes were already owned by United and they had all the tooling and spare ect for them. Where did these planes end up, in the desert for a time. Why? Because instead of flying the plnes they owned someone decided they needed a new monkey on their back in the form of lease payments for all new 777s. So what happened to those 727s? Untied sold them to an upstart carrier (one of the latest incarnations of Pan Am) I'm told, for $250K each. Oh, and I forgot to mention the huge maintenance facility the built in Inianapolis around '95, which I understand is now closed.
Now I might have some of the specifics a bit off, because all my info about United comes second hand, but I'm going to forward this thread to my friends still in the industry in the hopes that they will sign on and confirm/refute any of what I have said. I don't want to misrepresent any of what actually happened, but I want the smaller, behind the scene specifics to be better known.
Which brings me back to elaborate on the second part of the original post.
QUOTE
Is their something the government should do to hold companies more responsible when it comes to pensions instead of bailing them out?
I really don't want more government in too many aspects of life, but there seems to yet have been a proven way for the "market" to enforce good business decisions, whether they are on the behalf of the stockholders and onvestors or the employees. TWA shook down St.Louis for tax breaks and other financial incentives becuase they were "keeping good paying jobs in the area", so likewise if the jobs cease to become good paying, or simply cease - shouldn't they be held accountable. I also don't like the idea of a private company passing it's burdon on to the general public such as what will happen if the PBGC has to pick up the tab for this. It's not a matter of United not having the money to pay the pension, it's a matter of them squandering it all at a time when they did have it instead of putting it where it was needed. Think of it in these terms, if a person was making a million dollars a month and spent it all at the time, then went boke, fell ill, or whatever, should the general public have to support him in his post wealth period? Those espouse (sp?) the concept of taking personal responsability and making the right decisions, well who has to accept the responsability if the PBGC has to pay for the wrong decisions of United execs? The market doesn't seem to yet have devised a way correct for this, perhaps we do need the government to force accontability.
I'm open to any better concepts.
HI All !
EDIT:
I should add that as part of the first bankruptcy arrangement 7 of the 9 seats on the board were held by TWA's various creditors, so the carriers interests were not being looked after, and many of the deals arranged were designed to benefit the creditor companies at varying times. There was rumor that some of the ex-CEOs went on to high paying positions in the employ of some of the creditor companies. I can confirm that the federal arbitrator who hashed out the terms of the merger for TWA and AA, promptly quick his low paying government job and was hired as a highly paid consultant for AA.
QUOTE(Amlord @ Aug 2 2004, 12:58 PM)
However, when it comes to bankruptcy, what makes a pension fund more worthy of funds than say, paying the rent, or paying back salaries? It's a moral judgement, not a legal one. They should have equal footing under the law (I am not saying that the pension fund should have less of a share).
I more or less agree with you, but if I remember TWA's banckruptcy, pensions are actually given a lesser priority legally than other debt, basically the same as unsecured stock or less. One possible exception might be that a utility bill, or short term lease contract for equipment or other "consumable" type of debt is of a different standing than a long term contract, obligation or pension. Bankruptcy protection might save a business from having to pay an existing debt, but it does not require that the vendor or outside service provider continues to do business the company, a person owed a pension has no such option.
Welcome ChargedDust and you are quite correct about bankruptcy seeing pension funds being unsecured. As well as the company should have been putting the money away from the start since they are taking money out of your paychecks for the pension fund. That is one of the problems pensions thru out alot of industries have done in the past thinking it is their for the company to play with and that it should be there later on when the person retires if everything works out, but it usually doesn't.
QUOTE(Cadman @ Aug 3 2004, 10:32 AM)
Welcome ChargedDust and you are quite correct about bankruptcy seeing pension funds being unsecured. As well as the company should have been putting the money away from the start since they are taking money out of your paychecks for the pension fund. That is one of the problems pensions thru out alot of industries have done in the past thinking it is their for the company to play with and that it should be there later on when the person retires if everything works out, but it usually doesn't.
Which is the way Social Security works. Which is why it needs reform
.Most retirement plans are Ponzi schemes. They work fine as long as the number of workers exceeds the number of retirees by 4 to 1 or more. Once the ratio drops, they are in trouble.
The only retirement plans which avoid this pitfall are ESOP type accounts, where the pension fund is covered by stock in the company. It is unclear, but seems that UAL may have once had this type of plan. It was once majority employee owned. Now, employees own less than 25%.
Welcome to AD, ChargedDust.
QUOTE(Amlord @ Aug 3 2004, 11:42 AM)
The only retirement plans which avoid this pitfall are ESOP type accounts, where the pension fund is covered by stock in the company.
If the pension is funded with company stock, then like Enron, the pension can find itself without any money if the company goes bankrupt.
The big hullabaloo (wonder if spell check will like that; it did!) is over converting the dinosaur pension plans into "cash balance" plans (instead of a "defined benefit" plan, which is what they have now), which operate more like a savings account. Cash balance is the only retirement plan where you CAN predict what your future liabilities will be for the company, because the future liability is NONE. But the payout may be smaller for the security of knowing that the balance is the balance and the company's fortunes don't change that.
On another note, part of the reason the pension is in trouble now is also because when times are good, the company is limited in how much money it can put into the pension plan (since that's an expense to the company and can lower the company's taxes). The laws are specific that you cannot underfund or overfund, even as the company's fortunes wax and wane.
QUOTE(Amlord @ Aug 3 2004, 11:42 AM)
The only retirement plans which avoid this pitfall are ESOP type accounts, where the pension fund is covered by stock in the company. It is unclear, but seems that UAL may have once had this type of plan. It was once majority employee owned. Now, employees own less than 25%.
You are correct, UAL did have an ESOP initiated after thier first bankruptcy filing circa '93. Employees at that time held a majority of the shares, 55% if memory serves. TWA also has an ESOP plan after the bankruptcy of '92, employees owned 45%. The differences that I know of are that TWA employees were permitted to purchase additional stock at the time, it might have even been discounted to some degree, UAL offered no such option. And as prevously stated at TWA we were allowed to cash out our stock before retirement, UAL employees were not. I should point out that at TWA I don't think we had the ability to roll directly into an IRA or annuity plan, so anyone who cashed out (such as myself) had to pay taxes and penalties. On a side tangent, I sent in my request to cash out (get my stock certificates), at the time the stock was $16/sh, by the time they sent it to me (about 6 week) it had fallen to $12/sh. I never cashed it in, but had to pay the penalties and the taxes on it that year. In the end I used it as a capital gains loss 5 years later after the merger.
Personally, I would like to see corporate control of pension funding out of the hands of the corporations since I think it has been determined by the courts that underfunding of pensions is allowed, or at least it used to be. The courts consider it just another debt like any other - well not ANY other since there does seem to be a pecking order as far as which debts get paid first and which get paid with whatever is leftover.
Perhaps something like personal 401K plans are the way to go, where the employer pays into and INDIVIDUAL retirement account, instead of a pension plan. Unfortunately that opens the door again to people mismanaging their own accounts and being retired broke. Which again brings in the need for legislative action to limit the type and amount of risk taking by any individual or appointed account manager. It might be the lesser of 2 evils if the other choice is to have the taxpayers at large pick up the tab for corporate mismanagement of pensions.
On a quick side note, I forgot to mention the 20% (I think) pay cut that UAL employees took after Sept. 11. There was also an arbitrater awarded pay raise in 2000 based on the HUGE RECORD PROFITS UAL reported from '95-'99/'00.
EDIT:
I wanted to mention it in my original post but lost somewhere along the line. I don't see other airlines (this might not apply to other types of corporations) filing for bankruptcy as a way out paying their pensions or other debts. By declaring bankruptcy the CEO, board members and other execs would be hard pressed to give themselves bonuses when in banckruptcy, especially if they had to sell the idea to the bankrutcy judge. They want to stay out of the courts, while shirking as much debt and obligation as they can so that they can point to huge cash reserves as a justification for giving themselves bonuses. Then there is also the favor trading that goes on - i.e. the board votes to incur addition debt by leasing new aircraft (for example) and then those members find high paying consultant jobs at the companies where the planes are being leased from.
More on this topic here:
$450 Billion Pension Fund Shortfall (you might have to give your e-mail address to get in)
$450 Billion Pension Fund Shortfall (you might have to give your e-mail address to get in)
QUOTE
Let's do a simplified analysis. Let's say the pension of Company ABC has $1 billion dollars. The actuaries work to figure out what the fund will need in future years. The managers of the fund make assumptions about how much the fund portfolio will grow in the future from a combination of investments and more contributions by the company. Let's assume Company ABC is going to need its investment portfolio to grow by 9% per year in order to stay fully funded. The more you assume the portfolio will grow, the less ABC will need to dig into its pockets from pockets to fully fund the pension plan.
Assuming a typical 60% stocks/40% bonds mix, what type of returns does the company need from its stock portfolio? Let's be generous and project a 5% return from its bond portfolio over the next decade. That means it will need over 11% from the equity portion of its portfolio!
<snip>
If we were starting from a point of strength, it might be less troublesome. But the Pension Benefit Guaranty Corporation notes that defined benefit pension plans are under-funded to the tune of $450 billion (the combination of single and multi-employer plans). But that is likely an understatement. How you figure full funding is actually quite flexible. It is an arcane art rife with assumptions and wiggle room. And employees are in the dark about how well their pensions are funded. As an aside, the Bush administration has proposals to require disclosure to employees, but strangely Congress has yet to act on this obviously common sense and long overdue proposal. Let's make sure hedge funds are regulated (we gotta protect the rich), but let corporations hide their pension fund liabilities. I mean, you have to establish priorities.
For example, in its last filing prior to termination of its plan, Bethlehem Steel reported that it was 84% funded on a current liability basis. At termination, however, the plan was only 45% funded on a termination basis - with total underfunding of $4.3 billion. PBGC had to assume that liability.
Assuming a typical 60% stocks/40% bonds mix, what type of returns does the company need from its stock portfolio? Let's be generous and project a 5% return from its bond portfolio over the next decade. That means it will need over 11% from the equity portion of its portfolio!
<snip>
If we were starting from a point of strength, it might be less troublesome. But the Pension Benefit Guaranty Corporation notes that defined benefit pension plans are under-funded to the tune of $450 billion (the combination of single and multi-employer plans). But that is likely an understatement. How you figure full funding is actually quite flexible. It is an arcane art rife with assumptions and wiggle room. And employees are in the dark about how well their pensions are funded. As an aside, the Bush administration has proposals to require disclosure to employees, but strangely Congress has yet to act on this obviously common sense and long overdue proposal. Let's make sure hedge funds are regulated (we gotta protect the rich), but let corporations hide their pension fund liabilities. I mean, you have to establish priorities.
For example, in its last filing prior to termination of its plan, Bethlehem Steel reported that it was 84% funded on a current liability basis. At termination, however, the plan was only 45% funded on a termination basis - with total underfunding of $4.3 billion. PBGC had to assume that liability.
This is only the tip of the iceberg with airlines. For years airlines have been protected as an industry, specifically the legacy carriers have been protected by the Federal Government through loan guarantees, an antiquated gates allocation system and now they want pension bail out.
I for one would love to see these bloated dinosaurs go out of business so that I can fly Jetblue to more cities!
I for one would love to see these bloated dinosaurs go out of business so that I can fly Jetblue to more cities!
Good point, SVD. Airlines have historically been one of the most protected and subsidised industries world-wide, not just in the US. (Think of all the hoo-ha that goes on about state-owned European airlines, or about the huge subsidies given to Airbus - as if Boeing doesn't get the same effect from their huge military contracts.)
Not the least of these subsidies is the fact that aviation fuel is not subject to taxation in any jurisdiction anywhere. Certainly this is a global problem, as any state that introduced it would simply find that airlines flew somewhere else to fill up. But it does distort the travel market, since trains, trucks and cars have to pay tax at the going rate on their fuel.
On of the daftest results of this is that a lettuce or apple grown on the other side of the world and flown in a refrigerated cargo plane can retail for the same or less than one grown in the same county, even when the crop is in season locally, because the trucks that take the local produce to the stores pay more fuel taxes than the airliners that bring imported produce from the other side of the planet. So we lose local farmers and stop growing things locally so we HAVE to fly stuff in from far away.
Not the least of these subsidies is the fact that aviation fuel is not subject to taxation in any jurisdiction anywhere. Certainly this is a global problem, as any state that introduced it would simply find that airlines flew somewhere else to fill up. But it does distort the travel market, since trains, trucks and cars have to pay tax at the going rate on their fuel.
On of the daftest results of this is that a lettuce or apple grown on the other side of the world and flown in a refrigerated cargo plane can retail for the same or less than one grown in the same county, even when the crop is in season locally, because the trucks that take the local produce to the stores pay more fuel taxes than the airliners that bring imported produce from the other side of the planet. So we lose local farmers and stop growing things locally so we HAVE to fly stuff in from far away.
I think companies should not be able to sell off chunks of their business to satisfy their creditors or Chapter 13 their way out of bankruptcy without paying their employees and employee shareholders first. As in: if you are going under, your top of the list getting their money first creditors should be your employees.
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