American Airlines' flight attendants union and the Pension Benefit Guaranty Corp. both issued statements on Thursday, urging the carrier to keep its pension commitments.
PBGC director Josh Gotbaum has previously said that if the PBGC had to take over American's pension commitments, American employees could lose about $1 billion in benefits.
"We think that commitments to 130,000 workers and retirees shouldn't be disposable, that American should have to prove in court that this drastic step is necessary," Gotbaum said.
Association of Professional Flight Attendants president Laura Glading agreed that it is in everyone's best interests that American's pension plans are not terminated or frozen.
"For decades we have dutifully done our part to support this pension plan by paying into it with our hard earned wages, and we expect it to be there for us when we retire. Anything short of this is a betrayal," Glading said.
Here is the full text of the PBGC statement.
Pension Benefit Guaranty Corporation Director Josh Gotbaum released the following statement today on the American Airlines' pension plans:
"Some have suggested that American must duck its pension commitments and kill its pension plans in order to survive. We think that commitments to 130,000 workers and retirees shouldn’t be disposable, that American should have to prove in court that this drastic step is necessary.
"For other airlines, it hasn’t been. American’s competitors found ways to increase revenues and get competitive costs while honoring pension benefits. Delta maintained its non-pilots plan, and both Northwest and Continental kept their plans going after their bankruptcies.
"Counsel for American claims that it needs to kill its employees’ pensions in order to be competitive with other major carriers. The numbers tell a different story: Delta Airlines, which reorganized in bankruptcy, pays an average of $13,210 per employee in pension costs – almost 2/3 more than American’s pre-bankruptcy cost of $8,102. (Source: 2010 annual reports)
"American has more than $4 billion in cash; some of that money should already have been paid into its pension plans. However, Congress, hoping to preserve plans, allowed American to defer the payments. It would be a tragedy if American repaid Congress’s generosity by turning around and killing the plans anyway.
"PBGC is always ready to provide a safety net to employees whose companies can no longer afford their commitments, but that doesn’t mean that it’s good for employees and retirees when we do. There are legal limits to the amounts we can pay, and we don’t cover retiree health care. That's why PBGC always tries first to preserve plans. We will continue to encourage American to fix its financial problems and still keep its pension plans.
"We stand with American’s workers and retirees who are concerned about their futures. Many of the airline’s employees took lower wages so the plans could continue. Now, it’s American’s turn to step up so workers aren’t short-changed."
Here is the full text of the APFA statement.
The Association of Professional Flight Attendants (APFA), which represents more than 16,000 American Airlines Flight Attendants, today called on American Airlines to honor its pension obligations to current employees.
“We support the PBGC’s call to retain these benefits. American Airlines Flight attendants have earned their pensions, and we have sacrificed wages and other benefits in exchange for them, including voluntarily giving back one third of our pay and benefits in 2003, cuts which remain in effect today.” said Laura Glading, president of the Association of Professional Flight Attendants. “For decades we have dutifully done our part to support this pension plan by paying into it with our hard earned wages, and we expect it to be there for us when we retire. Anything short of this is a betrayal.”
Flight attendants in particular present a relatively small pension cost to American Airlines. Their wages are comparatively low as are their pension obligations. The impact of a pension termination or freeze on the company’s aging workforce – the average age of an American Airlines flight attendant is 51 years old – would be particularly devastating on a human scale. Employees nearing retirement would have little opportunity to save the additional amount necessary to make up for the loss of their pension benefits.
“It is in every party’s interests to ensure that American Airlines pension plans are not terminated or frozen,” said Glading.
For American Airlines the difference between the cost of maintaining its defined benefit plans for current employees and the cost of terminating these plans in favor of defined contribution is not significant. And Gerard Arpey, former CEO of American Airlines, agrees. He stated several months ago that the amount American’s competitors are paying to fund their defined contribution plans is not markedly different from the cost to American of maintaining its defined benefit plans.
“When you look at structural benefits, the biggest place where we are off market, is actually not pensions,” said Arpey on a July 20, 2011 earnings call. “If you look at our defined benefit pension plans over the long-run, and you take their cost as a percentage of salary, you will find that math leads to about 5 to 6 percent in terms of pension cost over time. If you look at what former bankrupt companies have put in place that terminated or froze their [defined benefit] plans, many of them are approaching matching [defined contribution] kind of contributions that are headed in that direction.”
Furthermore, if the company were to terminate the plan it would have to pay PBGC $1250 per participant for three years after emerging from bankruptcy. With nearly 130,000 participants spread over four pension plans, this would amount to a total cash payment of $480 million. Taking into account these additional costs, the savings, if any, the company would realize by freezing or terminating employee pension plans is not significant.
For unsecured creditors, termination would substantially reduce their recovery. The PBGC has estimated that the claim resulting from the termination of American’s four pension plans would add $10.2 billion to the pool of unsecured claims, which would significantly dilute the recovery of other unsecured creditors.
For employees, termination would mean the decimation of the benefit for which we have worked the longest and fought the hardest to improve and preserve. Indeed, over the past forty years flight attendants devoted substantial amounts of their negotiating capital to their retirements rather than to their wages or other benefits.
For the public, if the pension plans are terminated it would significantly add to the PBGC’s deficit.
“The termination or freezing of the pension plan would not only harm employees, the company, its creditors, and put taxpayers at risk; it would undermine a shared concern of all these interests by jeopardizing the successful reorganization of American Airlines,” said Glading.
The company acknowledged this at the outset of the bankruptcy when it argued in court documents that the mere delay in benefit payments would “irreparably impair the Employees’ morale, dedication, confidence, and cooperation.” The company also recognized that since the employees are the face of American Airlines, their support for the reorganization efforts is critical to its success.
“At this early stage, the Debtors simply cannot risk the substantial damage to their business that would inevitably attend any decline in their Employees’ morale attributable to the Debtors’ failure to pay wages, salaries, benefits and other similar items,” wrote the company.
There should be no doubt that if the withholding or untimely payment of wages and benefits could irreparably damage employees’ morale, then the freezing or terminating of their pension benefits would surely have a catastrophic impact on their “dedication, confidence and cooperation” and therefore jeopardize the successful future of American Airlines.