United sets sights on terminating pension
Blames denial of loan guarantee
United Airlines warned Thursday that it likely
will have to terminate its severely underfunded pension plans to attract the
investment capital needed to get out of Chapter 11 bankruptcy.
documents filed in federal bankruptcy court in Chicago, the USA's No. 2 carrier
said it will continue to explore other options.
United previously said
it must cut costs further and has said pensions could be a target. The court
filing makes significant changes appear more likely.
But the company
said the size of the additional cost reductions necessary to create a business
plan investors would support means that "the termination and replacement of all
of United's defined benefit pension plans likely will be required."
United blamed the likely terminations on an adverse decision this summer by the
government board created to help airlines recover from the impact of the Sept.
11 terrorist attacks. The board denied United's application for a $1.6 billion
Management said the airline needed the loan guarantee
to emerge from bankruptcy court. Management also said record-high fuel prices
are partly to blame.
The airline, which entered bankruptcy protection
in December 2002, says higher-than-expected fuel prices this year have added $1
billion to operating costs.
If United does terminate its pension
plans, which are underfunded by more than $8 billion, it would be the largest
default in the 30-year history of the federal Pension Benefit Guaranty
The PBGC says it would be liable for $6.4 billion in payments to
United retirees. And in that case, most retirees would receive less money - in
some cases, much less - than they expected.
Last month, United said it
would not make $575 million in pension plan contributions due this year to
preserve cash. That prompted the PBGC and unions representing United workers to
go to court to try to block the move.
It also prompted widespread
speculation that United eventually would terminate its pension plans and trigger
a domino effect in which other airlines would be forced to terminate their
expensive defined benefit plans in order to remain cost competitive.
Thursday's filing by United came as a prelude to a hearing today on the
renegotiated terms of United's debtor--in-possession loan from a group of
The new arrangement would give United an extra $500 million in
cash and extend the loan through June 2005.
United's management hopes
that's enough time to put together a new business plan.