Pension Turbulence the Reason for American Airlines Bankruptcy?

(December 1, 2011) — Did pension plan turbulence cause the crash of AMR Corp, the parent company of American Airlines?

This is the question posed by many in the industry, including Jon Waite, Director of Investment Management Advice of SEI Institutional Group, who notes that the bankruptcy exposes the challenge of providing a legacy benefit in an industry where the competition is not doing the same. 

General Motors —perhaps the symbol of the deteriorating affect of pension debts on corporate profits—was not created as a pension plan, yet its pension grew to dwarf its core business, and like many plan sponsors, the scheme has become a legacy problem. Similarly, early signs are indicating that the four underfunded pension plans of AMR Corp. were a significant factor in the company’s decision to file for bankruptcy. 

“…American Airlines’ parent company filed for bankruptcy. When this happens employees and retirees worry — and they should,” Pension Benefit Guaranty Corporation Director Josh Gotbaum said in a statement. “In past bankruptcies, workers and retirees have lost their healthcare and seen their pensions cut. Based on our estimates American Airlines employees could lose a billion dollars in pension benefits if American terminates their plans.”

He continued: “This is true even if PBGC becomes responsible for those plans, because Congress has limited the size of the pensions we can pay. Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically. That’s why PBGC always tries first to preserve plans, even after companies enter bankruptcy. As we did with Visteon, and with some plans at Delta and Northwest Airlines, we will encourage American to fix its financial problems and still keep its pension plans.” 

“A termination would also weaken the financial condition of PBGC, which has a record $26 billion deficit as a result of failed plans the agency has already assumed,” PBGC commented in a statement.

American Airlines sponsors four traditional pension plans that cover almost 130,000 participants. As of November 29, according to the PBGC, the plans collectively had about $8.3 billion in assets to cover about $18.5 billion in benefits. If American Airlines were to end their plans, the agency would be responsible for paying about $17 billion in benefits; about $1 billion in benefits would be lost. 

American Airlines is not the only airline facing difficulties largely due to their floundering pensions — United, Delta Air Lines Inc and US Airways Group Inc all left their pensions in recent years when filing for bankruptcy, costing the PBGC more than $11 billion.