As the nation's airlines fight battles on many fronts, one huge issue that had been hanging over them--how to fund their enormous pension plan liabilities--is virtually gone.

Over the past four years, all of the nation's major airlines with defined benefit plans have either terminated or frozen at least one of those plans, except for American Airlines (see box).

Two airlines, US Airways Inc. and United Airlines, no longer offer defined benefit plans. As part of their bankruptcy reorganizations, they jettisoned the plans and stuck the federal pension insurance agency with a multibillion-dollar tab for some of the plans' promised but unfunded benefits.

Other airlines, such as Delta Air Lines Inc., have kept some of their plans but frozen benefit accruals.

While that means airlines won't have to worry about growing plan liabilities and the deficit-ridden Pension Benefit Guaranty Corp. has been spared more massive losses, it also means that several hundred thousand airline employees are no longer earning benefits through those plans (see related story).

Instead, future retirement benefits will be earned exclusively through defined contribution plans, with the amount of benefits available largely depending on employees' investment acumen.

The erosion of airline pension plans is not a recent development. In the early 1980s, the PBGC took over--at a cost of nearly $48 million--three pension plans sponsored by Braniff International Corp. after the famed Texas-based airline filed for bankruptcy.

Then in the early 1990s, pension plans sponsored by Pan American World Airways and Eastern Airlines were taken over by the PBGC as those once-storied aviation names descended into bankruptcy and then liquidation. The termination of Pan Am's plans cost the PBGC about $840 million, while its takeover of Eastern Airlines' plan cost about $550 million.

In early 2001, Trans World Airlines failed and the PBGC picked up nearly $700 million in unfunded pension promises.

But the cost to the PBGC of those earlier airline pension plan failures pales in comparison to the more recent round of airline plan terminations. For example, the PBGC estimates that its 2005 takeover of United's four pension plans will cost more than $7 billion--its biggest loss ever from a corporate pension program failure.

That dwarfs the PBGC's 2003 takeover of bankrupt Bethlehem Steel Corp.'s pension plan, which the PBGC calculates will cost it about $3.7 billion. At the time of the takeover, it was the largest pension plan failure.

While the losses to pension plan participants and to the PBGC--which is partly funded by premiums paid by employers with pension plans--were unprecedented, the airlines broke no laws in underfunding their plans.

"No one did anything illegal," said Frank Cummings, of counsel with LeBoeuf, Lamb, Greene & MacRae L.L.P. in Washington, who represented retired United Airlines pilots.

Instead, experts say, the culprit was a combination of events, including low interest rates that drove down the value of plan assets and the fall in the equities' markets, which accelerated after the Sept. 11, 2001, terrorist attacks.

"It was devastating," said Ethan Kra, chief actuary with Mercer Human Resource Consulting in New York, referring to the double hit of low interest rates and the bear equities markets.

"There was an unfortunate confluence of events," said Mike Pollack, a principal in the Stamford, Conn., office of Towers Perrin.

While those factors affected the funded status of all pension plans--requiring most employers for the first time in years to increase contributions to boost their plans' funding levels--airlines faced additional problems, experts say.

Airlines' ability to make pension plan contributions was pinched because of soaring costs, chiefly for fuel. At the same time, business dropped off sharply for airlines in the wake of the Sept. 11, 2001, attacks and competition increased from other airlines with lower operating costs.

"Few industries were touched more by Sept. 11 than the airlines," said Alan Glickstein, a senior consultant with Watson Wyatt Worldwide in Dallas.

Airline plans also were hurt as employees, who were eligible to retire and feared pension plans might not survive, took their benefit as a lump sum rather than a lifetime monthly annuity, draining the plans of assets.

"It is a kind of run on the bank," said Mercer's Mr. Kra.

But if there was a silver lining to the airline pension crisis, it was that it focused congressional attention on the need to tighten pension funding rules--another factor in why airline pension plans were so underfunded.

Pension funding reforms that Congress passed in 2006 would not have been approved without the "airline pension crisis," Mr. Cummings said.

While no one will say that the reforms would have prevented airline plan failures, the failures might have been less costly to the PBGC and participants had they been enacted years earlier.

Among other things, the 2006 law requires faster funding of plan liabilities and requires employers to fully fund their plans rather than at 90%, as was the case under the previous law.

Additionally, as Mr. Pollack put it, the law includes "stop-bleeding" provisions. For example, benefits cannot be paid out as lump sums when plan funding falls below a certain level. In addition, underfunded plans cannot increase benefits and must use more conservative actuarial assumptions that have the effect of boosting contributions.

While those funding reforms will not prevent future pension plan failures, "they will keep losses at a more reasonable level," said Mark Warshawsky, former assistant secretary of economic policy at the U.S. Treasury Department, who played a key role in drafting the Bush administration's pension funding reform package. Now he is director of retirement research at Watson Wyatt in Arlington, Va.

The 2006 law could further boost pension plan funding levels by significantly increasing the maximum tax-deductible contributions employers can make to the plans, said William Quinn, chairman and chief executive officer of Fort Worth, Texas-based American Beacon Advisors, which manages the pension plans of American Airlines, the only major commercial carrier not to have frozen or terminated at least one pension plan in the last few years.

"You can put in more money in good years," helping plans build cushions, Mr. Quinn said, adding that a prudent investment strategy and making bigger plan contributions led to better pension plan funding at American compared with some other competitors.