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THE PROSPECT OF American Airlines Inc. terminating its hugely underfunded pension plans and shifting billions of dollars in promised but unfunded benefits to the Pension Benefit Guaranty Corp. is drawing closer.
This potential debacle offers lessons for American, its unions and federal lawmakers.
As we report on page 1, American announced last week that it will seek bankruptcy court approval to unload the plans—with an estimated $8.7 billion in unfunded guaranteed benefits—onto the PBGC, whose insurance programs already are in the hole to the tune of $26 billion.
If that $8.7 billion estimate proves accurate, the termination of American's plans will be the biggest loss in the history of the PBGC, whose revenues are in part derived from premiums paid by employers that offer defined benefit pension plans.
But this loss need not have been as big as it is likely to be. American's financial problems—like those of the other long-established commercial airlines—didn't happen overnight. American has been losing lots of money for many years, due to high fuel prices and competition from airlines with a lower cost structure.
It should have become apparent to its top executives years ago that benefit programs—created when economic conditions were much better—had to be cut back.
Similarly, American's unions needed to be much more open to benefit concessions. For example, if American's pension plans had been frozen years ago, some employees, such as pilots, would not be facing the massive cuts to their pension benefits that will occur if the plans are terminated.
There is a lesson for federal lawmakers as well. Several years ago, Congress passed special-interest legislation that gave American more time to fund its pension obligations and use a higher interest rate assumption—compared with other employers—in valuing its liabilities.
That special treatment allowed American to put a lot less money into its plans than otherwise would have been required, meaning an even bigger potential loss for the PBGC and smaller benefits for some plan participants had Congress not acted.
Congress didn't do anyone any favors—especially the PBGC or American's pension plan participants—with that special treatment, and only put off the day when American would fold the plans.