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American Airlines to freeze pension plans

American Airlines to freeze pension plans

FORT WORTH, Texas—In a big change of position, American Airlines Inc. said Wednesday that it intends to freeze—not terminate—at least three of its four massively underfunded pension plans.

If that happens, the federal Pension Benefit Guaranty Corp. will be spared from picking up the billions of dollars in pension benefits American has promised to the plans' 130,000 participants but not funded.

In a letter to employees, American—which had been under intense pressure from the PBGC to retain the plans—said that in working with its unsecured creditors committee and the PBGC, “We've developed a solution that would allow us to pursue a freeze of our defined benefit pension plans for nonpilot employees instead of seeking termination.”

While freezing the plans will mean higher costs than American contemplated in its business plan, “We intend to seek new capital at the appropriate time to cover the incremental costs of funding the frozen pension plans and to help fund the pension liabilities we will continue to have on our balance sheet,” Jeff Brundage, senior vp-human resources at American Airlines parent AMR Corp., wrote in his letter.

American now intends to freeze three plans covering members of the Transport Workers Union, the Assn. of Professional Flight Attendants and other nonunion employees.

It also would like to freeze the plan covering the airlines' pilots if it can work out an issue affecting lump-sum benefits, on concerns that a high number of pilots would retire early to collect their lump sum payout if it freezes the plan.

“The departure of a significant number of pilots in a short period of time, incentivized by the availability of lump-sum payouts, would have a severe detrimental impact on our operations and is a risk that the company simply cannot afford to take,” Mr. Brundage wrote.

Mr. Brundage said American will continue to work with the PBGC and the pilots' union on an approach that would allow it to freeze the pilots' plan.

PBGC Director Joshua Gotbaum welcomed American's change in position.

“It is great progress and good news that American recognizes it can reorganize successfully and preserve its employees' pension plans. We're also glad the company is willing to work with us to preserve their pilot plan too,” he said in a statement.

The PBGC, which now has a record $26 billion deficit and wants Congress to raise premiums it charges employers to help pay for benefits in failed pension plans the agency takes over, has estimated that it would incur its biggest loss ever if American's plans are terminated.

According to preliminary PBGC estimates, the four plans have about $8.3 billion in assets and about $18.5 billion in promised benefits.

The PBGC said if the plans were to fold, the agency would be liable for about $17 billion in benefits, resulting in an $8.7 billion loss to the agency.

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