AMR Corp. today shifted tactics on the defined benefit pension plans held by its staff, proposing to freeze, rather than terminate, most of its obligations with unionized employees.
The move could appease many of the airline’s unions, which have balked at AMR’s previous plan to terminate the pensions, a move that would not only end all future payments, but also reduce the amount paid from these plans on retirement. The U.S. government’s Pension Benefit Guaranty Corp. (PGBC), which would have assumed the terminated pension obligations, has previously said about $1 billion would be lost if the plans were terminated.
Details are only just emerging from AMR, but the company says the plan was developed in tandem with its unsecured creditors committee (UCC) and the PBGC, which has been a vocal opponent of the termination plan and could have hindered AMR’s plan of reorganization throughout the Chapter 11 process. A key reason for AMR’s argument to terminate—that it would eliminate upwards of $800 million a year in costs—will now be met through new capital, says the airline, although it does not say how this will be achieved.
“By freezing the defined benefit pension plans, employees would retain the full value of their accrued benefit through the date the plan is frozen, and their benefits would not be reduced to PBGC guarantee levels in retirement. Employees would also continue to earn vesting service and retirement eligibility service. This means those who are not currently vested or eligible for early retirement could still grow into those options, options we know many employees value,” adds AMR.
While the carrier says it has reached a tentative agreement on the pension issue with the Transport Workers Union and intends to negotiate similar terms with the Association of Professional Flight Attendants, AMR’s mainline pilots’ two defined benefit pension plans are not included as they “pose additional challenges beyond those raised by freezing pensions for other work groups,” the company notes.
“We are committed to working with the PBGC, the UCC and APA [Allied Pilots Association] to identify acceptable alternatives to termination of the pilot pension plan,” AMR adds.
This change to AMR’s plan of reorganization does not affect the $1.25 billion in cost cuts the company is seeking from labor. But with this capitulation, AMR makes it clear it wantsrecent troubles with its labor negotiations to end and for union leaders to agree to new contract terms that will reduce employee costs an estimated 20%.
“We must clearly demonstrate to other stakeholders—and now potential investors—that we have addressed our cost challenges and can emerge from Chapter 11 as a viable, well-capitalized airline,” says Senior VP-Human Resources Jeff Brundage in a March 7 letter to staff. “It’s time to move to the next phase in the restructuring process, so we can focus on the path ahead and restore American to industry leadership and profitability.
“Our hope is that we can move quickly to reach agreements and continue executing our business plan,” he adds.
AMR is hoping to reach accords with all its labor groups by mid-March.
While the airline’s unions digest this latest development, PBGC Director Josh Gotbaum has already issued his own approval. “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.
“Bankruptcy forces tough choices, but that doesn’t mean pensions must be sacrificed for companies to succeed. We will continue to work with American and the other participants in the bankruptcy to ensure that success,’ adds PBGC’s chief.