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United's Faustian Bargain

Literature's Dr. Faustus is a scholar who has learned all there is to know and makes a pact with Mephistopheles, the devil, trading his soul for power and material gains. He's likened to Icarus, who flies so close to the sun his manmade wings melt, and he falls fatally to Earth.

That seems like an apt metaphor for the deal United Airlines' parent UAL (Nasdaq: UAUA  ) made with the government's Pension Benefit Guaranty Corp. (PBGC) in defaulting on its employee pensions.

Apparently, I was too exuberant in suggesting the government give back to United the pension obligation it foisted on the PBGC. As part of its agreement with the airline, the PBGC imposed an extraordinary waiver of its powers and agreed not to seek to restore it to United -- ever. 

It's a curious move by the pension agency. While only once before has it returned a pension plan to a company that defaulted on its pension obligations, I'm sure today's situation might be the only time a company has been sitting on a host of valuable assets it now wants to spin off and reap billions of dollars in profits from.

An embarrassment of riches
UAL has been floating the idea of selling its Mileage Plus loyalty program, which one Bear Stearns (NYSE: BSC  ) analyst has suggested could be worth $7 billion if spun off. It also wants to shed its profitable United Services division -- the maintenance, repair, and overhaul business estimated to be worth as much as $600 million. In total, United might be able to fetch some $16 billion from the noncore pieces it puts up for sale. Considering the PBGC assumed more than $6 billion worth of pension obligations from United, it would be reasonable to ask why the airline shouldn't be responsible for the obligations it shed.

Employees were the ones who lost their souls after having worked for decades for the airline to see their benefits slashed. Pilots, for example, who are required by law to retire at age 60, found out that not only would their benefits be cut nearly in half because the maximum the PBGC pays is about $47,000 for someone who retires at 65 -- they were penalized again because the PBGC discounts benefits further for those who retire before 65! Talk about being caught between the flames and the fire!

Contrast that with the sweet deal chairman, president, and CEO Glenn Tilton carved out for himself.

A deal worthy of Mephistopheles
If not for its extraordinary waiver guarantee, the PBGC might have returned the pension obligations to United as it did with LTV in 1990, and restored to United's employees the benefits they had worked and negotiated for, and had been expecting. What's not clear is why the PBGC agreed to such a waiver.

Was it the money? The PBGC was given a $1.5 billion stake in United when the airline reminted its previously worthless shares, equivalent to 23.4% of all outstanding shares and making it the largest shareholder at the time. The pension agency received 11.1 million shares of common stock and 5 million shares of convertible preferred shares. It's not atypical for the PBGC to get shares in a company whose pensions it takes on, as it allows the federal corporation to recoup some of its costs. 

A higher calling
In Goethe's Faustus, divine intervention at the last moment prevents Mephistopheles from seizing the alchemist's soul. Unless it's found that there was some skullduggery involved in the negotiations between United and the PBGC, it seems it will take divine intervention to make United responsible for its pension obligations.

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