The story for bankrupt air carrier United Airlines (OTC BB: UALAQ) is a simple one: It doesn't have enough cash on hand to take care of all of its obligations. That, after all, is why it sits in bankruptcy protection. It has leasehold obligations on its planes to Boeing (NYSE:BA), General Electric (NYSE:GE), and a million other financing groups; it has operating expenses that continue to skyrocket as fuel costs surge. It has other sundry debts -- merchant liabilities, mostly. And yes, United Airlines has a total pension fund shortage of $8.3 billion to go along with scheduled payments of $725 million for 2004, $4 billion through 2008. So United came up with a plan: Cease funding its pension plans.
Man, take a look at what's going on at United, US Airways (NASDAQ:UAIR), where liquidation is a rumor with some credibility attached, and Delta (NYSE:DAL), which has a brutal restructuring of its own. Don't even get me started on the disaster that is European aviation. This industry burns through shareholder equity like no one's business.
United Airlines' management would dearly like to emerge from bankruptcy, and the process here is to work among all of the creditor classes to come up with a plan that will give the company financing and a capital structure that will allow it to operate. The other choice is liquidation -- not a great outcome. The problem in arranging financing is that those footing the bill in arranging financing aren't very interested in relaunching a business that will simply destroy more capital. United, like many companies before it, might be worth more to creditors broken up and sold for scrap than as an operating entity. So the company has to come up with a plan that shows creditors that it has a reasonable chance to gain a return in the event the company operates once again. A $4 billion cash obligation along with an $8 billion existing shortfall in United's pension plans make the case for continuing United as an operating company much tougher.
But United is desperate. Last month the federal government denied the company financing that would have allowed it to emerge from bankruptcy, sending it on the chase for commercial sources for about $1 billion.
United's financing facility includes a provision that prohibits the company from making contributions to its pension plans -- covering about 119,000 current employees and retirees -- without consent by its lenders. United has already missed a required payment, which was due in July. The Pension Guaranty Benefit Corporation (PBGC), the government-provided insurance corporation for pensions, thinks that United's election to do so not only puts United's pension in jeopardy but also violates the Employee Retirement Income Security Act (ERISA). If the judge overseeing United's bankruptcy proceedings approves the company's plan, liability for payment of the employee pensions could fall to the PBGC. The amounts to many United retirees would be reduced as its pension benefits exceed that which is guaranteed by PBGC. Further, if United succeeds in sidestepping its payments, PBGC thinks that the precedent could put benefits of other pensioners around the country at risk.
What a total mess. United noted in its filing that it "would like nothing better than to keep the pension plans intact." This, of course, is not quite true. What United would like to do more than anything else is to emerge from bankruptcy. Obviously, the company has obligations that far outstrip its ability to fulfill them. UAL notes that it hopes to gain an agreement from various unions that will allow it to meet its pension obligations and operate.
But should it not be able to, and should it go forward with the plan to terminate its pensions, the damage in its relationship with employees will likely be forever destroyed.
United doesn't have the money. It follows US Airways, and it also follows Lucent (NYSE:LU), which had to crank back on the amount of post-retirement benefits it pays its retirees. These are the perils of companies that once upon a time were large and important -- they shrink, but their obligations don't. At this point United's choices are to either hose its retirees or go out of business for good. I vote for B.
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Bill Mann owns none of the companies mentioned in this story, but he has warned investors in the past to pay attention to companies' pension liabilities.
