Bethune defiant as Continental plugs pensions gap

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Continental Airlines has highlighted the long-simmering issue of pension shortfalls. As the airline boosted its pension reserves, it sent a message to Congress, where lawmakers from US states that have been hit hard by airline, automotive and steel industry layoffs are contemplating changes to pension laws.

Low interest rates, combined with steep declines in the stock market, have caused a corporate pension crisis. US airlines have about $26 billion in under- funded pension liabilities out of the nation's under-funded total of $80 billion, according to the Pension Benefits Guarantee Corp.

In mid-September, Continental gave $103 million in cash to its employees pension plan. It also contributed $100 million in shares in its regional unit ExpressJet Holdings, lowering its stake in the airline to 31%.

"Unlike our competitors, we are not asking the government to solve our pension issues. We are handling it ourselves," says Continental chairman Gordon Bethune. "We continue to believe that it is our own performance that will make Continental profitable again. By making our employee pension plan a top priority, we illustrate the value of our workforce and our willingness to honour all of our commitments."

As well as sending a message to legislators, his comments were perhaps a swipe at carriers such as US Airways, which terminated its pilot pension plan earlier this year, and at United Airlines, which is lobbying Congress for changes to pension laws.

Continental's move in early September follows that in August by Northwest Airlines to use the stock of a regional subsidiary to help cover a shortfall in its pension plans. Northwest won a rare exemption to federal rules to let it contribute up to 100% of the stock of its Pinnacle Airlines unit to fund a $223 million pension obligation for 2002. Northwest had made a $44 million contribution of Pinnacle stock to its pension funds in January, but that was not a large enough transaction to require the special federal permission.

United's recent disclosure that it needs to make about $4.2 billion in cash contributions to its pension plans through 2008 has led to renewed concern. CSFB analyst Jim Higgins reports that United employees, including retirees, are organising to fight changes to their plan, including a possible termination. Higgins expects "some white-knuckle moments as this issue heats up in coming months".

Standard & Poor's airline analyst Phil Baggaley said United would have to resolve the pensions problems to win the federal loan guarantee it needs to exit bankruptcy.