For the two carriers now in bankruptcy court reorganisation, the new bill allows a much longer time to repay deficits in its retirement schemes, adding a decade to the seven years previously allowed. It also permits them to use a significantly higher discount rate in calculating their pension liabilities.

The increase from 6% to 8.85% has the effect of reducing the shortfall. Standard & Poor's analyst Phil Baggaley explains that "by dramatically spreading out the pension deficit repayment period", the legislation strengthens the financial outlook at Delta and Northwest Airlines and should help attract financing to allow them to exit bankruptcy. With Northwest, it removes the overhanging issue of potentially difficult negotiations with its pilots union over compensation for the termination of their pension plan. Northwest, which was facing $3.7 billion in pension deficits as of early 2006, says the bill "will save the pension benefits of 73,000 current and former employees".

At Delta, the pilots union had already agreed to the termination of their pension plan, although the details of that agreement and Delta's funding shortfall have been challenged by the Pension Benefit Guaranty Corporation. The federal watchdog has already taken over the pensions of workers at both United and US Airways while those two carriers were in bankruptcy reorganisation.

But for legacy carriers not in bankruptcy, the bill, which President George Bush signed in mid-August, presents a more complex situation. It certainly gives them "breathing room", says Baggaley, but for major carriers such as American and Continental the situation is not as clear cut.

American unsuccessfully lobbied to persuade lawmakers to apply the 17-year grace period, or an even longer one, to carriers that are not bankrupt. The two senators from Texas, home to both American and Continental, tried in vain to get a 25-year grace period considered, and one senator, Republican Kay Bailey Hutchison, has vowed to seek a legislative fix later this year.

Without a fix, the two airlines will be in the position of having to consider freezing their pension plans, a move which would almost certainly be meet with labour resistance. Doing so would give them similar time relief and would end the build-up of retirement allowances and benefits for workers through paying benefits already earned.

Continental's pension shortfall, at $1.2 billion, is manageable, according to Baggaley. But American, with between $2.3 billion and $3.2 billion in retirement fund deficits, may ask its employees to agree to freeze their plans, says JP Morgan analyst Jamie Baker. This will not be easy because it means American would have to bring labour to the table before contracts expire. Still, says Baggaley, despite the competitive cost disadvantage American and Continental face, the bill is an improvement going forward.■

Source: Airline Business