AMR's American Will Freeze Pensions, Not Kill Them

By Salon Staff

Published March 7, 2012 10:36PM (EST)

DALLAS (AP) — American Airlines will freeze pensions for most workers and back away from a threat to terminate the plans, as the company tries to cut costs while in bankruptcy protection.

The freeze will apply to flight attendants and ground workers but not yet to pilots.

The decision to freeze instead of terminate pensions was a surprise. American hoped that the gesture would push labor unions to go along with other cost-cutting steps.

Last month American said it would terminate pension plans for 130,000 current and retired employees and hand over the plans' assets and obligations for future payments to a government agency. The airline's unions and the U.S. Pension Benefit Guaranty Corp. opposed ending the pensions, which would reduce benefits for some workers and dump billions of dollars of new obligations on the pension agency.

The director of the agency, Joshua Gotbaum, praised American for changing course.

"Bankruptcy forces tough choices, but that doesn't mean pensions must be sacrificed for companies to succeed," he said.

Under a freeze, workers will keep their current pensions but won't earn any additional benefits. Termination could have reduced benefits for about 2 percent of workers other than pilots and executives, American estimated. The airline has 73,000 employees.

The fate of pensions for about 10,000 pilots remained up in the air. The pilots can take part of their payout in a lump sum when they retire, and American insists that they give up that perk.

The airline fears that so many pilots would quit to grab the lump sum that it wouldn't have enough people to fly its planes.

Pilots, who have the richest pensions at American, face a choice: Give up the lump sums and save the value of their current pensions, or watch American terminate the plan and have their benefits reduced by the federal pension agency.

The agency won't pay above certain annual caps, which range from $24,300 for those retiring at 55 to $54,000 for those retiring at 65 — and more for people who work to older ages.

Before bankruptcy the average retiring pilot's pension was worth about $2.2 million, according to union spokesman Tom Hoban. About half was in a lump sum and the rest in monthly payments, he said. The union estimated that 3,800 pilots — about one-third — would see "significant losses" under the federal caps.

Pilots at Delta Air Lines were in the same position when that company went into bankruptcy in 2005. Delta terminated the pilots' plan, which also had a lump-sum feature, while freezing benefits for other workers at the amounts they had earned up to that time.

American's so-called defined-benefit pension plans are underfunded — the company hasn't contributed enough to cover all the money it expects to pay out as workers retire.

American's senior vice president of human resources, Jeff Brundage, said that American will look for new capital when it reorganizes under bankruptcy protection to meet its pension obligations. He gave no other details.

James Little, the president of the Transport Workers Union, which represents mechanics and baggage handlers, said that American also dropped a demand for an additional $600 million to $800 million in annual labor-cost concessions from employees — the amount that American hoped to save by terminating the pensions.

American is negotiating with TWU and unions for pilots and flight attendants over pay cuts and contract changes that it claims would save $1.25 billion per year. If the company can't agree with the unions, it can ask the bankruptcy judge in New York to impose its terms on workers.

The dispute over dumping pensions had threatened to make the bankruptcy process longer and more difficult for American and its parent company, AMR Corp. With Wednesday's move, the company hopes to take the issue off the table while still seeking other concessions from employees.


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