American Airlines plans to cut 13,000 jobs, terminate pension plans


Details of the American Airlines bankruptcy are emerging.  And the details are that AMR wants all of its creditors to take a deep haircut, especially the workers:

The company aims to cut labor costs 20% under bankruptcy protection, and will soon begin negotiations with its three major unions. Some management jobs would also be cut.

AMR also proposes to end its traditional pension plans. The move has been strongly opposed by the airline's unions and the U.S. pension-insurance agency.

CEO Thomas Horton said the company hopes to return to profitability by cutting spending more than $2 billion per year and raising revenue by $1 billion per year.

Horton said cost-cutting will include restructuring debt and aircraft leases, grounding older planes, and changing labor contracts.

This is just the opening salvo in what promises to be a bruising negotiation with the unions.  It's not clear that the company actually expects to be allowed to terminate the pension plan.  But the threat certainly gives them leverage with the unions, especially the pilots, because if the plan is terminated and taken over by the Pension Benefit Guaranty Corp, the payouts will be capped at around $50,000 a year--far less than pilots get from the current plan.

However, the PBGC is going to fight hard to keep this from happening.  Our government-chartered pension insurer is severely underfunded, thanks to congressmen who showed their appreciation for local firms by keeping pension insurance premiums low.  And to be fair, it's hard to set these premiums, because what you'd really like to do is risk-rate the premiums--force firms to pay more when their firms look especially shaky.  Unfortunately, pensions look especially shaky when the firms that sponsor them look especially shaky, and the PBGC does not really want to be in the business of tipping shaky firms over the edge of bankruptcy and then . . . will you look at that! . . . assuming responsibility for their underfunded pensions.  Nor do they exactly want solvent firms to have to pay extra-high premiums in order to compensate for their idiot competitors who poured the pension fund into jackalope ranches and fur-bearing trout farms.

And so the agency is badly underfunded, and very much opposed to taking on the burden of large, underfunded pensions, which would hasten the day when the PBGC itself is forced to apply to Congress for a bailout.  They'll fight it all the way through the bankruptcy process.

As I understand it, the judge is likely to listen, too.  Bankruptcy courts are not in the business of giving firms a "get out of expensive pension promises free" card; they exist to allocate inevitable losses among creditors.  American cannot just apply to have its plan terminated because they'd rather not pay the bill; they have to prove that they actually can't return to profitability without terminating the plan.

I have no idea how that will shake out, of course.  Hopefully the company and the union will come to some sort of reasonable accommodation, and we won't have to find out.

Source: The Atlantic