AMR Corp, the bankrupt parent company of American Airlines, has offered to freeze, rather than terminate, the pension plans of many of its employees in a significant concession to the US pension insurance agency and labour unions.
It said on Wednesday that the proposal was an effort to speed up vital but contentious contract negotiations with unions. AMR says it must cut 13,000 jobs, reduce costs by $2bn and boost revenues by $1bn in order to survive.
“We believe this solution would remove a major obstacle to reaching consensual agreements and help to spark needed urgency at the bargaining table,” Jeff Brundage, an American Airlines executive, said in a letter to employees.
Observers said the AMR offer was also an attempt to forestall unwanted takeover approaches during bankruptcy, by appeasing influential, but potentially disgruntled, parties such as the Pension Benefit Guaranty Corp, that might be tempted to ally with outside groups to secure a better deal.
Under US bankruptcy rules, AMR’s management, which prefers an independent future, has the exclusive right to lead the restructuring for up to 18 months. After that point, third parties working with unsecured creditors can offer rival plans.
AMR said it was still targeting $1.25bn in employee cost savings and that it would pay for the incremental annual pension costs and the balance sheet pension liabilities by raising new capital “at the appropriate time”.
Under the plan, AMR will honour benefits accrued before the freeze date for all non-pilots. Mr Brundage said the airline could not accommodate pilots as their contracts allow them to retire with lump sum payouts.
If a significant number of the 5,207 pilots eligible for retirement chose to do so in a short period of time, tempted by the availability of the payouts, the moves “would have a severe, detrimental impact on our operations and is a risk the company simply cannot afford to take”.
The Allied Pilots Association, which represents the airline’s 10,000 pilots, said it would ask its members whether they would waive the lump sum option in order to address management’s concerns.
In early February, AMR presented proposals to dump its underfunded pension plans on to the PBGC as part of a broader restructuring effort, triggering an outcry. AMR sponsors defined benefit plans for about 130,000 workers and retirees.
The PBGC opposed AMR’s initial proposals, in part because taking on the pension liabilities would further weaken its stretched balance sheet. Last year the PBGC reported a record deficit of about $26bn. It estimates that AMR’s plans are underfunded by about $10bn.
“Bankruptcy forces tough choices, but that doesn’t mean pensions must be sacrificed for companies to succeed,” said Josh Gotbaum, director of the PBGC,. “We will continue to work with American and the other participants in the bankruptcy to ensure that success.”
Unions were also upset, arguing that some workers would face pension cuts under the PBGC’s less generous payouts and that if the plans were terminated employees would never be able to win better terms from AMR, even if its situation improved.
Get alerts on AMR Corp when a new story is published