"Bankrupt airlines rarely have much lift left"

Monday, October 3, 2005

Bankrupt airlines rarely have much lift left
By Tim McLaughlin
The St. Louis (MO) Post-Dispatch


Airlines that file for bankruptcy protection to reorganize have a staggering
failure rate, a government audit released Monday shows. And recent
bankruptcy filings by Delta Air Lines and Northwest Airlines don't bode well
for pensions, which have a track record of being waylaid during the process.

Between 1978 and 2004, there were 162 bankruptcy filings - reorganizations
and liquidations - by 142 airlines. But only 18 are still operating with
Federal Aviation Administration certificates, the Government Accountability
Office report said.

The study also said the Chapter 11 process, which allows companies to dump
their pension obligations and reduce their debt, doesn't give reorganizing
airlines an edge over rivals that are not in bankruptcy.

"There is no clear evidence that airlines in bankruptcy keep capacity in the
system that otherwise would have been eliminated, or hurt the industry by
lowering fares below what other airlines charge," the GAO said. "While the
liquidation of an airline may reduce capacity in the near term, capacity
returns relatively quickly."

The GAO report also shows how companies can use a loophole to distort how
much they should fund their workers' pensions. Airlines' defined-benefit
pension plans are underfunded by an estimated $13.7 billion, and they face
minimum contribution commitments of $10.4 billion over the next four years,
the GAO said.

That's significantly more than they can afford, given their huge operating
losses and other fixed obligations, the GAO said. Congress is trying to
remedy the problem by giving the industry more time to meet contribution
requirements.

Delta and Northwest currently have the most significant pension deficits,
more than $5 billion and $4 billion, respectively. But on a termination
basis, Delta's pensions would be underfunded by $10.6 billion, while
Northwest's would be $5.7 billion, the GAO report said.

As recently as 1999, airline industry pensions showed a surplus of $700
million. That balance took a hit amid stock market losses and rock-bottom
interest rates.

The GAO said interest rates play a critical role in calculating the level of
assets needed today to pay tomorrow's obligations to retired workers.

When interest rates fall, projected returns on assets are lower, requiring
companies to invest more money today to finance those future benefits. Using
a 6 percent interest rate as an example, the GAO said, a promise to pay $1 a
year for the next 30 years has a present value of $14. If that interest rate
is reduced to 1 percent, however, the present value of the $1 obligation
increases to $26, the GAO said.

Companies also can use funding credits to meet minimum contribution
requirements. The credits accumulate when a company contributes more than
the minimum in a year, or when the plan's actual performance exceeds
expectations.

The credits then can be substituted in later years for cash contributions,
acting as a buffer against volatile funding requirements, the GAO report
explained. But when the market value of a pension plan's assets declines,
the value of the funding credits may be inflated.

A company can receive a $1 million credit by making a $1 million
contribution above the minimum funding requirement. However, even if the $1
million in assets loses all value the next year, the $1 million credit
balance remains in place, the GAO said.

Starting in 2000, United Air Lines used funding credits to avoid making cash
contributions to its pilots' pension plans, even though the true funded
status deteriorated, the GAO said.

Bankrupt United terminated its pension plans this year, costing employees
$3.2 billion in lost benefits. That figure represents the difference between
the original benefit and the lower amount insured by the Pension Benefit
Guaranty Corp.

Bad odds

Bankruptcy filings are common in the airline industry. But a new federal
report shows a low survival rate for airlines that did so between 1978 and
2004:

Total bankruptcy filings: 162*

Chapter 7 liquidation: 14

Chapter 11 reorganization: 148

No longer FAA certified: 112

Refiled for bankruptcy, no longer certified: 18

Has FAA certificate, still operating: 18

*Note: Some airlines filed for multiple bankruptcies.

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