The Hindu Business Line : Giving wing to crashing carriers

The US Bankruptcy Court approving the United Airlines plea to shift its under-funded pension plans to the Pension Benefit Guaranty Corporation has raised the hackles of its employees. But this historic approval allows the big carriers to re-engineer themselves along the lines of the LCCs, and remain air-borne. This has important implications for India's airline industry, which is being deregulated, says G. Ramachandran.

JUDGE Eugene Wedoff of the United States Bankruptcy Court for the Northern District of Illinois made history this week. He chose to vote for pragmatism and the long-term viability of America's beleaguered legacy airlines. He approved the plea of United Airlines (United) to shift its under-funded pension plans to the Pension Benefit Guaranty Corporation (PBGC). This historic approval allows United to shift $6.6 billion of its defined-benefit pension liabilities.

United's past and present employees are livid at Judge Wedoff's ruling. America's Association of Flight Attendants (AFA) has threatened random, unannounced strikes against United. The AFA, which represents about 15,500 of United's flight attendants, says it has been sold out by the ruling.

United's pilots feel a strike is a real prospect. The approval to shift pension liabilities, they assert, has undermined the morale of United's employees.

Past employees of United may be justified in being angry at having been sold out. But is the case for anger and despair on the part of United's current employees right and purposive? United has approximately 61,000 employees, of whom about 80 per cent are represented by unions. It is very tempting to go on the affirmative and say they are and then go on to slamming United for breach of trust. But slamming United would be wholly counterproductive.

Same, any which way

United would sink without a trace if it has to stand by its pension obligations. To fund its pension payouts, United would have to increase its fleet size and raise fares.

It has to do both very quickly to keep its past and present employees happy and calm. But United is bankrupt and cannot find the money to pay some of its lease payments due. It faces the threat of dispossession of leased aircraft. Buying or leasing new aircraft is ruled out.

In a fiercely competitive market, raising fares is as good a move as flying all United flights empty. America's low-cost carriers (LCCs) such as Southwest Airlines and JetBlue Airways have carved up almost a third (30 per cent) of the domestic market. Every cent of raised fares at the big carriers would be a boost to the LCCs' wings. So, United would lose any remaining wings if it chose to push fares up.

United can, of course, choose to do neither. That would mean slow death for a while and rapid extinction thereafter. Its present employees would yet be exposed to the certainty — it would no longer be a risk — of not receiving a major part of their pension entitlements. They would be lucky if they got their salaries and wages. Why? United has been under bankruptcy protection since December 9, 2002.

Seeing the brighter side

A sober analysis of United's plea and Judge Wedoff's ruling would show that the ruling has brightened up the future of United's current employees. They would not have to carry the burden imposed by the past employees who lived luxurious lives when the US airline industry was regulated.

They would not be crushed by the burden of pensions to be paid to past employees who earned fat fortunes when fares were unrealistically high. For example, a ticket from Dallas in Texas to Nashville in Tennessee cost $468 in 1965. It costs $220 in 2005!

The Airline Deregulation Act of 1978 has done wonders for the common man. It may have also brought some misery to those who benefited immensely when Europe's aristocrats, America's tycoons, Hollywood's stars, India's maharajas and the Beatles alone could afford to fly.

Given that fuel costs have risen by more than 40 times in 40 years, a fall in salaries, wages and pensions should be seen as the necessary fallout of the deregulation of the airline industry. At the same time, it would be grossly unjust to push United's current employees out of work to pay for the pensions of employees who earned very big salaries when a ticket from Dallas to Nashville cost $468. It would also be suicidal to push America's legacy carriers out of business.

A sober analysis of Judge Wedoff's ruling is a must for India's airlines, employees, unions and policymakers. It has important implications for India's airline industry. India too has begun to deregulate its airline industry. As competition intensifies, some airlines could go bankrupt.

If costs cannot be cut and if obligations cannot be restructured, India's airline industry would lose one wing after another.

Deft and bold

Judge Wedoff's ruling has cleared the way for the largest pension default by an American company in the 31-year history of the PBGC, the US's pension insurer.

The ruling has deftly and boldly kept the economic and competitive circumstances of the legacy carriers in mind while making the ruling on United's plea.

The significance of the Wedoff ruling goes far beyond mitigating the excruciating pain suffered by United since September 11, 2001. The option to shift under-funded defined-benefit pension liabilities will now be vigorously examined by the other big legacy airlines such as American Airlines, Delta and Northwest. The ruling allows the big carriers to re-engineer and rejuvenate themselves. In very simple terms, Judge Wedoff has given United and its unspectacular peers the opportunity to craft and recreate themselves along the lines of the LCCs.

Blow after blow

America's legacy air carriers have been under intense fire since that fateful day in September 2001 when terrorists chose to use hijacked passenger aircraft to launch a savage attack on civilian lives and structures. Passenger traffic fell as a consequence. The economic downturn has made a rebound that much more difficult.

The surging price of fuel since 2003 has pushed up the operating costs of the legacy carriers. Due to the highly competitive nature of the airline industry, United's ability to pass on increased fuel costs to its customers in the form of higher ticket prices has been limited. What is more, fuel is the second biggest component of costs of almost all air carriers. There are no prizes for guessing what the biggest component is. Employee costs are the biggest. With revenues under attack and costs out of control, the big legacy carriers had hoped that they would benefit from any marginal improvement — even if infinitesimal — in passenger traffic. However, to their utter dismay and discomfort, passenger traffic has migrated to the LCCs such as Southwest Airlines and JetBlue Airways. The LCCs have carved out over 30 per cent of the domestic share of passenger traffic.

As a result, a whopping 75 per cent of the domestic revenue of United, American, Delta and Northwest is now exposed to the LCCs. A decade ago, the revenue impact of the LCCs was merely 37 per cent.

Legal, with precedent

Neither the plea nor the approval is in violation of any constitutional and contractual obligations. United is a wholly-owned subsidiary of UAL Corporation. UAL and United had filed voluntary petitions to reorganise their businesses under Chapter 11 of the United States Bankruptcy Code on December 9, 2002. United now operates its business as a `debtor-in-possession' under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the US Bankruptcy Code.

The US Bankruptcy Code allows United to shift as well as to default on its pension obligations. Effective July 2004, United ceased making contributions to its qualified defined benefit pension plans.

United had to do this to preserve its liquidity. If it had contributed to the pension plans, its flight attendants would have been grounded by now. Thanks to United's decision, they are flying. They do not have to envy the flight attendants that fly for US Airways.

US Airways, a smaller airline, has been under bankruptcy protection for the second time since September 12, 2004. It had shifted its pension plans to the PBGC in February 2005. US Airways was reorganised under bankruptcy protection after the 9/11 attacks, and was released from bankruptcy on March 31, 2003.

However, it filed for bankruptcy protection for the second time on September 12, 2004. The uncommon becomes common when industries are deregulated.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A low-key visit

Giving wing to crashing carriers

Coal imports SAIL into trouble

Voter apathy

Water situation: Is Kerala in dire straits?

Banning Tobacco

Right to information