From Pensions to Profits in Airlines to Auto
By Jennifer Biddle and Richard Turk
Labor Notes/September 2004
IT WOULD BE A GREAT Jeopardy question for any blue-collar union worker.
It was the biggest corporate entity for its industry in the nation and lost
huge amounts of revenue to rivals who utilized low-wage, non-union labor in
the US to provide an unimaginably cheap product. A revolving door of top
executives squandered billions by acquiring and investing in business
ventures that fell flat. It was wracked with industry overcapacity,
decreased demand amid a sluggish US economy and depressed prices. Its union
capitulated to billions of dollars worth of concessions and to massive
layoffs in an effort to save it.
Is it Goodyear Tire & Rubber Co. and the United Steel Workers of America
(USWA), or United Airlines and the International Association of Machinists
Actually, itıs both.
At Goodyear, the USWA took the added step of hiring Wall Street firm Lazare
Freres to devise a long-term plan resulting in an even more aggressive
restructuring than the company originally asked for.
At United, the IAM simply gave up language in its contract protecting
mechanics from the outsourcing of labor-intensive heavy maintenance. The
move by the IAM allowed United to close two of its three maintenance
overhaul bases, resulting in the loss of over half its mechanics post-9/11
largely to third-party vendors in the US.
To save the oldest commercial airline in the country, unions for Unitedıs
mechanics, pilots, flight attendants, baggage handlers and customer service
agents agreed to give away $5.2 billion in concessions over five and a half
years under the threat of possible bankruptcy. In the end, rank and file
mechanics at United were the only group to vote against the cuts.
United still went bankrupt in December 2002.
So did steelmaker LTV Corporation in 1987 and again in 2003.
LTV led the way in the steel industry in wiping out retiree health benefits
through bankruptcy and turning its pension obligations over to the Pension
Benefit Guarantee Corporation (PBGC), the government agency that insures
workersı pensions. The PBGC cut retireesı benefits drastically while LTV
replaced its defined benefit plans with defined contribution plans for
The PBGC successfully argued in a Supreme Court case that LTV should assume
fiscal responsibility for the funds because it was financially solvent
enough to do so. The Supreme Court sided with the government and returned
three of LTVıs four pension funds to the employer.
Last year LTV liquidated during its second bankruptcy and the PBGC took over
its defined benefit plans that were under-funded by some $2.3 billion
AIRLINES MAKE THEIR MOVE
Testing the waters in the airline industry, US Airways, also operating with
bankruptcy protection, terminated its pilotsı pension plan and turned it
over to the PBGC last year. Pilots saw their retirement incomes go from a
maximum $130,000 to a cap of $28,585 a year.
However United, long on firsts in aviation history, appears to be at the
forefront of transforming the entire airline industry.
United has 35,000 retirees and pensions that are under-funded by an
industry-leading $8.3 billion. United is committed to $4.1 billion in cash
contributions over the next five years, along with another billion due for
retiree healthcare benefits.
Mid-July the company announced it would skip its pension payments for the
rest of the year (some $568 million) leading many to speculate that United
would completely eliminate its defined benefit plans for current employees
and dump the rest of its obligations on the PBGC.
If United doesnıt pay up, the PBGC will be liable for $6.4 billion - the
largest default in the PBGCıs history.
The PBGC protested Unitedıs move saying it was illegal. Of particular
concern to the PBGC is the airline industryıs estimated $31 billion pension
liabilities, and the potential for a domino effect with other airlines as
the industry restructures.
(Box?: Pension liabilities for other carriers: Delta 5.7b; Northwest 3.7b;
American 2.7b; and Continental 1.1b)
The PBGCıs protest came on the heels of the news in late June that the Air
Transportation Stabilization Board (ATSB) turned down Unitedıs loan
guarantee request to exit bankruptcy for the third and final time. The ATSB
asserted United could get financing on its own. Sure enough, one month
later, United received $1 billion in additional Debtor In Possession
While the mainstream media reported the cash came with the caveat that
United jettison its pension debt, it was actually United that presented the
idea to its financiers.
Earlier in the summer, United gave notice to its retirees that it would need
to cut health benefits and worked out deals with all of its unions in
advance of petitioning the bankruptcy court.
While legally it is easier for employers to cut health benefits for
retirees, pension cuts are more complicated. Pensions law says that pensions
owed workers cannot be taken away, but bankruptcy law defines pensioners as
unsecured creditors with respect to any shortfall in funds.
Mid-April Congress made it easier for airline and steel companies to
under-fund their pensions by allowing them to skip payments into their plans
for the next two years.
Additionally, many employers paid little into pension funds during the bull
market of the late 1990s as assets grew in value due to the strong market.
In 1999, the average pension for an S&P 500 company was over-funded by $726
million. Eighty-five percent of these companies are now under-funded.
THE UNION RESPONSE
When all is said and done, retirees at United stand to lose more than $2
billion in pension benefits should the airline hand them over to the
The IAM, the largest union at United, filed a lawsuit on behalf of its
37,000 active and retired members against Unitedıs move not to meet its
Along with the IAM, the Association of Flight Attendants is petitioning for
a Chapter 11 Trustee.
The pilots issued a statement saying they will do whatever is necessary to
defend their pensions. ALPA points out that Unitedıs pilots have taken a 45%
cut in pay, a 20% cut in benefits and a 15% increase in work hours over the
past 18 months.
The Aircraft Mechanics Fraternal Association (AMFA), who won representation
of Unitedıs mechanics from the IAM in July 2003, has met with the PBGC and
is organizing an informational protest at airports across the country.
Since mechanics at United have been disproportionately hit with layoffs and
cuts, the anger here seems to run deepest. Seeing the writing on the
wall--that their jobs may be completely eliminated in the next few
years--there is much talk on the shop floor of an organized work action.
The last time United mechanics tried to fight cuts during contract
negotiations in 2000-2002, United had a judge issue a Temporary Restraining
Order preventing any kind of organized resistance. Mechanics at that time
were still in the IAM and the President of Local 1781, Ray Perry, was famous
for saying he would not go to jail for mechanics who violated the TRO.
In response to questions at a union meeting in July about a possible
independent work action by mechanics today, AMFA Local 9 President Joe
Prisco said, "If the company told me to tell mechanics to stop whatever it
is they do, then my response would be, ?I did not tell them to do anything,
therefore I will not tell them to stop what they decided to do.ı"
"And if it came to the same threats the IAM was given," Prisco said, "my
response would be, ?Lock me up.ı"
CHANGING LANDSCAPE FOR WORKERS
All pension programs are at risk, including ones sponsored by unions. In
fact, programs like the Teamstersı Central States Pension Fund and the IAMıs
National Pension Fund have loopholes that suspend or eliminate all pension
payments to retirees who go back to work - something more and more older
Americans will be forced to do as their healthcare costs increase with cuts.
Twenty years ago, the ratio of worker to retiree was three to one. Today it
is one to one and set to grow exponentially as baby boomers begin to retire.
The airlines will not be the last stop in this transformation. In 2003
pension and healthcare costs at General Motors amounted to $6.2 billion.
Thatıs $1,784 per vehicle. Compare that to Toyotaıs pension costs which
amount to $200 per vehicle.
While these industries are changing, they are not dying. In fact, they are
growing. Boeing for example projects a $5.2 trillion market for new
commercial aircraft and aviation services over the next 20 years. The
Federal Aviation Administration expects the number of passengers to exceed
more than one billion by 2015.
Itıs a tragic irony of history that the generation of children who were born
in 1938 and benefited from the passage that year of the Fair Labor Standards
Act which all but eliminated child labor, is the same generation who now
will have to work through what was promised to be their golden years.
Jennifer Biddle is an aircraft mechanic at Alaska Airlines and a furloughed
mechanic from United, both AMFA-represented carriers. Richard Turk is the
Communications Officer for AMFA Local 9 in San Francisco.