Pending pension legislation for distressed airlines could have serious implications for unsecured bond holders if an upcoming law that forces airlines to terminate their pension plans is passed. Lawmakers on Capitol Hill are preparing to hash out a final pension reform bill for distressed airlines, which is scheduled to be passed by April. Airlines are pulling for a Senate bill that would allow them to spread their pension plan funding over 20 years instead of the current four years. A House version would not give that break to airlines.
If the Senate version of the bill is not passed then observers said companies such as Delta Air Lines and Northwest Airlines may be forced to turn over their the pensions to the Pension Benefit Guaranty Corp. These claims would then be made pari passu to the unsecured bonds, seriously diluting the unsecured note holders' claims. "Pension legislation will be the next focus of attention," said a trader dealing in distressed airline bonds. "I would imagine it will make people nervous. It should create more volatility on the unsecured bonds."
Roger King, an airline analyst at CreditSights, said he thinks Northwest and Delta will end up rejecting the pension plans, even if the Senate version goes through. "Let's say pension legislation goes through and Northwest and Delta are able to pay pensions over 20 years, it is a big amount for a company to pay for 20 years," said King. He added that if the airlines terminated their pensions, the unsecured claims would be bad for the bonds "They would not wipe out the value of the bondholders' claims, but they would significantly dilute them," said King.
Northwest and Delta did not return calls seeking comment. Phillip Baggely, managing director at Standard & Poor's and senior airline credit analyst, said Northwest has stated that it would try to maintain defined benefit plans if pension legislation went through that would allow it to stretch pension payments over a long period. The case with Delta is less certain. "Delta has been more quiet. They have a larger pension deficit than Northwest. It is not clear whether legislation would allow them to maintain claims," said Baggely. Delta and Northwest have not yet filed 10Ks that state their current pension liabilities. As of the end of 2004, Delta had $5.3 billion of underfunded pension liabilities, while Northwest had $3.8 billion. "It has probably gotten a lot worse since then," said Baggely.
Keeping hold of pensions would be a cash drain on the airlines, but it also gives them a bargaining chip that they can use to negotiate labor contract concessions with their unions. This could be an important motivation for airlines to hold onto them. "It is valid that airlines may say they want to keep their pensions to bargain with the unions," said King. But the new bankruptcy law, which has reduced the time a company can stay in bankruptcy, may also persuade airlines to terminate their plans to speed up the process. "People are cognizant of the fact that bankruptcies are faster and more efficient," said the trader.
