United Airlines tossed a stink bomb our way last week. The company announced that it would not be making any more contributions to its pension funds while it was still under Chapter 11 bankruptcy protection. Taxpayers should be prepared to write another check.
United Airlines was once the largest air carrier in the United States – in fact, the world – and, to a certain extent, that is part of its problem. As deregulation exposed more of the airline industry’s faults, United’s enduring mix of internal management problems and chronic labor discontent increasingly found its way into the ticket counters and jetliner cabins where customer contact was made.
And because the airline was so huge, there were very few air travelers in the U.S. who didn’t encounter some sort of unpleasant experience with United Airlines. Whether it was a prison-trained cabin attendant, baggage handlers who could make things disappear with David Copperfield-like deftness, or an unscheduled Friday night bivouac at O’Hare, United provided thousands of travelers with something to remember – something that all the good experiences (and there were a lot of them, too) could not entirely erase.
The result was that there was no wellspring of public sympathy when United Airlines got into financial trouble. It seemed that the public was tired of the company’s endless inter-union and union-management squabbles, and was prepared to let the airline go under if it couldn’t compete. And there was little or no popular support for a federal government guarantee of the loan the air carrier said it needed to get back on its feet. United’s application for a guarantee was submitted, and turned down, three times – without attracting much notice in this busy world. Sad stories are often played out to small, uncaring audiences.
There are actually four separate pension funds involved, and United had missed making the required payments of $72.4 million to three of them in mid-July. Still, the announcement that there would be no more payments came as something as a shock – certainly to the Pension Benefit Guaranty Corporation, the government agency that would have to cough up at least $5 billion if United’s plans go belly up. Since the guarantee agency is in financial trouble itself, that would be $5 billion of our taxpayer money, of course, so we have a keen interest in the proceedings.
The Pension Benefit Guaranty Corporation was set up as part of the ERISA (Employee Retirement Income Security Act) of 1974, and was intended to ensure that workers with defined benefit retirement plans actually got the money they were promised. Defined benefit plans are the ones that promise a specific dollar amount – usually in monthly installments – that will be paid out upon retirement.
Ironically, ERISA marked the decline of defined benefit plans and the emergence, and ultimate dominance, of the 401 (k) and its relatives – which do not specify any particular retirement income. Defined benefit plans were found mostly in the older, unionized, often decaying industries of the U.S. economy. So the Pension Benefit Guaranty Corporation for the most part found itself the curator of broken dreams – congressionally authorized to clean up the mess left by mismanaged corporations. The latest corporate filings show that defined benefit pensions in the United States are underfunded by $278 billion, so they have their work cut out for them.
From an economic policy and public interest standpoint, the United Airlines situation raises some interesting and difficult questions. Clearly, the public has an interest in the airline’s future, but it is far from clear how this interest should best be pursued.
The first question to be addressed is whether United Airlines should be allowed to terminate its pension plans and, if so, under what conditions. We have, at a minimum, a $5 billion stake in this issue, and must also consider the impact on the 58,000 retirees and thousands of current employees covered by these plans.
The second question is whether United Airlines should be allowed to operate as a bankrupt corporation, shedding financial obligations as it sees fit in order to keep its costs and fares competitive. This raises obvious questions of fairness and equity, but there is, in addition, the issue of how that kind of legal subsidy affects the economic efficiency of the air travel market.
No matter how many accounting reforms are installed, corporations will still be mismanaged and fail. And some of today’s corporate bankruptcies are so enormous that their economic implications go well beyond the scope and intent of our existing bankruptcy laws. Congress should be looking into this. There used to be a television advertisement that included the advice, “Life is messy. Clean it up.” In this case, that’s exactly what we should do.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.
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