Bankruptcy and Pension Progress
United has inspired significant media attention for its successful progress in restructuring, meeting its DIP lenders’ requirements, achieving an operating profit, and progress in addressing pension issues.
While United continues to operate under Chapter 11 bankruptcy protection, and significant obstacles must be overcome prior to obtaining exit financing and successful emergence from bankruptcy, our airline does seem to be on the right track. The Company reported an operating profit of $60 million in October and had a net income of $25 million before reorganizing expenses. United also announced it met DIP covenants and expects to meet them for November as well. This means United has hit its marks, meeting performance targets set by DIP lenders for the ninth month. The operating profit of $60 million compares to the operating loss of $240 million a year ago, and despite October not being one of the busier months for larger commercial airlines, United maintained a positive cash flow of about $7 million a day. The sum result amounts to United having $2.5 billion in cash at the beginning of November, with three quarters of it unrestricted.
In the last two years our industry has definitely seen changes unprecedented even during Deregulation, and we’ve all learned to adapt continually to adjust with them. But despite dire warnings and speculation from some analysts and the media that domestic airlines are on the verge of collapsing, many airlines are in fact hiring. The AFA International website has a link on its front page that lists no fewer than 22 airlines that are looking for Flight Attendants. Despite the fact that things are not as dire as many predict or claim to be, it will take significant time and resourcefulness to keep up with the transformation our industry is undergoing.
One of the largest issues before United is pension funding, but the financial requirements of adequately funding pensions are not unique to our airline, or even the airline industry. The New York Times reported yesterday on United’s Plan to postpone about $2 billion of required pension contributions over the next three years, having concluded that doing so is the only way to bring our airline out of bankruptcy.
The information reported in the New York Times is not new. We’ve reported on United’s filing of IRS tax waivers in early October, as well as the collaborative efforts of AFA, management and all United Unions in support of government legislation to provide relief for airline deficit reduction contribution payment penalties. The waivers would allow United to contribute $4.8 billion to its pension plans over the next five years, or about $1 billion annually, instead of a majority being due in the first two years.
In response to a New York Times article from November 20, 2003, regarding pensions, United’s Chief Financial Officer Jake Brace stated, "Some people are trying to confuse our situation. The facts are that we can fund our pension obligations on the standard, non-accelerated timetable; we intend to continue to fund our pension obligations; and we do not want to shift this burden to the Pension Benefit Guaranty Corporation (PBGC) and the American taxpayer.
Brace continued by stating, "The only issue we have is the significantly accelerated pension funding schedule (deficit reduction contributions) currently mandated. United, along with many other companies, supports the efforts in Congress to modify this accelerated timeline and smooth out pension contributions in the short term. This would enable companies to protect the pension benefits of millions of American workers and retirees for the future. We are emphatically not seeking government aid or asking the government to take over our obligations."
Other airlines as well as government agencies, including the PBGC are closely watching the IRS decision on waivers, and will likely raise objections if United’s applications are approved. Opposition, particularly from Continental, however, is not surprising. Gordon Bethune has objected to everything United has applied for with any government agency. A decision from the IRS is expected to take about 9 months and in the meantime, AFA is actively lobbying with United and the other Unions for a legislative solution, which we all agree is the preferable choice.
The House of Representatives approved a bill yesterday that would allow airlines with severely underfunded pension plans to defer 80 percent of the deficit reduction contributions for the next two years. This positive step towards resolving United’s pension issues can be credited towards AFA Government Affairs’ hard work in collaboration with United and the Union Coalition. The House bill now moves to the Senate, where similar legislation is pending.
As we end the week with positive news about United’s financial performance and movement towards solving United’s pension issues, the Company also issued a press release about United’s operational performance and credited the results to front-line employees. Pete McDonald, executive vice president - Operations stated, "United employees once again delivered strong operational performance in spite of the challenges presented by the wildfires in California and the increase in load factor over last year. System-wide, 77 percent of United flights departed exactly on time. On-time arrivals within 14 minutes was 86.2 percent."
In 2004, our Contract provides that results such as these will provide quarterly bonuses to all United employees. Representatives from AFA, each of United’s Unions and management groups gathered this week to discuss communication about the Success Sharing plan scheduled to begin in January of 2004. Success Sharing was negotiated as part of the Restructuring Agreement for all Union contracts and will take part in two different plans, Performance Incentive and Profit Sharing. The Profit Sharing Plan will not begin until 2005, but Performance Incentive will start in just six weeks and will provide opportunity for a pensionable bonus that can amount to as much as 10% of our annual wages, including base, holiday, sick, vacation, overrides and premium pay. Management will set the goals annually with the approval of the United Board of Directors, and our Contract requires that a large portion of management’s salary be tied to these goals so that our Management will have an invested interest in our Company’s success, and also ensure that the goals are attainable for all of us to profit. More information about this program will be available as we approach the New Year.
Our Company is still in bankruptcy, but throughout this past dismal year, United would not have been able to continue operations without the extraordinary efforts of the front-line employees. With the initiation of the Incentive Program, United Airlines will move towards a new way of doing business that values the contributions of all of its employees and shows the rest of the industry and its customers that United is committed to continuing its outstanding performance and service.
