Pension Legislation Gives Airlines a Boost

Airline pension legislation approved by the Senate Aug. 3 should help bankrupt airlines attract debt financing to exit Chapter 11, according to a Standard & Poor's report. The legislation will ease cash obligations over the next few years for AMR Corp., the parent company of American Airlines, and Continental Airlines.

The pension legislation allows airlines that have frozen their pension plans, 17 years to repay their pension deficit; most U.S. companies get seven years. Airlines that have not frozen their defined-benefit pension plans can repay plan deficits over 10 years.

Northwest Airlines Corp.'s CEO Doug Steenland said the airline would have been forced to terminate pensions if legislation was not passed before Congress broke for the summer recess (CIN, 7/6). In a release, the airline applauded the bill's passage and said it will save the pension benefits of 73,000 current and former Northwest employees, if the airline had terminated its pensions, they would have been handed over to the Pension Benefit Guaranty Corp. This could have made anunsecured claim that would have diluted recoveries for Northwest's unsecured bondholders. Banks launched syndication of a debtor-in-possession financing for Northwest last Monday, which could be affected bythe threat of a flight attendant strike (see related story, page 1).

The ratings agency said it is unclear, however, whether foregoing the opportunity to terminate pension plans over the long term will help or hurt Northwest. "Keeping pensions and not terminating them leaves them with greater liability over the long term," said Philip Baggaley, an S&P analyst.

Baggaley did not think last Thursday's arrest of terrorist suspects in the U.K., who allegedly were planning to blow up planes departing the U.K. for the U.S., would have a long-term negative effect on airlines. "It will cause some loss of revenues in the short term from trip cancellations and loss of travel bookings," said Baggaley. "But as long as there is no attack or a wider terror plot that is out of control, it will not have a long-term impact."

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