American Airlines Inc. said Feb. 1 that it will seek bankruptcy court approval to terminate its four massively underfunded pension plans.
The termination, if approved, would shift billions of dollars of promised but unfunded benefits to the Pension Benefit Guaranty Corp., resulting in the biggest loss ever for the agency.
"We simply do not see a way we can secure the company's future without terminating our defined benefit plans," American Airlines said in a statement.
"If we receive court approval to terminate our plans, every active employee's and retiree's vested defined pension benefit will be turned over to the PBGC and guaranteed up to the PBGC's 2011 maximum benefit limits," the AMR Corp. unit said.
The airline said it plans to replace the defined benefit plans with a new 401(k) plan. All nonpilot employees would receive a dollar-for-dollar company match of employee contributions, up to 5.5 percent of salary. Pilots would participate in a new defined contribution plan, details of which the airline did not disclose.
If AMR, which filed for bankruptcy reorganization in November, receives bankruptcy court permission to fold the plans, the PBGC would be hit with its biggest loss ever. The PBGC's deficit last year was a record $26 billion.
According to preliminary PBGC estimates, the four plans have about $8.3 billion in assets and about $18.5 billion in promised benefits for nearly 130,000 participants.
The PBGC said if the plans were to fold, the agency would be liable for about $17 billion in benefits, resulting in an $8.7 billion loss to the agency and eclipsing the $7.35 billion loss incurred in 2005 when the agency took over United Airlines' pension plans.
The PBGC, though, is expected to oppose American Airlines' action.
"Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have declined to provide even the most basic information to decide that," PBGC Director Joshua Gotbaum said in a statement.
None of the airline's competitors offers ongoing defined benefit plans.
Aside from United, the PBGC in 2003 and 2005 took over three US Airways Inc. pension plans, incurring a $2.75 billion loss. Then, in 2006, the PBGC took over a Delta Air Lines Inc. plan covering the airline's pilots at a cost of $1.72 billion. Those terminations occurred in the wake of bankruptcy filings by the two airlines.
In addition, Delta sponsors a frozen plan for nonpilot employees and retirees, as well as three frozen plans covering Northwest Airlines Inc. employees and retirees, which Delta acquired in 2008. Participants do not accrue benefits in frozen plans.
Other major competitors, including Southwest Airlines Co. and JetBlue Airways Corp., do not sponsor defined benefit pension plans.
Speculation about the future of American's plans has loomed since parent company AMR Corp. of Fort Worth, Texas, filed for bankruptcy reorganization in late November.