"The stick when unions refuse the carrot"
01-13-2012, 09:35 AM
#11
Gets Weekends Off
Joined APC: Jan 2006
Position: Right seat, left seat, right seat, left seat....?
Posts: 122
Airlines Game Their Pensions by Imitating Governments - Forbes
Airlines Game Their Pensions by Imitating Governments
AMR, the parent company of American Airlines, is in bankruptcy. The Wall Street Journal reports that they are looking to discarge some pension obligations, which is common for bankrupt firms. But AMR’s pension plans are less funded than they should have been, because the government gave airlines a special break that allowed them to underfund pension plans—by mimicking the accounting practices used by state and local governments.
The key to pension funding calculations is a figure called the discount rate—essentially the inverse of an interest rate, it determines how much money you need to set aside today to cover an obligation that is due far in the future. Companies that guarantee pension benefits are generally required to use a discount rate that matches the interest rate on high-quality long-term corporate bonds, currently about 5 percent.
But in 2007, Congress passed a law (actually, they inserted a provision in the Iraq War Funding bill) that specially allowed airlines to use a discount rate of 8.25 percent. A higher discount rate means fewer assets are needed to cover a given set of benefits, and therefore lower contributions into the pension fund are required. Essentially, this law allowed cash-strapped airlines to borrow money from their pension funds to keep themselves afloat.
While a discount rate over 8 percent is irregular in the private sector, it is common among state and local governments. Indeed, 8 percent is the most commonly used discount rate among state and local pension systems in the United States, and some plans use a rate as high at 8.5 percent.
These rates assume that the plans can consistently achieve investment returns as high as 8 percent a year; while plans may achieve those rates on average, this accounting practice does not account for the fact that payouts to beneficiaries are fixed while investment returns may vary widely. (For a more detailed discussion of discount rate selection and what’s wrong with an 8 percent rate, see my National Affairs essay from last spring.)
Pension beneficiaries will bear the brunt of the pension underfunding if AMR defaults. As a Mercer consultant tells the Journal: “It allowed them to make promises they knew would be difficult to keep… It’s not fair to the employees.”
Public pension plans have a fallback that AMR does not: demanding more money from taxpayers. The usual justification for allowing high discount rates in the public sector is that governments do not go out of business; sooner or later, at taxpayer expense, they will make good on their pension promises. The trouble with that idea is that sometimes they do not.
In rare cases, municipal governments have drawn the balances of their pension funds all the way down to zero, leading them to sharply cut back pension benefits or shut them off entirely. So far, only small jurisdictions have reached this point, though some larger ones (such as Cranston, Rhode Island) are in the danger zone.
More worryingly for public employees, several states have addressed pension funding shortfalls by cutting back on previously vested benefits. In the last two years, laws enacted in Colorado, Minnesota, New Jersey, South Dakota and Rhode Island have cut back on earned pension benefits, generally by reducing or eliminating cost of living adjustments.
These laws all face court challenges, but so far they are being upheld. If these laws survive, they will demolish the assumption that public employee pensions are ironclad guarantees, and the related assumption that public employees do not need to concern themselves with the funding status of the funds that back their pensions. Governments’ apparent ability to abrogate pension obligations presents a strong argument for forcing those governments to fund their pensions adequately.
The Journal notes that Congress is considering broader relief for corporate pension sponsors, by allowing a higher discount rate despite today’s low interest rate environment. That would be a mistake. Instead, Congress should insist on conservative funding standards—for airlines, for other companies, and for state and local governments.
Airlines Game Their Pensions by Imitating Governments
AMR, the parent company of American Airlines, is in bankruptcy. The Wall Street Journal reports that they are looking to discarge some pension obligations, which is common for bankrupt firms. But AMR’s pension plans are less funded than they should have been, because the government gave airlines a special break that allowed them to underfund pension plans—by mimicking the accounting practices used by state and local governments.
The key to pension funding calculations is a figure called the discount rate—essentially the inverse of an interest rate, it determines how much money you need to set aside today to cover an obligation that is due far in the future. Companies that guarantee pension benefits are generally required to use a discount rate that matches the interest rate on high-quality long-term corporate bonds, currently about 5 percent.
But in 2007, Congress passed a law (actually, they inserted a provision in the Iraq War Funding bill) that specially allowed airlines to use a discount rate of 8.25 percent. A higher discount rate means fewer assets are needed to cover a given set of benefits, and therefore lower contributions into the pension fund are required. Essentially, this law allowed cash-strapped airlines to borrow money from their pension funds to keep themselves afloat.
While a discount rate over 8 percent is irregular in the private sector, it is common among state and local governments. Indeed, 8 percent is the most commonly used discount rate among state and local pension systems in the United States, and some plans use a rate as high at 8.5 percent.
These rates assume that the plans can consistently achieve investment returns as high as 8 percent a year; while plans may achieve those rates on average, this accounting practice does not account for the fact that payouts to beneficiaries are fixed while investment returns may vary widely. (For a more detailed discussion of discount rate selection and what’s wrong with an 8 percent rate, see my National Affairs essay from last spring.)
Pension beneficiaries will bear the brunt of the pension underfunding if AMR defaults. As a Mercer consultant tells the Journal: “It allowed them to make promises they knew would be difficult to keep… It’s not fair to the employees.”
Public pension plans have a fallback that AMR does not: demanding more money from taxpayers. The usual justification for allowing high discount rates in the public sector is that governments do not go out of business; sooner or later, at taxpayer expense, they will make good on their pension promises. The trouble with that idea is that sometimes they do not.
In rare cases, municipal governments have drawn the balances of their pension funds all the way down to zero, leading them to sharply cut back pension benefits or shut them off entirely. So far, only small jurisdictions have reached this point, though some larger ones (such as Cranston, Rhode Island) are in the danger zone.
More worryingly for public employees, several states have addressed pension funding shortfalls by cutting back on previously vested benefits. In the last two years, laws enacted in Colorado, Minnesota, New Jersey, South Dakota and Rhode Island have cut back on earned pension benefits, generally by reducing or eliminating cost of living adjustments.
These laws all face court challenges, but so far they are being upheld. If these laws survive, they will demolish the assumption that public employee pensions are ironclad guarantees, and the related assumption that public employees do not need to concern themselves with the funding status of the funds that back their pensions. Governments’ apparent ability to abrogate pension obligations presents a strong argument for forcing those governments to fund their pensions adequately.
The Journal notes that Congress is considering broader relief for corporate pension sponsors, by allowing a higher discount rate despite today’s low interest rate environment. That would be a mistake. Instead, Congress should insist on conservative funding standards—for airlines, for other companies, and for state and local governments.
01-13-2012, 10:22 AM
#12
New Hire
Joined APC: Apr 2011
Posts: 7
Originally Posted by Golden Bear
Editorial Chapter 11: The stick when unions refuse the carrot | ATWOnline
Chapter 11: The stick when unions refuse the carrot
By Karen Walker
Gerard Arpey famously once said while he was American Airlines chairman and CEO that he was “looking under every rock” to find the savings necessary to keep the company from having to file for Chapter 11 bankruptcy protection.
In the end, the rock-searching quest failed. For many observers, AMR Corp.’s fall into Chapter 11 was no surprise. The company has lost more than $11 billion since 2001 and has seen its rivals merge into mega-carriers that outsize and outcompete American.
But there was one rock that was most obstinate of all and which ultimately forced Arpey’s hand, making him deal the Chapter 11 hand even though he refused to play this game (Arpey was asked by the AMR board to remain as chairman and CEO, but chose to resign, reportedly stepping down without any severance).
AMR’s labor groups were the immovable obstacles. And it was not only about money; unrealistic work practice rules were a particular sticking point. American said that its labor costs were $800 million a year higher than its rivals, mainly because its pilots operate under less flexible, fewer-hour contracts.
It must be pointed out that US legacy airline management—including American’s —is partly to blame for this situation. Back in the heyday 1990s when business was booming, US airlines did generous deals with their unions which now seem, albeit with hindsight, recklessly neglectful of the need to prepare for harder times. Management failure to strike tough but fair bargaining agreements created a double-headed problem. First, these high labor costs were unsustainable in the post 9/11 era—and even without 9/11, they could not compete with the new and growing wave of low-cost carriers. And second, they fueled a misperception by unionized employees that every new contract would improve on the last one, while also securing jobs for all.
Nevertheless, AMR’s union leaders must be held to task for not seeing the stick that was most assuredly coming in the form of Chapter 11 if they refused the carrots that Arpey and his team spent years attempting to make palatable. Given the evidence all around them—every other US legacy carrier has resorted to Chapter 11 at some point and American is bleeding money in a weak economy that may worsen before it turns around—then it was foolhardy to think the AMR board would not follow the same path.
The failure of legacy carrier labor groups to wake up to the new economic reality is not unique to the US. Witness the ultimate showdown that Qantas CEO Alan Joyce eventually had with his airline’s unions in October when he ground the fleet to force to a head a long and costly dispute.
For American, Chapter 11 is neither as dramatic a step nor is it as traumatic for customers. But that does not mean it will be easy. CEO Tom Horton has warned of a tough, unpredictable path ahead that will result in unpopular decisions and, of course, job cuts. Management now has much less control of where it slices and dices; and union leaders have done neither their company nor the employees they represent any favors by their stubbornness.
Chapter 11: The stick when unions refuse the carrot
By Karen Walker
Gerard Arpey famously once said while he was American Airlines chairman and CEO that he was “looking under every rock” to find the savings necessary to keep the company from having to file for Chapter 11 bankruptcy protection.
In the end, the rock-searching quest failed. For many observers, AMR Corp.’s fall into Chapter 11 was no surprise. The company has lost more than $11 billion since 2001 and has seen its rivals merge into mega-carriers that outsize and outcompete American.
But there was one rock that was most obstinate of all and which ultimately forced Arpey’s hand, making him deal the Chapter 11 hand even though he refused to play this game (Arpey was asked by the AMR board to remain as chairman and CEO, but chose to resign, reportedly stepping down without any severance).
AMR’s labor groups were the immovable obstacles. And it was not only about money; unrealistic work practice rules were a particular sticking point. American said that its labor costs were $800 million a year higher than its rivals, mainly because its pilots operate under less flexible, fewer-hour contracts.
It must be pointed out that US legacy airline management—including American’s —is partly to blame for this situation. Back in the heyday 1990s when business was booming, US airlines did generous deals with their unions which now seem, albeit with hindsight, recklessly neglectful of the need to prepare for harder times. Management failure to strike tough but fair bargaining agreements created a double-headed problem. First, these high labor costs were unsustainable in the post 9/11 era—and even without 9/11, they could not compete with the new and growing wave of low-cost carriers. And second, they fueled a misperception by unionized employees that every new contract would improve on the last one, while also securing jobs for all.
Nevertheless, AMR’s union leaders must be held to task for not seeing the stick that was most assuredly coming in the form of Chapter 11 if they refused the carrots that Arpey and his team spent years attempting to make palatable. Given the evidence all around them—every other US legacy carrier has resorted to Chapter 11 at some point and American is bleeding money in a weak economy that may worsen before it turns around—then it was foolhardy to think the AMR board would not follow the same path.
The failure of legacy carrier labor groups to wake up to the new economic reality is not unique to the US. Witness the ultimate showdown that Qantas CEO Alan Joyce eventually had with his airline’s unions in October when he ground the fleet to force to a head a long and costly dispute.
For American, Chapter 11 is neither as dramatic a step nor is it as traumatic for customers. But that does not mean it will be easy. CEO Tom Horton has warned of a tough, unpredictable path ahead that will result in unpopular decisions and, of course, job cuts. Management now has much less control of where it slices and dices; and union leaders have done neither their company nor the employees they represent any favors by their stubbornness.
The comments that the author 'Karen Walker' makes about labor and the airline industry in general are about as informed as Karen Walker, the lush on TV'
Yes Mrs. Walker there are gross inefficiencies at most airlines. Most of these stem from mismanagement. If you ever worked at an airline, clearly it was not at a hourly labor position.
If you had ever worked at an airline your article would have been much more specific about the ills that face the 'long in the tooth' legacy carriers.
REGARDING:
AMR’s labor groups were the immovable obstacles. And it was not only about money; unrealistic work practice rules were a particular sticking point.
American said
You Said It: "American said"
You can't possible believe the self serving propaganda that AMR publishes.
AA produced the inefficient schedules that all pilots had to fly. Further you fail to point out that pilots and flight attendants are responsible for a 15-16 hour duty day (average 13-14) while only being paid for an average of 5 hours.
Clearly Mrs. Walker your broad brush comments, sans detail, are without merit.
JR
Last edited by AANoUntilRetro; 01-13-2012 at 10:34 AM.
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