American Airlines layoffs could spell end of the airline

American Airlines’ plan to lay off more than 13,000 employees and eliminate all four of its pension plans as part of its bankruptcy reorganization could eventually spell the end of the airline and leave its pilots with dramatically reduced pensions, say two experts at Washington University in St. Louis.

“Like GM, Kodak, US Steel and several of the other legacy airlines, American made promises to pilots and other employees about pay, benefits, retirement and employment, and many of these promises are not going to be kept,” says Glenn MacDonald, PhD, the John M. Olin Distinguished Professor of Economics and Strategy at Olin Business School.

“American’s competitive position will not generate profit sufficient to keep those promises,” he says. “In fact, absent significant reduction in what American will provide its employees, it will soon be gone, not just reorganized, with pieces bought by Delta, USAir and others.”

He says what the company will or won’t do for its employees will take time to sort out in court.

Part of the airlines’ plan, if approved by bankruptcy court, would be to place its pensions with the federal Pension Benefit Guaranty Corporation (PBGC), an agency funded by premiums levied on employers that sponsor pensions.

If PBGC does take over the plans, the agency will assume the responsibility for paying retirees’ benefits — but not necessarily all of them. The agency caps the monthly benefit it pays at about $4,653 a month for plans ended in 2012.

This is not a good sign for pilots, says Peter J. Wiedenbeck, JD, the Joseph H. Zumbalen Professor of Law.

“The legacy-carrier airlines tend to have special plans for pilots that promise far more generous benefits, so pilots might be shorted by plan termination in reorganization,” says Wiedenbeck, an expert on pension policy and employee benefit law.

However, he says, other American employees could fare well.

“The maximum PBGC-guaranteed benefit for plans terminated in 2012 is $55,840.92 for a 65-year-old retiree,” he says. “Compared to the average level of private pensions, that’s pretty high, so in general a large majority of workers, something like 85 percent, covered by terminated PBGC-insured plans get the full amount they are due. ”

Wiedenbeck also noted that under a special rule, commercial airlines were permitted to elect a slower pension funding schedule in 2006 or 2007 than the schedule that applies to other businesses.

“If American made that election, then the amount of PBGC-guaranteed benefits would be set by reference to pensions earned when that funding extension took effect, rather than the actual amounts accrued as of plan termination in 2012.”