June 10, 2005
St. Paul, Minn. — In describing its own pension crisis, Northwest asks you to imagine falling behind on your mortgage payments. You're hit by a string of bad luck -- your wages are down, your investments have fallen, but your expenses aren't going anywhere.
And then, when your financial situation is most dire, your bank tells you have three years to pay off your entire mortgage balance.
To Northwest, U.S. pension law seems equally draconian. Andrea Newman, Northwest's vice president of government relations, says when a company's pension assets get too low, U.S. law clamps down -- hard. Northwest has lost about $3 billion on its operations since the start of 2001, and now faces a pension bill that tops even those huge losses.
"In Northwest's case, in '06, '07, and '08 we would basically have to make up underfunded liability -- which as reported to the SEC is over $3 billion," Newman said. "And it's impossible. It is virtually impossible to make that happen."
This week, Northwest CEO Doug Steenland told the U.S. Senate Finance Committee the airline is in the equivalent of "debtor's prison," telling senators "it's the one problem we have that we can't solve ourselves. This requires a legislative solution."
Without Congressional relief, Steenland says Northwest will go the way of United Airlines. Last month, with the blessing of a bankruptcy judge, United dumped its vastly underfunded pensions on the Pension Benefit Guaranty Corporation, a quasi-governmental entity funded by employer premiums. It will pay United pensioners only a fraction of what they had once been promised. The PBGC itself is billions of dollars short of what it needs, and some fear absorbing more airline pensions could trigger a taxpayer-funded bailout.
A bill now in Congress would give Northwest and other financially strapped airlines what they want. If Northwest and its unions agree to freeze the current pension plans, the bill would give the airline 25 years to fill the financial hole in the plans. Workers would get the benefits they had already earned when the plans were frozen. It's not a part of the bill, but Northwest says it will also institute a 401k-style plan to replace its old pension system.
Northwest pilots support the company's approach. If Northwest dumped its pensions on the PBGC, pilots could see their pension fall 70 percent or more.
Pilots union spokesman Hal Myers says pilots will lose under Northwest's plan too -- but not nearly as much. "It's a very difficult situation. We're trying to make the best of it, preserve the benefits pilots have earned and provide them a benefit in the future," Myers said.
As the highest-paid labor group, pilots stand to lose the most in a pension take-over. Other Northwest unions have so far withheld any public show of support for the airline's plan.
The proposal could also face turbulence in Washington. In the Finance Committee hearing this week, senators from both parties expressed reservations about it. They also reminded airline executives of the temporary pension relief Congress passed one year ago. At the time, airlines said that would be enough to fix the problem.
Bradley Belt, executive director of the Pension Benefit Guaranty Corporation, also raised doubts about the plan. "Does it simply put off the day of reckoning to another day down the road, and is there potential for the problem to be worse at that point compared to where we are today?" said Belt, a Bush appointee who backs a broader administration plan to reform pension law.
"Secondly, it seems to me you have to ask yourself the question as to whether it sends the right message if the way to get special funding rules is to get in a deep hole in the first place."
Other critics say the bill lowers the heat on airlines -- just when they more than ever need a fire lit under them to fix their financial problems.
Northwest says these criticisms miss the more immediate point. Without relief, there is -- in the words of the airline's top lobbyist -- "no solution" but to terminate the pension plans and leave the PBGC to pay meager benefits to retirees.