Bailout This: PBGC Pension Takeovers

Includes: AAL
by: Walter Kurtz

Was the AMR (American Airlines) bankruptcy filing really necessary? Analysts are speculating that if AMR hadn’t pursued an orderly restructuring, they would likely be forced to go through this process in about a year (Bloomberg radio). This will allow AMR to come out of the restructuring swinging, with cash reserves and airplane leases in place.

Great. But one thing that remains uncertain is the AMR pension. Typically pension liabilities for a U.S. firm constitute unsecured subordinated debt. That means that legally AMR could walk away from their pension obligations. And if they decide to do so, the U.S. government would be on the hook. More precisely it is the Pension Benefit Guarantee Corporation (PBGC), a government agency.

From PBGC: American Airlines sponsors four traditional pension plans that cover almost 130,000 participants. As of today, the plans collectively had about $8.3 billion in assets to cover about $18.5 billion in benefits. If American Airlines were to end their plans, the agency would be responsible for paying about $17 billion in benefits; about $1 billion in benefits would be lost.

So PBGC would cut benefits some, but with $8.3 billion in the AMR pension assets, the taxpayer would be responsible for about $9 billion. And this is just a drop in the bucket relative to the amounts of obligations PBGC may be assuming. Below is a table by industry showing changes in assumed pensions:

(Click to enlarge)

2011 will see an increase of 33% in pension liabilities over the previous year. The agency is already running a $26 billion deficit. Talk about a bailout.

The hope of course is that AMR will reach a deal with the union in which it would keep the pension, while the union would agree to accept pay cuts. Otherwise there will be more financial pain for PBGC and the taxpayer.

PBGC 2011 Annual Report

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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