UAL Plan To Dump Pension Could Become Industry Model Monday November 8, 4:58 PM EST NEW YORK (Dow Jones)--UAL Corp.'s (UALAQ) plan to terminate its pensions may threaten the pensions of employees at other airlines across the industry. Experts say as the world's second-largest airline restructures in bankruptcy, UAL may be setting a cost-structure template that other major airlines must copy in order to compete profitably, and one major point of that cost structure could involve eliminating some retirement benefits. What's more, this restructuring may be impossible for some rivals to match outside of bankruptcy. On Friday, the airline told employees it will have to terminate the pension plans and cut more labor costs in order to exit bankruptcy. Whether UAL manages to terminate the pension is a big question hanging over executives with other major airlines as they approach their own employees for salary and benefit concessions. "History shows us the domino theory is likely," said Pete Janhunen, a spokesman for the Air Lines Pilots Association, the pilots' union. "Airline managements over time have demonstrated that they're not necessarily innovative. When one does it, others are willing to pick up those same models." Further, UAL's cuts within bankruptcy may be impossible for some rivals to match outside of court protection. If so, a rival like Delta Air Lines Inc. ( DAL), which narrowly avoided a bankruptcy filing last month by inking a cheaper contract with pilots, may wind up in Chapter 11 as the airline labor environment continues to shift. "The problem these days for airlines is to remain competitive on costs, and it is not clear to me that Delta outside of bankruptcy can do so," said William Rochelle, a bankruptcy lawyer and airline expert with Fulbright. "If you fix the business today, it may be entirely inadequate nine months from now." Jonathan Rosenthal, a partner at Saybrook Capital LLC, an investment company retained to advise a Delta creditor committee, agreed that Delta has likely avoided a filing by cutting costs enough to compete in the current environment. The airline must now focus on improving its balance sheet, he said. "There's a high likelihood they will avoid a bankruptcy filing in the next few quarters," said Rosenthal, who is also advising parties in United's bankruptcy. "The bigger question that nobody can answer is, will the airline be in a position to compete six months or a year from now?" Analysts have long said underfunded pensions are gaping holes in the balance sheets of the major airlines, and an important reason the majors have trouble competing with low-cost rivals, which mostly offer employees defined contribution 401k plans. UAL carries the largest pension hole on its balance sheet. Its plans were underfunded by $6.156 billion as of the end of 2003. Delta was No. 2 in terms of the amount its pension was underfunded, at $5.659 billion at the end of last year. So on Friday, UAL told employees it must terminate its defined-benefit pension plans in order to cut costs far enough to exit bankruptcy. The airline has long said it might have to take such action, and in August UAL stopped funding its pension plans. It's not clear how far a judge would allow the termination to go but a worst- cast scenario for retirees would be to turn the plan over to the federal Pension Benefit Guarantee Corp. The PBGC may not be able to pay the level of benefit retirees anticipate. The airline asked the bankruptcy court to set up a framework for negotiations with work groups about pensions and other cost cuts, and to set a deadline when the court could impose the cuts if agreements aren't reached. Meanwhile, Delta is close to resolving its pension dilemma before it's clear what UAL will ultimately do. The airline on Monday confirmed that its tentative contract agreement with pilots shifts to a defined contribution plan, in which pilots contribute a defined portion of their income to their retirement fund, from a defined benefit plan, under which pilots can expect a defined level of benefit once they retire. But Delta didn't go so far as to terminate the old defined benefit plan and close the balance sheet hole. Instead, according to pilot spokeswoman Karen Miller, pilots agreed to freeze the old plan as of Dec. 31, and start the new plan January 1. When pilots retire, they will get benefits from both plans, depending on the amounts they contributed to each. Further, the new plan was contrived in a way to make it commensurate with the old plan, the union said. Pilots have until Thursday to vote on the plan. ALPA national spokesman Janhunen said the union is willing to be flexible with airlines across the industry about pensions, but there's no need to terminate plans. The union has suggested first that the U.S. Congress allow airlines more time to contribute the underfunded portion of the pension plans, as much as 10 years, he said. For those airlines that still need help, pilots may negotiate shifting to a defined contribution plan, starting from the assumption that the benefits would be commensurate with the old defined benefit plans, he said. Still, even those negotiations may be a slippery slope for pensions. "The result of that process will depend on how those pilots negotiate and how the pilots then vote on those deals," Janhunen said. By Elizabeth Souder, Dow Jones Newswires; 201-938-4148; Roger EWROPS