Friday, March 17, 2006

Airline Pension Obligations: Is "Zombies Walk the Earth" Good Policy?

by Tom Bozzo

An "even the Bush administration thinks it looks bad" moment. From the NYT:
The Labor Department is investigating whether Northwest Airlines systematically shortchanged its employee pension fund over three years, then avoided having to make a $65 million payment to the fund by filing for bankruptcy protection just one day before the payment was due.
The underlying problems include managment's conflicting responsibilities to shareholders and pension program participants, divided regulatory oversight responsibilities, and of course the inability of the industry to sustain break-even fare levels, particularly in an era of expensive oil.

The proposed solution, on the other hand, is basically wait-and-pray:
Northwest received a waiver from the I.R.S. in 2003, allowing it to reschedule that year's pension contributions over five years. Since then, it has been seeking additional ways to reduce or postpone its contributions for 2004, 2005 and beyond. Some of the delayed contributions are now starting to come due, and the airline has been lobbying Congress to give it still more time. The Senate has passed a measure that would give Northwest and the other major airlines 20 years to catch up on their pension contributions — nearly three times as long as most companies would get under a major revision of the pension law that has been passed by both houses of Congress.
The fear is that pressing the airlines will lead them to dump their obligations on taxpayers, but one might wonder whether this is a delay of the inevitable without real structural reform of the industry. Is there much reason to believe that the money to catch up the pension fund contributions will somehow show up over the course of the catch-up period? Imagine what the industry's finances would look like if demand for air travel at current fares were weak for cyclical or geopolitical reasons.

I see a small measure of karmic payback for tut-tutting of Japan over institutional arrangements that extended its period of malaise by deferring the tough job of stopping technically insolvent 'zombie' firms from walking the earth. We may not be in that position economy-wide — at least not yet — but mere malaise would probably seem like paradise to airline employees.
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