By Amy Yee in New York
Financial Times
July 29 2004

Pressure mounted on United Airlines on Thursday as a labour union filed a lawsuit against the troubled airline over its decision not to pay $500m in employee pension contributions this year.

The International Association of Machinists and Aerospace Workers (IAM) filed a complaint in US district court in Illinois alleging that United Airlines had violated federal regulations to fund its pension plan.

"As fidicuaries of the pension plans, the defendants had a responsibility to compel United to meet its funding obligations," said Robert Roach, IAM vice-president. "Clearly, they failed. The IAM has a responsibility to utilise all possible measures to protect the interests of our members."

IAM filed the lawsuit after United said last Friday it did not intend to make a $500m in pension contributions due later this year. The airline said the move would give it more financial flexibility for its restructuring in bankruptcy. United already missed a $72m pension contribution this month.

The need for cost cuts follows a decision last month by a federal loan board to deny United's application for a $1.6bn loan guarantee that was critical to its plan to exit Chapter 11 bankruptcy protection.

The lawsuit came as United on Thursday met officials from the Pension Benefit Guaranty Corporation in Washington. The body oversees pensions payments of US companies.

The previously scheduled meeting with the PBGC is standard for companies in bankruptcy protection. However, following United's announcement, the PBGC said in letter dated July 26 that the decision "is a serious matter that increases the risk of loss to plan participants and the federal pension insurance program."

Jake Brace, United finance director, said: "Without the Air Transportation Stabilization Board (ATSB) loan guarantee, we need to do more restructuring and cost reduction work to formulate a business plan that will attract the financing necessary to exit Chapter 11.

"Because existing pension plan contributions will remain a huge financial burden after exit, it is incumbent on United to study all possible options and to determine whether United can sustain this burden and still attract exit financing."

Randy Canale, district president of IAM and a director of UAL Corporation, said United should not be allowed to "abandon employee benefits at will" or to pursue a "slash and burn approach to restructuring without realising serious consequences".

United is one of the few airlines to retain defined benefit plans for its employees.

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