By MICHELINE MAYNARD and MARY WILLIAMS WALSH
The New York Times
August 20, 2004

United Airlines said yesterday that it would most likely terminate its four employee pension plans and replace them with less generous benefits, a drastic move that United said was needed to attract the financing that would allow it to emerge from bankruptcy protection.

In a 26-page filing with the Federal Bankruptcy Court in Chicago, United stopped short of issuing a formal notification that it was ending the plans and said it had not made a final decision to do so.

But the warning from the airline was the clearest indication yet of its intent to shed its pension obligations.

If United follows through, as its unions and industry analysts expect, it would be an industry milestone and a remarkable step for a company that was owned by its employees 20 months ago.

No other airline has terminated all its pension plans, except in cases of liquidation, where the airline itself was going out of existence. Last year, US Airways terminated its pilots' plan but kept two other employee pension plans in place. It then emerged from bankruptcy and resumed normal operations. It was required to terminate the pilots' plan as a condition of the federally backed loans that paved its way out of bankruptcy.

"As a labor issue, this is tremendously significant," said Gary L. Chaison, professor of industrial relations at Clark University in Worcester, Mass. Traditional pensions are a valuable benefit because they shield employees from market risk and come with a government guarantee.

For employees accustomed to earning such benefits as a part of their compensation, terminating a pension plan is tantamount to cutting pay. Employees continue to do the same work, but they no longer earn the income promised for their retirements. When they retire, the federal government pays their benefits, and some may receive less than they would have had the original plan been kept intact.

Pension specialists say that United's tremendous size means that its actions are likely to set a pattern that other airlines will eventually have to follow, cutting or shedding their pension plans to stay competitive.

That would put enormous pressure on the Pension Benefit Guaranty Corporation, the federal agency that would assume responsibility for the terminated plans. While it was created to insure pension benefits, it would be placed in a role for which it was not designed - restructuring an entire industry.

United's move came on the eve of a court hearing scheduled for this morning, at which Judge Eugene C. Wedoff is expected to hear motions from the federal pension agency, United's machinists and its flight attendants, all challenging the airline's efforts to get out from under its pension liabilities.

Joseph Tiberi, a spokesman for the International Association of Machinists and Aerospace Workers, said the union had been expecting United to take some action to reduce its pension debt since late July, when the airline said it would make no further contributions to its four plans while it remained in bankruptcy.

United sought court protection in December 2002 and based its plans for restructuring on the expectation of getting a package of federally backed loans. But on June 28, the Air Transportation Stabilization Board rejected United's application for the loan guarantees for the third time, forcing United, the nation's second-largest airline behind American Airlines, to seek private financing.

The airline, which estimates it must contribute $4.1 billion to the four pension plans in the next four years alone, skipped a $72.4 million payment owed to three of its plans last month, setting off a wave of anxiety among its workers. In total, the federal pension agency estimates that United's four plans are about $8.1 billion short of the value of the pensions the workers have earned so far.

In its bankruptcy court filing yesterday, United said the rejection of its loan guarantee application, along with record prices for jet fuel, forced it to move against its retirement plans.

United, which until recently was not protected by fuel-hedging contracts, estimates it will spend $1 billion more on jet fuel this year than it anticipated at the end of 2003.

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