Pensions: It's No Time For A Bailout
A key role of government is to protect the public from the market's excesses. Think antitrust laws or pollution rules. But well-meaning legislators also can take actions that make matters worse. Consider the Employee Pension Preservation Act of 2005, introduced in the Senate last month. The bill, championed by Senator Johnny Isakson (R-Ga.) would allow Delta Air Lines Inc. (DAL ) (based in his home state) and other legacy carriers to take up to 25 years to pay down the shortfall in their underfunded defined-benefit pension plans. Current rules mandate a three-year catch-up funding schedule.
It's hard to overstate the challenges facing the airlines. Saddled with a high-cost business model increasingly at odds with the times, the industry has lost close to $33 billion in just the past four years. Five major carriers are in or near bankruptcy. And the airlines have a collective pension funding shortfall of about $21 billion. Yet those are exactly the reasons it's not the proper time to be talking about a bailout.
The aftereffects of September 11, the recession, and the spike in oil prices all hit airlines especially hard. But the structural problems -- unrealistic pricing, uncompetitive labor costs, inflexible work rules, and unwise fleet and expansion strategies -- predate those challenges by many years. Addressing the pension issue piecemeal only lets airlines postpone the inevitable restructuring needed to make them financially viable long term.
Moreover, giving more special treatment to the airlines, which already received loan guarantees after September 11 and easier pension requirements last year, seems like overkill. It's also a slap in the face of companies that have already made expensive moves to close their pension deficits. General Motors Corp. (GM ), for example, in 2003 borrowed $13.5 billion to fully fund its pension plans. Its shareholders would no doubt also have preferred legislative legerdemain to the cold cash they paid.
To be sure, the industry's reorganization won't be pretty. Just look at United Airlines Inc. (UALAQ ), which in May terminated its pension plans covering 130,000 employees and retirees. And with Delta facing a liquidity squeeze late this year and Northwest Airlines Corp. (NWAC ) probably not far behind if it can't trim costs, the pressure will be on Congress to act. But the pols should remember that, despite all the financial turmoil, U.S. air service has not been hobbled. In fact, there's still too much airline capacity -- one reason carriers have lost the pricing power to earn themselves out of their current crisis. And average ticket prices today are comparable to those of the mid-1980s. Requiring carriers to come current with their pension obligations -- or, like United and US Airways Group Inc. (UAIRQ ), use existing mechanisms like bankruptcy to get a fresh start on them -- probably wouldn't lessen fare competition much. That's why it's tough to support the kind of government intervention Senator Isakson is calling for.
The market is a harsh disciplinarian. But it's right more often than not. So government needs to set a particularly high hurdle for overruling market decisions on allocating capital -- especially when consumers aren't being hurt. With airlines' financials in a tailspin and their shares virtually grounded, the market has spoken. Let's hope Washington listens.