CHARLOTTE, N.C. ( TheStreet) -- In March 2003, as it was emerging from the first post-Sept. 11 airline bankruptcy, US Airways terminated its pilot pension plan, depriving thousands of pilots of comfortable retirements they had come to expect.
Eleven years later, the court battles are still being fought after two groups of pilots sued the government-backed Pension Benefit Guaranty Corp., which took over the plan.
In one case, the US Airline Pilots Association, which represents US Airways pilots, contends that the agency -- as the plan's trustee -- should have investigated and pursued wrongdoing that occurred before the takeover occurred. A decision could come any day.
In the other case, the Soaring Eagles -- a group of mostly retired 1,700 pilots -- have challenged the agency's interpretation and calculations of how benefits should be paid out. The interpretations deprive retirees of thousands of dollars per month, the Soaring Eagles said. Two courts have rejected their arguments. In a last-ditch effort, the Soaring Eagles now hope to convince the Supreme Court to hear the case.
During the round of airline bankruptcies and consolidations that has occurred in the first 15 years of the 21st century, no major airline pilot group has paid a higher price than pilots from the former Crystal City, Va.-based US Airways. The pilots lost their pensions, worked for industry-low wages for a decade and suffered from a controversial seniority ruling following a 2005 merger with America West Airlines.
The wage disparity was generally addressed in the 2013 merger with American Airlines (AAL - Get Report). But following the American merger, the US Airways pilots contend that contract improvements have been delayed and worry that their union could disappear before a seniority list is prepared.
Still, for many, the loss of pension benefits has been the worst blow, although it has been mitigated to an extent because in 2007 the Federal Aviation Administration raised the mandatory retirement age for U.S. pilots to 65 from 60.
The US Airways pilot pension plan had about 7,000 participants when it was terminated in 2003, according to the PBGC, while plan assets were valued at $1.2 billion. "PBGC expects to pay $1.7 billion in benefits," said agency spokesman Marc Hopkins. "That means PBGC will pay about a half billion dollars to participants from its insurance funds to make up the shortfall."
USAPA's case was filed in U.S. District Court in Washington 2009. The case alleges gross misconduct by officials who oversaw the plan before the PBGC took it over. Dave Westberg, a 28-year US Airways pilot who is chairman of the pension investigation committee, said a 20-year pilot who expected to retire at 60 with a pension of about $96,000 annually will instead collect $28,000 annually as a result of the plan's termination.
Robert Lee Whitt, a 29-year pilot and investigating member of the pension investigation committee, said the assumed return from the plan's investments was based on an unreasonably high expected return rate of 9.5% annually, while the assumed payout rate was based on the fallacious assumption that most pilots would continue to work until they turned 60, then the mandatory retirement age.
Whitt said that using the expected rate of return, rather than the lower discount rate, enabled the airline to provide about $700 million less in contributions, while the assumptions regarding age 60 retirements cost the plan an estimated $400 million. "When you set ridiculous assumptions, you have a pension plan that will fail," Westberg said.
Additionally, Whitt said, in 2000, when the airline was seeking a merger with United, it used money that might have gone to the pension plan to buy back stock. "Instead of keeping the plan solvent and healthy, they borrowed money to buy stock to keep the strike price at $60," he said.
In 2000, United UAL agreed to buy US Airways for $4.3 billion or $60 a share. But the deal collapsed in 2001, at least partially because United decided that the price was too high, and, Whitt said, because the pension plan was underfunded.
A 2012 review of the plan by Benchmark Financial Services, which was contracted by USAPA, found that "the overwhelming majority of the records related to the plan have simply vanished" and that "the only conclusion that can be reached is that they are being withheld." The report said the PBGC "did not adequately investigate conflicts of interest, undisclosed fees and malfeasance involving investment firms providing services to the plan."
From the limited materials available, Benchmark found conflicts of interest and likely improper practices by several of the firms retained to manage the pension plan. As a result, when the plan was terminated in March 2003, it suffered from a $2.1 billion funding shortfall, Benchmark said.
While USAPA alleged that PBGC breached its duty to investigate and pursue former plan officials for wrongdoing, "the pilots never identified any actual claims that PBGC could have pursued," the PBGC's Hopkins said.
"At trial, PBGC showed that the decline in the plan's funded status during the period in question was explained by ordinary factors, such as changes in interest rates, additional benefits being earned by active employees, benefit payments to retirees, and investment losses consistent with market performance," he said.
The case was heard in U.S. District Court in Washington during two days in February 2013. In January 2014 the court promised a decision in March. It March it extended the decision until April. Last week, in a notice to USAPA members, the pension investigation committee wrote: "We are very disappointed in the court system taking this long; however, it may signal this is a tough case."
The Soaring Eagles first filed their case against the PBGC in U.S. District Court in June 2008. When they lost, they filed in U.S. Appeals Court, while ruled against them in Nov. 2013. Last month, the group filed a writ asking the Supreme Court to hear their case.
"We feel confident that if we can get someone to pay attention to this case, we will win," said Ron Natalie, a retired Washington D.C. attorney who represents the retirees.
Natalie said the PBGC made three mistakes. First, in 1997, US Airways created a plan to encourage pilots to retire early, enabling some pilots to retire with annuity payouts. But in the case of about 300 pilots, the PBGC ended the payouts in 2003. "They were getting paid, but down the road the PBGC changed its mind," Natalie said. "Now some get nothing."
Another set of several hundred pilots had payouts set by IRS limits, but when the limits increased, the PBGC did not increase its payout. The IRS limit, once $135,000, is now $180,000, he said.
A third group includes about 1,000 pilots or their estates. A 1975 contract agreement with US Air ended a defined benefit pension plan but retained a defined contribution plan. "The plan provided that they would keep getting cost of living increases" in the latter plan, "but the PBGC ignored the (promise of) increases," Natalie said. The decision is costing pilots $30,000 to $50,000 annually, he said.
US Airways pilot Jeff Davis, a spokesman for the Flying Eagles, recalled that his father, Tom Davis, a former Mohawk and US Air pilot, was the named plaintiff in the group's original case. Asked why the Supreme Court should hear a case that has already lost in two lower courts, Davis responded: "The PBGC has used its governmental might to overpower a group of elderly individuals and is winning a war of attrition as they pass away.
"I know this all too well," he said. "My father died last summer having not seen one penny that is due to him."
PBGC's Hopkins said the pilots "challenge PBGC's longstanding interpretation of statutory provisions that govern the allocation of plan assets, which in turn affects the calculation of benefits to be paid by PBGC."PBGC's view is that it interpreted the law and calculated benefits correctly," he said.
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