How the Pension Benefit Guaranty Corp. Enabled the American/US Airways Merger

NEW YORK (TheStreet ) -- The Pension Benefit Guaranty Corp., the government agency that guarantees pension benefits, was a key player in the successful bankruptcy restructuring of the U.S. airline industry. But it played its most complex role at American Airlines (AAL), where it helped creditors decide between two competing management teams.

For that, the Association of Professional Flight Attendants recently awarded its Edward M. Kennedy Award for Public Service to Josh Gotbaum, PBGC director from 2010 to 2014, and the agency's staff.

"But for the careful work of the PBGC, the merger probably would not have happened," Gotbaum said, in an interview. "The management of American Airlines didn't want to do the merger -- their analysis said the merger would be terrible. The management of US Airways wanted to do the merger; they produced an analysis that said the airline merged would do better than it would on its own.

"So who did the objective analysis?" Gotbaum asked. "The answer was the PBGC, (which) did reliable financial work on what the airline would look like standalone and what it would look like if merged with US Airways."

According to APFA, "Though it began as a far-fetched plan, the merger eventually gained the support of the entire creditors' committee due in large part to the efforts of organized labor and the PBGC." As a result, legacy American flight attendants received equity in the new company as well as a new contract with a strong, competitive network carrier, the union said. US Airways flight attendants also secured an improved contract.

American filed for bankruptcy protection in November 2011. "On the day that American filed, they announced 'we cannot afford our pension plan and we will have to terminate it the way the other airlines did,'" Gotbaum recalled.

"I went to the finance staff of the PBGC which said: 'We have been looking at the American situation. It used to be the case that if American went into bankruptcy, there would be no way to reorganize without termination. But the airline industry is more profitable now. They have choices. It's clear that American labor costs are high and will have to come down, but that doesn't mean they have to terminate the plan."

The agency began talks with the carrier and its unions about how to preserve the plan by making changes elsewhere in the labor contracts. "PBGC showed the various unions that there were ways to keep their pensions," Gotbaum said.

Step two was talking with the creditors. PBGC offered a compelling argument, saying that American's pension plans were underfunded by about $10 billion and that "if the plans are terminated, PBGC becomes the largest creditor," Gotbaum said. It would then have vast influence over the bankruptcy case's outcome.

"The creditors didn't want to give up their ownership of the airline," he said. "The company had announced it would go to court to ask for permission to terminate, so the PBGC went to the union and the creditors and said to both 'If the company asks to terminate, you will be worse off.'"

According to the 2014 book, American Airlines, US Airways and the Creation of the World's Largest Airline, which I wrote with Dan Reed, creditors' committee attorney Jack Butler told his clients, "If you terminate, you create a $10 billion to $12 billion unsecured claim which swamps all the other claims. PBGC becomes the controlling creditor and you deep-six the rest of the committee."

In April 2012, the US Airways management team, headed by Doug Parker, announced it had signed tentative contract agreements with the American unions, whose support enabled it to make the case to the creditors' committee that it could run the airline more effectively.

APFA President Laura Glading was the union leader most involved in working with the creditors' committee. In a prepared statement last month announcing the award to Gotbaum and the PBGC staff, she said, "The men and women of the PBGC are some of the most empathetic professionals I have ever worked with.

"They put themselves in my shoes, and the shoes of every flight attendant at American, and viewed the bankruptcy in terms of what it meant to our families -- not just numbers on a balance sheet," Glading said.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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