In 2005 United Airlines terminated its employee pension plans, creating the single largest corporate pension default in U.S. history.
The belief was that it simply had more liabilities than assets and was under bankruptcy protection already. If it was going to emerge from bankruptcy (which it did in February of 2006), it would need to reduce costs further. Putting the federal taxpayer on the hook for the $6.6 billion in pension plan costs through the federal Pension Benefit Guaranty Corporation, or PBGC, was an easy out.
It seems, though, that the unions, shareholders, creditors, government – and, most importantly, the retirees – were mislead. United had an asset on its books that could have paid for the entire cost of the pension obligations – and then some – but according to the financial statements at the time, it was a negative asset, a cost. Now United is profiting handsomely from those assets.
Like a number of airlines these days, United is looking to spin off its customer loyalty program to raise money, because these programs are about the only thing making money for the major carriers. Although it’s not a stand-alone company reporting results, the Mileage Plus program is estimated to have generated $600 million last year for United, and a Bear Stearns analyst figures it could be worth more than $7 billion if it’s spun off.
The airlines sell the mileages to merchants, who in turn use them as rewards for their customers. American Express, Citigroup, MasterCard, and Visa all use mileage programs as inducements for consumers to use their cards. They’re so profitable because the airlines sell the miles for pennies, getting revenue up-front, and then the fliers later redeem the points at prices higher than what they probably would have paid for the tickets. It can also take years before they’re redeemed, if at all.
In its annual report for 2004, the loyalty program is not listed as a valued asset. In fact, it’s not mentioned as an assets at all. United does say it recorded an $840 million liability to account for miles being redeemed in the future, giving the impression that the Mileage Plus program was costing United money. This is in stark comparison to Air Canada which, in 2005, sold off a 12.5% stake in its Aeroplan loyalty plan for a price that valued the entire frequent flier program at about $2 billion Canadian.
Ever since Air Canada spun off its Aeroplan loyalty program, the programs have become a hot commodity for the airlines, and a potential quick fix of cash.
Now United has this richly valued asset it could use this money to pay the pensions, instead of benefiting at the taxpayers’ expense.
Executives were granted millions of dollars in stock awards upon the company’s emergence from bankruptcy. CEO Glenn Tilton alone received more than half a million shares valued at more than $20 million – and selling the loyalty program would certainly enhance the stock’s value for him and other top executives.
There is a legal system whereby the PBGC can give the pensions back to United Airlines.
Under Section 4047 of the Employee Retirement Income Security Act of 1974 (ERISA), the PBGC can order a company to restore its pension obligations when the company’s financial health has improved. In fact, it did that with steelmaker LTV back in 1990.