August 19, 2004
Dear Fellow Pilot:
This morning, United Airlines, referencing a filing it made in bankruptcy court, stated in its NewsReal: "As United has told its Board of Directors, Creditors Committee and labor unions, given the magnitude of the further cost reductions needed to create a viable business plan and attract exit financing, the termination and replacement of all its defined benefit pension plans will likely be required."
If this, indeed, is the road the Company is opting to take, it's an unfortunate and disturbing step. The numbers underlying the Company's announcement are sobering. United is currently required to contribute over $3 billion to pension plans within 30 months of its emergence from bankruptcy. At the same time, rising fuel costs have reduced the Company's profitability and cash resources by well over $1 billion a year for the foreseeable future. In a very real sense, the Company is transferring pension funding dollars to oil producers with every uptick in the price of crude.
Your MEC and its professional advisors have closely tracked this evolving situation for the past 12 weeks and we fully comprehend the issues surrounding the Company's difficult financial position.
However, we have no intention of participating in the Company's pension termination program and we will use every legal means available to us to defend our collective bargaining agreement.
There are two crucial points that the Company has failed to recognize.
First, the pilot pension benefit is far different from any other pension program at United Airlines.
The pilots alone face a mandatory retirement age not imposed on any other group. We have built our entire compensation structure and career path to protect the pension benefit that we receive at age 60 when we are no longer permitted to earn a living in our profession. Even so, we were the only employee group to accept substantial pension reductions under Contract 2003, and we did so in return for the Company's solemn promise to protect the pilot "A Plan" benefit in the future.
More importantly, the federal pension guarantee system insures the overwhelming majority of the pension benefits enjoyed by every other United employee group. Most other employees would suffer little or no loss of benefits in a "termination and replacement" scenario because the federal Pension Benefit Guarantee Corporation will offset the Company's under-funding. This is not the case for pilots. We estimate that the pilots, as a group, will lose nearly 50% of the dollar value of their accrued pension benefits under the Company's scheme. Some would lose less and some would lose more, but the pilot group will bear the brunt of the financial devastation in the Company's termination program.
When the Company filed for bankruptcy in 2002, the pilot group accounted for 25% of the Company's total labor expense. Management nonetheless asked us to provide 43% of the $2.6 billion in labor cost reductions secured by the Company. As a result, the average pilot has sacrificed more than 40% of his or her take-home compensation over the past 18 months. Our contributions and sacrifices were far greater than those of every other employee group, including management. We will not be singled out for unfair treatment in any pension discussion and we will demand that the Company find a way to protect the full value of the pilot pension benefit in its final exit financing program.
Second, this management team has utterly failed to control non-labor costs.
When you exclude fuel and labor expense, American Airlines enjoys a 25% cost advantage over United. That is simply unacceptable. Your union and its advisors have identified a series of further cost savings that must be pursued by the Company prior to any discussions about our pensions or our contract. Here are the areas we have identified:
The Company has publicly acknowledged that its fixed maintenance costs are too high relative to the industry and carriers of like size. This issue must be fully addressed and solved before management comes to us for relief.
The Company has publicly stated that its contracts with its regional carriers contain costs that are too high relative to the industry, particularly in the area of fuel, for which United pays as a pass-
through charge from the regionals. This issue must be fully addressed and solved before management comes to us for relief.
The Company has recently told the bankruptcy court that it is not going to agree to a deal it previously tentatively reached with a consortium of aircraft lessors due to the high cost of the deal. The Creditors Committee has estimated that the Company has vastly overpaid for portions of its fleet and our advisors agree. This issue must be fully addressed and solved before management comes to us for relief.
The Company has embraced a concept known as "lean manufacturing principles" for its maintenance operation. We are confident this concept can be translated to other aspects of the Company's operations as well. This issue must be fully addressed and solved before management comes to us for relief.
The Company is basing many of its long-term financing decisions on fuel prices at the historic, and ultimately unsustainable, high prices we have seen in the past few months. We feel that fuel price will abate over the next 18 months, thus mitigating some of the damage United currently suffers in the financial markets. This issue must be fully addressed and solved before management comes to us for relief.
The Company has shared some of its thinking about the availability and cost of exit financing with its unions and employee representatives. We need more information, and the opportunity to offer input, before the company cements its exit financing agreements. This issue must be fully addressed and solved before management comes to us for relief.
As I said at the beginning of this letter, pilots are different from every other employee group at United. In Contract 2003, pilots sacrificed 43% of the total wage and work-rule savings the company got through 2009, the end of this contract. We fully expect that all employees, regardless of status, will meet the threshold established by the pilot group prior to any discussion or consideration of further cuts to our wages or working conditions.
Our sacrifices go far beyond monetary and quality of life issues. We have lost additional flying to United's regional carriers, and have watched United suffer greatly due to the company's crew staffing mismanagement. The fact that we have experienced totally unacceptable flight cancellations for lack of pilots, especially in the narrow body fleets, speaks to the issue of accountability and management expertise, NOT to the issue of forcing us to make-up for these shortfalls by further sacrificing what little we have left.
We cannot sit back and allow the company to take the easy road toward financing a reorganization plan. Our pensions should not be an obvious target for United management. A resolution adopted by your MEC at its July meeting makes our position clear, and it reads as follows:
WHEREAS, recent speculation regarding the United Pilot Defined Benefit Pension Plan has been widespread,and
WHEREAS, Pilot Defined Benefit Pension Plans have historically been the cornerstone of retirement benefits for pilots at numerous airlines, including those at United Airlines, and
WHEREAS, any change to the Pilot Defined Benefit Pension Plan at United Airlines would not only harm United pilots and retirees, but would place Pilot Defined Benefit Plans of other carriers in jeopardy as well, and
WHEREAS, the Company has informed the UAL-MEC that it has substantial non-labor cost savings that it has yet to effectively pursue,
THEREFORE BE IT RESOLVED, the UAL-MEC declares its strong conviction that any consideration of change to the United Pilot Defined Benefit Pension Plan undermines the interests of United Pilots, retirees, and
United Airlines, and is therefore absolutely unacceptable, and
BE IT FURTHER RESOLVED, the UAL-MEC categorically rejects any such consideration and will oppose it to the maximum extent of our abilities.
The MEC continues to stand firmly behind the language in this resolution.
I have attached the latest in our series of Questions and Answers from the MEC Retirement and Insurance Committee regarding the company's expected announcement and what that really means to you, United's 9,000 pilots and your families. If you have any questions regarding this Q&A, contact your local representatives or the MEC office for clarification.
Your MEC is fully briefed and engaged in the effort to protect your pensions and ensure we are recognized for the sacrifices we have made to ensure the long-term viability and success of United Airlines. Make no mistake, this is a struggle in which every pilot has a clear stake. We are ONE pilot group and we will only protect both our contract and a livable, enduring pension through the strength of our unity and our resolve.
Your support is crucial and fundamental to our ultimate success.
Fraternally,
Captain Mark Bathurst
Chairman
UAL-MEC
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R&I Committee Q&As
August 19, 2004
Information Concerning Expected UAL Announcement Regarding Its Intention to Initiate Pension Discussions with Its Employee Groups
United announced today it intends to discuss with its unions (including ALPA) proposals to terminate and replace its pension programs. The R&I Committee has prepared the following Q&As which are intended to address concerns which pilots may have regarding the meaning and effect of the announcement.
Q-1. Is this announcement the formal "notice of intent to terminate" which starts the PBGC plan termination process (and arguably cuts off PLSAs)?
A-1. No.
The "notice of intent to terminate" is a formal, written notice which the Company must send to the PBGC, ALPA and A-Plan participants. United's announcement today is simply a public statement by the Company that it plans to enter into negotiations with its unions regarding termination of its pension plans. Statements made by the Company in court filings or employee news releases do not constitute the ERISA-required notice of intent to terminate.
Q-2. Is my PLSA still available?
A-2. Yes.
As explained in earlier Q&As, PLSA checks should continue to be issued unless and until the Company issues a formal, written notice of intent to terminate conforming to the requirements of Title IV of ERISA. At that time, it is expected that the PBGC would take the position that the Company can no longer make PLSA payments.
Q-3. If the Company doesn't owe any contributions to the A-Plan until late 2005 at the earliest, why would they be talking about terminating the A-Plan now?
A-3. Based on the information available to us, the Company won't be required to contribute to the A-Plan until late 2005 or early 2006. However, the Company seems to be focusing on the contributions that will be due to all of its defined benefit plans, in the aggregate, through the year 2010 (including contributions that will be owed to the pilots' A-Plan beginning in 2006). The Company contention seems to be that it can't get exit financing without relief from these obligations in the aggregate.
Q-4. I've read that United has agreed with the Department of Labor to appoint an "independent fiduciary" to oversee United's pension plans. Is that good?
A-4. It is difficult to say what effect, if any, this move will have on the pilots' plan. ALPA was not consulted about the proposed agreement and is in the process of reviewing its implications.
The Department of Labor has general responsibility for enforcing the ERISA fiduciary standards. According to the DOL's press release of August 17th, it has entered into an agreement with United under which
United will appoint an independent fiduciary acceptable to the DOL to protect the interests of participants and beneficiaries of United's pension plans. According to the DOL, the independent fiduciary will have the authority to review issues relating to pension plan funding (including United's recently-announced decision not to make contributions to its non-pilot plans), to identify any claims against United, and to file suit if it decides it is appropriate.
Right now, United hasn't skipped (and hasn't threatened to skip) any contributions due to the pilot A-Plan, so for the time being the DOL announcement does not have any immediate practical effect on the pilot plan. The implications will become clearer once an independent fiduciary has been identified and further defines the scope of its authority.
Q-5. What's going to happen next?
A-5. Based on the Company's announcement, it appears that the Company intends to come to ALPA and ask the pilots to agree to let the Company terminate the A-Plan. The Company may also propose what it may call "replacement" benefits, but these are not likely to be in the form of defined benefit pensions. Your MEC has made our position clear: we will defend our existing retirement program with every means available to us.