American Airlines Seeks to Rob Retirees of Benefits

Posted July 19, 2012 in Bankruptcy by

In the midst of bankruptcy proceedings, American Airlines has asked a judge to allow it to stop paying retiree health insurance and life insurance benefits.

  • Airline hopes to save over $1.3 billion annually in benefits for 40,000 retirees
  • Fate of retiree benefits could depend on what is spelled out in the plan agreement
  • Bankruptcy may or may not lead to merger with US Airways

 

Loss of Billions

American, currently the nation’s third-largest airline, has been in bankruptcy proceedings since last November. The company has lost over $10 billion in the last decade, and reported a $241 million second quarter loss this week, although it would have earned a profit if not for bankruptcy costs. Earlier this month, the company filed a lawsuit to relieve itself of the some $1.3 billion it pays out annually for health and life insurance for 40,000 retirees.

Elizabeth Austin

There is precedent for a large company going through bankruptcy, according to Elizabeth Austin, who practices bankruptcy law for Pullman & Comley. “It is not unusual for these retiree benefits to be relegated to unsecured creditor status,” Austin says. “You do see these types of benefits discharged though Chapter 11 proceedings, or at least reduced.”

It will be up to a judge to rule if American can chuck its benefits or not.  “Can the company survive while paying these benefits or will it cause the company to not be able to survive? The judge has to make a decision,” Austin says. “If they go out of business they will not able to pay these obligations anyway.”

 

Benefits Stripped?

It might come as a surprise that the benefits granted to retirees can be stripped away, but it all depends on the agreement between the company and its workers, says George Kasper, an employee benefits attorney with Pullman & Comley.

George Kasper

“It is common for the plan document and summary plan description to prove that the employer intends to offer benefits indefinitely but reserves the right to amend or change the benefits at any time, including the right to terminate the benefits,” Kasper says. In such a case, it’s not a stretch for a judge to allow the company to stop paying. It gets more complicated if the contract explicitly states that the benefits are for life, or for a set number of years.

“Generally, the courts recognize employees’ rights to retirement benefits where an employer has clearly communicated to them that they vest in those benefits and have a lifetime right to them. The courts will look for some documentation evidence that that promise was clearly made,” Kasper explains. “On the other hand, they’re hesitant to enforce that claim where they don’t find anything clear in writing.”

American Airlines has stated that its retirement benefits were never promised to last a lifetime.

 

Merger on the Horizon?

The deal the retirees end up with could also depend on the result of merger talks between American and other airlines. Conventional wisdom says that American will have to merge with another airline to stay competitive with United and Delta, the largest and second largest airlines in the world, respectively. Most speculation points to US Airways as the best fit, and US Airways CEO Doug Parker has been trying for months to broker a deal allowing them to combine forces and challenge United for largest airline status.

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Parker claims that the best time for a merger is during bankruptcy, when it would be easier to get rid of assets the new management team doesn’t want, while preserving a better deal for employees and maybe retirees too. However, while American has said it is open to all options, it has consistently delayed negotiations.

Perhaps there’s a clue to the posturing in the potential payouts. According to the New York Times, American’s management team will earn $300 to $600 million if the company emerges from bankruptcy without merging with another airline. On the other hand, Parker stands to earn up to $20 million if US Airways is bought by American and he has to leave his post. This must all be heartening news for retirees waiting to see if they will still have health insurance six months from now.

Learn more about employee benefits and locate an attorney in your area who can answer your questions by visiting Lawyers.com.

Should financially-troubled companies be allowed to cut off retirees’ benefits? Share your opinion by leaving a comment below.

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