CHICAGO – United Airlines fired a major shot Friday in the battle with its workers over cost cuts, announcing that it would cease making payments to employee pension funds as long as it remains in bankruptcy.

The airline signaled the move last week when it missed a $72 million payment. It now expects to miss payments this fall totaling about $500 million to funds that the government says contain $7.5 billion less than needed to cover obligations to retirees.

But United acknowledged that it is considering pension cuts to attract the outside investment it needs to emerge from bankruptcy.

“Because United’s existing pension funding obligations will remain a huge financial burden after exit, it is incumbent on United to study all possible options,” airline lawyer James Sprayregen said at a hearing Friday in U.S. Bankruptcy Court.

Sprayregen said United’s new agreement for $1 billion in bankruptcy financing prevents it from making the pension payments.

The nation’s second-largest airline already has projects in place for $5 billion in cost cuts by 2005.

If United decided to dump its pension plans, the impact would reach far beyond employees. It could set a pattern for other major employers facing financial woes, said John Hotz, an official with the Pension Rights Center, a Washington, D.C.-based advocacy group.

“We are now in an environment where employers want to get out of the pension business,” Hotz said.

United’s plans are underfunded by at least $7.5 billion, according to the Pension Benefit Guaranty Corp.

Steve Blakely, an official with the Employee Benefit Research Institute in Washington, D.C., said a collapse of large pension plans like those at United would create a massive financial burden for the PBGC.

“It would very significantly increase the deficit that the PBGC faces,” he said.

In its latest annual report, the PBGC raised several red flags, noting potential problems among major airlines and steel companies, and cautioning that the financial health of the government’s pension insurance system “is at risk.”

Total underfunding of U.S. pension plans soared to more than $350 billion last year, the largest one-year amount ever, the agency said.

Industry observers have said United has no choice but to reduce its pension costs after failing to win a $1.6 billion federal loan guarantee to help it out of bankruptcy. Without federal backing, outside investors will demand that the airline work itself into better financial shape before putting up their own money to help United exit Chapter 11.

But United’s union workers – from pilots to machinists to ramp workers – blasted Friday’s pension move.

“Current management should explain to us why flight attendants should continue to support their reorganization efforts if this is the best United can offer for a lifetime of service,” the Association of Flight Attendants said in a written statement.

The flight attendants said they now consider termination of the pension plans “likely,” adding that the payment deferral alone would be “demoralizing to employee confidence.”

John Pincavage, a Westport, Conn.-based financial adviser to airlines, agreed.

“It’s water torture treatment,” he said.

United’s management appears to be trying to find a way to save as much of the pension benefits as possible, Pincavage said. But the airline’s apparent indecisiveness is more detrimental to workers than simply moving ahead with cuts, painful as they may be, he added.

“Nobody wants to make the really hard decisions that are going to have a negative impact on people’s lives,” he said.

United’s search for cost cuts has become more difficult as jet fuel prices have risen. Jake Brace, the carrier’s chief financial officer, said Friday that fuel costs would be $900 million higher than United had expected for 2004.

—

(c) 2004, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicagotribune.com/

Distributed by Knight Ridder/Tribune Information Services.

AP-NY-07-23-04 2016EDT