GAO-05-945 Commercial Aviation: Bankruptcy and Pension Problems
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United States Government Accountability Office GAO Report to Congressional Committees September 2005 COMMERCIAL AVIATION Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues a GAO-05-945 September 2005 COMMERCIAL AVIATION Accountability Integrity Reliability Highlights Bankruptcy and Pension Problems Are Highlights of GAO-05-945, a report to Symptoms of Underlying Structural congressional committees Issues Why GAO Did This Study What GAO Found Since 2001 the U.S. airline industry Bankruptcy is endemic to the airline industry, owing to long-standing has lost over $30 billion. Delta, Northwest, United, and US Airways structural challenges and weak financial performance in the industry. have filed for bankruptcy, the latter Structurally, the industry is characterized by high fixed costs, cyclical two terminating and transferring demand for its services, and intense competition. Consequently, since their pension plans to the Pension deregulation in 1978, there have been 162 airline bankruptcy filings, 22 of Benefit Guaranty Corporation them in the last five years. Airlines have used bankruptcy in response to (PBGC). The net claim on PBGC liquidity pressures and as a means to restructure their costs. Our analysis of from these terminations was $9.7 major airline bankruptcies shows mixed results in being able to significantly billion; plan participants lost $5.3 reduce costs—most but not all airlines were able to do so. However, billion in benefits (in constant 2005 bankruptcy is not a panacea for airlines. Few have emerged from dollars). bankruptcy and are still operating. Considerable debate has ensued There is no clear evidence that airlines in bankruptcy keep capacity in the over airlines’ use of bankruptcy system that otherwise would have been eliminated, or harm the industry by protection as a means to continue operations. Many in the industry lowering fares below what other airlines charge. While the liquidation of an have maintained that airlines’ use airline may reduce capacity in the near-term, capacity returns relatively of this approach is harmful to the quickly. In individual markets where a dominant carrier significantly industry. This debate has received reduces operations, other carriers expand capacity to compensate. Several even sharper focus with pension studies have found that airlines in bankruptcy have not reduced fares and defaults. Critics argue that by not rival airlines were not harmed financially. having to meet their pension obligations, airlines in bankruptcy The defined benefit pension plans of the remaining airlines with active plans have an advantage that may are underfunded by $13.7 billion, raising the potential of more sizeable losses encourage other companies to take to PBGC and plan participants. These airlines face an estimated $10.4 billion the same approach. in minimum pension contribution requirements over the next 4 years, significantly more than some of them may be able to afford given their At the request of the Congress, we continued operating losses and other fixed obligations (see figure). While have continued to assess the financial condition of the airline spreading these contributions over more years would relieve some of these industry and focused on the airlines’ liquidity pressures, it does not ensure that they will avoid problems of bankruptcy and bankruptcy because it does not fully address other fundamental structural pension terminations. This report problems, such as other high fixed costs. details: (1) the role of bankruptcy in the airline industry, (2) whether Comparison of Legacy Airline Cash Balance with Future Fixed Obligations bankruptcies are harming the 20 In billions of dollars industry, and (3) the effect of Cash at end of 2004 airline pension underfunding on 15 Other obligations employees, airlines, and the PBGC. Operating leases Capital leases DOT and PBGC agreed with this 10 report’s conclusions. GAO is Long term debt making no recommendations. Pension obligations 5 www.gao.gov/cgi-bin/getrpt?GAO-05-945. To view the full product, including the scope 0 and methodology, click on the link above. 2004 2005 2006 2007 2008 For more information, contact JayEtta Z. Hecker at (202) 512-2834 or [email protected]. Source: PBGC data and SEC 10K filings. United States Government Accountability Office Contents Letter 1 Results in Brief 2 Background 4 Bankruptcy Is a Response to the Airline Industry’s Structural Challenges 12 No Evidence That Bankruptcy Protection Harms the Industry or Hurts Competitors 27 Airlines Have Shed Billions in Pension Obligations, but Structural Cost Problems Remain 37 Concluding Observations 59 Agency Comments 60 Appendixes Appendix I: Scope and Methodology 63 Appendix II: Case Studies Describing Market Responses to Airline Withdrawals 65 Colorado Springs: Western Pacific Moved Its Operations to Denver 66 Columbus: America West Eliminated Its Hub 68 Greensboro: Continental Lite Service Was Dismantled 71 Kansas City: Vanguard Ceased Operations 74 Nashville: American Dismantled a Hub 76 St. Louis: American Acquired TWA 79 Appendix III: Comments from the Pension Benefit Guaranty Corporation 82 Appendix IV: GAO Contact and Staff Acknowledgments 84 Related GAO Products 85 Tables Table 1: Airline Bankruptcy Filings Since 2000 13 Table 2: Cost Reductions Achieved during Major Airline Bankruptcies 19 Table 3: Recent Examples of Airline Financing 33 Table 4: Case Examples of Markets’ Response to Airline Withdrawals 34 Table 5: Bankruptcy Filings, 1978-2004 36 Table 6: Costs of Terminating Airline Pension Plans 54 Page i GAO-05-945 Commercial Airline Bankruptcy and Pensions Contents Table 7: Estimated Benefit Cuts for United Airlines Active Employees 56 Table 8: Estimated Benefit Cuts for United Airlines Retirees 56 Table 9: 2006 Estimated Deficit Reduction Contribution Payments under Different Amortization Periods 58 Figures Figure 1: Average Annual Spot Price for Gulf Coast Jet Fuel, 1998-2005 6 Figure 2: Percentage Change in Passenger Yields Since 2000 7 Figure 3: Difference in Unit Costs between Legacy and Low Cost Airlines, 1998-2004 8 Figure 4: Airline Operating Profits and Losses, 1998-2004 9 Figure 5: Comparison of Airline and Overall Business Failure Rates, 1984-1997 17 Figure 6: Average Duration of Bankruptcies, by Industry, 1980-2004 24 Figure 7: Comparison of Airlines’ and Other Industries’ Bankruptcy Outcomes, 1980-2004 26 Figure 8: Growth of Airline Industry Capacity and Major Airline Liquidations 29 Figure 9: Return on Capital Invested, 1992-1996 31 Figure 10: Operating Profits, 2000-2001 32 Figure 11: Funded Status of Legacy Airline Defined Benefit Plans, 1998-2004 39 Figure 12: Pension Funding Status, 1998-2004 40 Figure 13: Legacy Airlines’ Projected Minimum Contribution Requirements, 2005-2008 42 Figure 14: Legacy Airlines’ Pension Assets and Returns, 1998-2004 44 Figure 15: Corporate and 30-Year Treasury Bond Yields, 1977-2005 45 Figure 16: Legacy Airlines’ Maximum Allowable Pension Contributions, Actual Pension Contributions, and Operating Profits, 1997-2002 47 Figure 17: Legacy Airline Pension Assets as a Percent of Liabilities, 1998-2003 49 Figure 18: Comparison of Legacy Airlines’ Year-end 2004 Cash Balances with Fixed Obligations, 2005-2008 53 Figure 19: Percentage Change in Colorado Springs Capacity and Total Traffic 67 Figure 20: Number of Destinations Served from Colorado Springs 68 Page ii GAO-05-945 Commercial Airline Bankruptcy and Pensions Contents Figure 21: Percentage Change in Columbus Capacity and Total Traffic 70 Figure 22: Number of Destinations Served from Columbus 71 Figure 23: Percentage Change in Greensboro Capacity and Total Traffic 72 Figure 24: Number of Destinations Served from Greensboro 73 Figure 25: Percentage Change in Kansas City Capacity and Total Traffic 75 Figure 26: Number of Destinations Served from Kansas City 76 Figure 27: Percentage Change in Nashville Capacity and Total Traffic 77 Figure 28: Number of Destinations Served from Nashville 78 Figure 29: Percentage Change in St. Louis Capacity and Total Traffic 80 Figure 30: Number of Destinations Served from St. Louis 81 Abbreviations ASM Available seat mile ATSB Air Transportation Stabilization Board BTS Bureau of Transportation Statistics CASM Cost per available seat mile DOT Department of Transportation DRC Deficit Reduction Contributions FAA Federal Aviation Administration PBGC Pension Benefit Guaranty Corporation PFEA Pension Funding Equity Act RLA Railway Labor Act SEC Securities and Exchange Commission This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page iii GAO-05-945 Commercial Airline Bankruptcy and Pensions A United States Government Accountability Office Washington, D.C. 20548 September 30, 2005 Leter Congressional Committees Since 2001, the U.S. airline industry has confronted financial losses of unprecedented proportions. From 2001 through 2004, legacy airlines (i.e., generally, those network airlines whose interstate operations predated deregulation) incurred operating losses of $28 billion. Since 2000, four of the nation’s largest legacy airlines—Delta Air Lines, Northwest Airlines, United Airlines and US Airways--have gone into bankruptcy.1 Together, these airlines provided over 40 percent