The federal pension insurance agency says Delta Air Lines' proposed new pilot contract violates pension law and wants the carrier's bankruptcy court judge to throw it out.
The Pension Benefit Guaranty Corp., which likely will have to assume Delta's pilot pension plan liability later this year, objected in a court filing Wednesday to a $650 million IOU that pilots would get to offset reduced benefits if their plan is terminated.
The PBGC contends it is the only party that can receive a bankruptcy court claim when it takes over a terminated plan.
The agency --- which keeps paying benefits after a plan is terminated, up to certain limits --- also objected to a separate part of the proposed contract that gives pilots an equity stake in the reorganized company. The PBGC contends Delta should not have promised such a claim to pilots before negotiating with other creditors.
A Delta spokesman said the agency's objections are "without merit," and legal experts said they are unlikely to derail the pilot contract, now being voted on by the airline's nearly 6,000 pilots.
Results of the ratification vote are due May 31, the same day Delta's bankruptcy judge will hold a hearing. The judge, Adlai Hardin, must sign off on the deal for ratification to become final.
Experts following Delta's 8-month-old Chapter 11 case say the PBGC move is probably aimed at boosting the agency's leverage to bargain for compensation if Delta does shed the pilots' pension plan.
A group representing about 2,700 retired Delta pilots have also filed an objection to the contract, arguing that Delta and the pilots union wrongfully negotiated a deal affecting their pension benefits.
Because of the PBGC's caps on benefits guarantees --- around $45,000 for full retirees but less for people who retire earlier --- many pilots would face benefits cuts if Delta terminates its plan. The pilot contract is designed to compensate working pilots but would not compensate retirees.
Pension plan termination is a potentially key part of Delta's recovery plan because it would enable the carrier to shed billions that it is supposed to pay into the plans to ensure that they cover all current and future liabilities.
After Delta filed for Chapter 11 last year, the PBGC said its two pension plans --- for pilots and other employees --- had $6.9 billion in assets to cover liabilities of $17.5 billion, making it one of the largest deficits the agency may have to take over.
But Delta spokesman Michael Frietag said the airline is on solid legal ground with the pilot contract.
"This appears to be an issue that has been addressed before in other Chapter 11 cases, and we believe that the PBGC's assertions are without merit," said Freitag.
He said the pilot agreement "is in the best interests of all constituencies."
The pilots union had a similar statement regarding the retirees' objections but was not immediately available for comment on the PBGC filing.
Despite the objections, the bankruptcy court is likely to approve the concession deal if it gets the pilots' vote, said Atlanta bankruptcy attorney Darryl Laddin, who represented the trustee in Eastern Airlines' bankruptcy in the 1990s.
"In a close call, the court is likely to give Delta the benefit of the doubt and approve the settlement," he said. "The settlement is a key component to the survival of Delta."
Delta has said the concession pact will save it $280 million a year and that it is essential to its turnaround efforts.
The pilot union's leaders agreed to the deal last month after protracted hearings in bankruptcy court and before an arbitration panel that was set to rule on whether to void the labor agreement. The union had vowed to call a strike if the panel allowed Delta to impose its own terms.
Under the 3 1/2-year agreement, pilots continue with a 14 percent pay cut this year, with small annual raises, but also agree to the shutdown of their traditional pension plan. Delta also agreed to grant pilots a $2.1 billion unsecured claim that could be converted to roughly $400 million worth of new stock or related securities after the carrier emerges from bankruptcy.
Delta has said it is likely that the pilots' pensions will be turned over to the PBGC. Delta said it believes its plan for non-pilots may be preserved if Congress enacts pension reform legislation that would allow it to stretch out payments into the fund.
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