BUSINESS WORLD
By HOLMAN W. JENKINS, JR.  
 
ABOUT THE AUTHOR

 

Holman W. Jenkins Jr. is a member of the editorial board of The Wall Street Journal and writes editorials and the weekly Business World column.

 

Mr. Jenkins joined the Journal in May 1992 as a writer for the editorial page in New York. In February 1994, he moved to Hong Kong as editor of The Asian Wall Street Journal's editorial page. He returned to the domestic Journal in December 1995 as a member of the paper's editorial board and was based in San Francisco. In April 1997, he returned to the Journal's New York office. Mr. Jenkins won a 1997 Gerald Loeb Award for distinguished business and financial coverage.

 

Born in Philadelphia, Mr. Jenkins received a bachelor's degree from Hobart and William Smith Colleges in Geneva, N.Y. He received a master's degree in journalism from Northwestern University in Evanston, Ill., and studied at the University of Michigan on a journalism fellowship.

 

Mr. Jenkins invites comments to holman.jenkins@wsj.com.
 
Send United to the Great Hangar in the Sky
May 25, 2005; Page A13

 

What's wrong with this picture? A federal government agency is getting stuck with United Airlines' pension obligations, and in return for this favor United is going to keep flying. By now, shouldn't the price be that United do the decent thing and disappear, vanish into the night, so the industry can begin to work off the problem of too many companies chasing too few passengers?

 

Federal bankruptcy law and the post 9/11 airline bailout have already done enough damage. US Airways and America West, both recipients of federal bailout loans, are merging mainly to make sure they will be "too big to fail" and thus entitled to a United-style cosseting next time they get in trouble.

 

Now United itself will dump its pensions on a taxpayer-backed government agency, a step that may well provoke other airlines to do the same. United even gave the government a stake in seeing this outcome come to pass -- in the form of $1.5 billion in convertible notes held by the federal Pension Benefit Guaranty Corp. The PBGC now finds itself in the weird position of cheering for United's success at the expense of carriers whose pension obligations it might have to assume next.

 

Let's dry our eyes. We've had two weeks for grieving over the pension plans of United Airlines; maybe we can have a few minutes of realism. What was lost, really? United's plans still hold $7 billion in assets, which could have been divvied up among retirees and employees by seniority. But this option was never considered -- it would have meant giving up the opportunity to collect, at government expense, an additional $6.6 billion in benefits promised by United but never backed by real money.

 

Be mindful of how these vapor benefits came into being. Until bankruptcy wiped out its vaunted experiment in worker empowerment, United was 55% owned by its employees and virtually dominated by the pilots union and machinists union.

 

From 1994 on, they controlled two seats on the board, held sway over a majority of others, and effectively hired and fired the CEO. To boot, labor didn't hesitate to reinforce its clout by threatening strikes and engaging in illegal work slowdowns -- a process that eventually led to the highest wages in the industry. As Rick Dubinsky, head of the pilots union, told management in 2000: "We don't want to kill the golden goose. We just want to choke it by the neck until it gives us every last egg."

 

Well, the goose is on government life-support now. But labor could always have used its clout to steer more eggs to the pension basket rather than the paycheck basket. A dirty little secret, however, is that it would have been crazy to do so. Pension underfunding (really, benefit overpromising) is too good a bargain to pass up -- a cheap option on government-paid pension benefits in the event of bankruptcy.

 

We specify "cheap" rather than "free," because the PBGC does charge a premium for insuring private pension plans, just not enough to make it uneconomic for troubled employers to engage in such flimflam. Look at the agency's main offenders: steel, autos, airlines -- companies with little hope of long-term prosperity and large, unionized work forces to keep placated in the meantime.

 

The pilots at United were in a particularly odd position, since many of the most senior were nominally entitled to pension benefits far in excess of the $46k-a-year the PBGC was willing to guarantee. No wonder their union was quick to propose a bankruptcy workout that would have given them a big new ownership stake in the carrier in return for dumping their plan -- oh yes, and on the condition that United also terminate the plans of lesser-paid employees.

 

But the larger point here is that defined-benefit pension plans aren't going out of style because they're structurally defective. They're going out of style because of a government-created incentive for weak companies to award more benefits than they have any hope or intention of funding.

 

In the wake of United's pension default, those worried about too much risk being placed on employees to manage their own savings might consider a solution: Abolish or privatize the PBGC. We might find that traditional pensions, if properly funded, have some life in them yet as a way for workers to guarantee predictable retirement income and insure against longevity. In fact, there's no reason such plans couldn't be adapted to fit today's more fluid corporate environment and personal job histories.

 

In the meantime, the whole purpose of trying to legislate away some of capitalism's hard edges for workers and companies has come sadly unstuck in the airline business. Somehow the industry has to reduce itself to a smaller handful of more efficient network carriers that can maintain service to smaller markets even in the face of cherry-picking by Southwest, Jet Blue and their low-cost brethren. And if ever a company has earned the fate of being the odd man out, United is it.

 

It's spent nearly three years in bankruptcy, shucking off labor contracts, debts and now employee pensions, but still loses money. United hasn't yet received its hoped-for federal bailout loan, but the bailout board did stretch its own rules to keep the window open, helping forestall a harsher fate in the private capital markets. House Speaker Denny Hastert, who lobbied fiercely on United's behalf, told the Chicago Tribune later that dismemberment at the hands of Delta and American would have been the likely result for United.

 

Dismemberment is still a good idea -- in fact, we proposed it here two years ago and even nominated Treasury Secretary John Snow to be in charge, given his role in a remarkably similar dissection of Conrail when he was a private railroad executive. An orderly liquidation of United is an even better idea now that the federal government and taxpayers face an urgent need to get off the hook for a potential industry-wide airline pension default