United Airlines should face up to its mistakes

Freedom Newspapers

One of the core foundations of the free market system is the idea that businesses should be able to fail. If a company makes poor choices, poor investments or offers poor services or products, it will not make money and will, ultimately, shut its doors.

Like almost all airlines, United Airlines was hurt in the aftermath of the Sept. 11, 2001, terrorist attacks. But United Airlines also has made a succession of poor business decisions, including agreeing to provide an unsustainable level of pensions to retired employees, as part of collective bargaining. The airline already is in Chapter 11 bankruptcy, but a federal bankruptcy judge on Tuesday gave an OK to the company’s plan to default on the pension promises.

According to published reports, United will be allowed to fob $6.6 billion worth of pension liabilities onto the Pension Benefit Guaranty Corp., a federal agency formed in 1974 to assure the continued funding of private pension plans.

PBGC doesn’t operate on tax revenues, but is funded through premiums from companies such as United. This is a government agency that serves, in one capacity, to bail out companies that made bad promises. The agency itself is facing potential insolvency given its current $23 billion debt, which means taxpayers ultimately might be forced to pay for private company pension promises. UAL is giving the corporation $1.5 billion in stock and notes in exchange for the bailout, but that doesn’t ameliorate the enormous fiscal problems PBGC is facing.

UAL unions were aghast at the decision because it would cap their pensions at $46,000 a year, far below the amount promised by the company. But United Airlines and the bankruptcy judge make a valid point: Without this deal to help the company emerge from bankruptcy, there will be no company and no pensions at all. The unions are in la-la land, oblivious to the costs of their demands.

Overblown pension promises are taking their toll in the public sector also, with the city of San Diego’s looming bankruptcy and ongoing political crisis (the mayor’s resignation, federal investigations of city officials, etc.) providing daily newspaper entertainment. In the public sector, politicians have every incentive to grant unsustainable pension benefits to aggressive public-employee unions. They buy temporary labor peace and political backing, while the financial problems don’t become evident for years down the line, when a new crop of leaders are in the hot seat. At that point, taxpayers are usually asked to accept higher taxes, more public debt or fewer services.

In the private sector, the day of reckoning should not impose costs on the taxpayer. General Motors is facing its biggest losses in more than a decade because of retiree health benefits, and analysts say the company’s uncompetitive automotive products are a reflection of the lack of money spent on research and development. As the company president recently noted, he became an auto executive for his love of cars but has ended up serving as a health-care administrator.

It is and should be the stockholders’ problem.

Unfortunately, when the feds step in and cushion blows, such as the UAL situation, then the day of reckoning doesn’t take place. Lessons aren’t learned. Other airlines are considering similar efforts to United’s to ditch their pension plans, which means more burden on PBGC and more taxpayer risk. The bailout also puts other airlines at a competitive disadvantage, given that UAL no longer has its pension burden and the other airlines still have theirs.

The right decision would have been to let UAL deal with its own mess. Had the company ceased operations, so be it. It would definitely discourage other companies from promising too many benefits to their union workers in the future.