Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues
Published: 2005-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2001 the U.S. airline industry has lost over $30 billion. Delta, Northwest, United, and US Airways have filed for bankruptcy, the latter two terminating and transferring their pension plans to the Pension Benefit Guaranty Corporation (PBGC). The net claim on PBGC from these terminations was $9.7 billion; plan participants lost $5.3 billion in benefits (in constant 2005 dollars). Considerable debate has ensued over airlines' use of bankruptcy protection as a means to continue operations. Many in the industry have maintained that airlines' use of this approach is harmful to the industry. This debate has received even sharper focus with pension defaults. Critics argue that by not having to meet their pension obligations, airlines in bankruptcy have an advantage that may encourage other companies to take the same approach. At the request of the Congress, we have continued to assess the financial condition of the airline industry and focused on the problems of bankruptcy and pension terminations. This report details: (1) the role of bankruptcy in the airline industry, (2) whether bankruptcies are harming the industry, and (3) the effect of airline pension underfunding on employees, airlines, and the PBGC. DOT and PBGC agreed with this report's conclusions. GAO is making no recommendations.
section_title: What GAO Found
paragraphs: Bankruptcy is endemic to the airline industry, owing to long-standing structural challenges and weak financial performance in the industry. Structurally, the industry is characterized by high fixed costs, cyclical demand for its services, and intense competition. Consequently, since deregulation in 1978, there have been 162 airline bankruptcy filings, 22 of them in the last five years. Airlines have used bankruptcy in response to liquidity pressures and as a means to restructure their costs. Our analysis of major airline bankruptcies shows mixed results in being able to significantly reduce costs--most but not all airlines were able to do so. However, bankruptcy is not a panacea for airlines. Few have emerged from bankruptcy and are still operating. There is no clear evidence that airlines in bankruptcy keep capacity in the system that otherwise would have been eliminated, or harm the industry by lowering fares below what other airlines charge. While the liquidation of an airline may reduce capacity in the near-term, capacity returns relatively quickly. In individual markets where a dominant carrier significantly reduces operations, other carriers expand capacity to compensate. Several studies have found that airlines in bankruptcy have not reduced fares and rival airlines were not harmed financially. The defined benefit pension plans of the remaining airlines with active plans are underfunded by $13.7 billion, raising the potential of more sizeable losses to PBGC and plan participants. These airlines face an estimated $10.4 billion in minimum pension contribution requirements over the next 4 years, significantly more than some of them may be able to afford given their continued operating losses and other fixed obligations. While spreading these contributions over more years would relieve some of these airlines' liquidity pressures, it does not ensure that they will avoid bankruptcy because it does not fully address other fundamental structural problems, such as other high fixed costs.

section_title: Letter
paragraphs: 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. Together,  these airlines provided over 40 percent of the available passenger seating  capacity operated by all U.S. airlines during the second quarter of 2005.  Under bankruptcy protection, United and US Airways terminated their  pension plans and passed the unfunded liability to the Pension Benefit  Guaranty Corporation (PBGC).
In recent years, considerable debate has ensued over legacy airlines’ use of  chapter 11 bankruptcy protection as a means to continue operations, often  for years. Some in the industry and elsewhere have maintained that legacy  airlines’ use of this approach is harmful to the airline industry as a whole  because it allows inefficient carriers to stay in business, creating  overcapacity and allowing these airlines to potentially underprice their  competitors. This debate has received even sharper focus since US Airways  and United defaulted on their pensions. Without their pension obligations,  critics argue, US Airways and United enjoy a cost advantage that may  encourage other airlines sponsoring defined benefit plans to take the same  approach.
Last year, we reported on the industry’s poor financial condition, the  reasons for it, and the need for legacy airlines to reduce their costs if they are to survive. At the request of Congress, we have continued to assess the  financial condition of the airline industry and, in particular, the problems of  bankruptcy and pension plan terminations. Accordingly, this report details  (1) the role of bankruptcy in the airline industry, (2) whether bankruptcies  are harming the industry, and (3) the effect of airline pension underfunding  on employees, airlines, and PBGC.
To help answer these questions, we relied on a variety of data sources. To  assess the financial status of airlines, including bankrupt airlines, we used  airline financial and operating data reported to the U.S. Department of  Transportation (DOT). To assess the reliability of these data, we reviewed  the quality control procedures that the Department and its contractors use  in collecting and maintaining these data. To analyze the impact of airline  bankruptcies, we relied on two different but complementary databases:   Professor Lynn M. LoPucki’s Bankruptcy Research Database and New  Generation Research’s bankruptcydata.com. We  assessed the reliability of  these data by comparing key elements from the two data sources and also  by comparing key elements with corporate filings with the U.S. Securities  and Exchange Commission (SEC).  To assess the effect of underfunding  airline pensions, we relied on PBGC data, supplemented by public financial  reports filed with SEC. We determined that the data we used were  sufficiently reliable for the purposes of this report. For our work, we also  reviewed academic studies, met with airline and trade association  representatives, government experts, and industry and legal analysts.  Additional information on our scope and methodology is available in  appendix I. We performed our work from August 2004 through September  2005 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: In 1978, under the Airline Deregulation Act, the United States deregulated  its domestic airline industry. The main purpose of deregulation was to  remove government control and open the air transport industry to market  forces. Previously, the Civil Aeronautics Board regulated all domestic air  transport, controlling fares and setting routes. In this regulated market,  airlines competed more through advertising and onboard services than  through fares. When the industry was deregulated, “legacy” airlines carried  over the cost structures that had been protected by price regulation.  Similar to other highly regulated industries, the airline industry was heavily  unionized, with a highly trained and stable workforce. By contrast, carriers  that started operations after deregulation sought to attract passengers from  legacy network carriers and to stimulate new passenger traffic—and did so—by offering lower fares. These airlines generally paid less for labor, on  a unit cost basis, which helped them keep their overall operating costs low.
In August 2004, we reported on the financial condition of the airline  industry. High-end demand for air travel had begun weakening in 2000  because of an economic turndown, and demand dropped significantly  following the September 11, 2001, terrorist attacks; the war in Iraq; and the  outbreak of SARS. We found that in response to changing market  conditions, legacy airlines had reduced costs, but mostly by reducing  capacity and not nearly enough to be competitive with low cost airlines.  Low cost airlines experienced significant growth and a fall in their unit  costs as measured by cost per available seat-mile (CASM), whereas legacy  airlines’ unit costs did not improve. In addition, we found that neither  legacy nor low cost airlines possessed much pricing power and suffered  declining unit revenue. As a result of their weak financial performance and  mounting losses, legacy airlines saw their financial liquidity and solvency  seriously deteriorate even as their debt and pension obligations mounted.  Since our 2004 report was issued, losses have continued to mount for  airlines even though traffic levels have returned to pre-9/11 levels. One of  the primary culprits has been record fuel prices, nearly doubling since 2003  (see fig. 1).
Low fares have affected revenues for both legacy and low cost airlines.  Yields, the amount of revenue airlines collect for every mile a passenger  travels, fell for both low cost and legacy airlines from 2000 through 2004  (see fig. 2). However, the decline has been greater for legacy airlines than  for low cost airlines.  Only during the first half of 2005 has stronger demand  allowed airlines to increase fares sufficiently to boost their yields.
Legacy airlines, as a group, have been unsuccessful in reducing their costs  to become more competitive with low cost airlines. Unit-cost  competitiveness is essential to profitability for airlines after years of  declining yields. While legacy airlines have been able to reduce their overall  costs since 2001, they have done so largely by reducing capacity and  without improving their unit costs as compared to low cost airlines.  Meanwhile, low cost airlines have been able to maintain low unit costs by  continuing to grow and maintaining high productivity. As a result, low cost  airlines have been able to sustain a unit-cost advantage over their legacy  rivals (see fig. 3). In 2004, low cost airlines maintained a 2.7 cent advantage  per available seat mile over legacy airlines. This advantage is attributable to  lower overall costs and greater labor and asset productivity. Thus far in  2005, airlines have been able to trim most of their nonfuel-related costs, but  high fuel prices and debt interest charges have kept airlines’ costs from  falling.
Weak revenues and the inability to realize greater unit-cost savings have  combined to produce unprecedented losses for legacy airlines. At the same  time, low cost airlines have been able to continue producing modest profits  (see fig. 4). Legacy airlines have incurred a cumulative $28 billion in  operating losses since 2001. Despite a modest recovery for some airlines  during the first half of 2005, analysts predict the industry will lose another  $5 billion to $9 billion in 2005.
Owing to continued losses, legacy airlines built cash balances not through  operations but by borrowing. Legacy airlines have lost cash from  operations and compensated for operating losses by taking on additional  debt, relying on creditors for more of their capital needs than in the past. In  doing so, several legacy airlines have used all, or nearly all, of their assets  as collateral, potentially limiting their future access to capital markets.
Airlines (and other businesses) that are unable to operate profitably over  time may seek recourse under the U.S. Bankruptcy Code. In general, two  major provisions of the bankruptcy code govern actions taken by airlines  and other businesses:  Chapter 7 of the code governs liquidation of the debtor’s estate and is  often referred to as a “straight bankruptcy.”  A trustee is appointed to  sell off available assets to repay creditors.  is designed to accommodate complicated reorganizations of publicly  held corporations. Among other things, it allows companies, with court  approval, to reject agreements made under collective bargaining and  renegotiate contracts with other creditors. With the approval of the  bankruptcy courts (which administer the bankruptcy laws), companies  may also modify retiree benefits.
Airline bankruptcies typically include a large number of stakeholders. The  primary stakeholder is the airline itself, known as the debtor-in-possession.  Federal stakeholders include the bankruptcy judge, who presides over the  administration of the case and decides contested aspects, and the U.S.  Trustee, whose duties include ensuring the integrity of the process and  approving the retention of professionals (e.g., bankruptcy attorneys).   During this most recent round of airline bankruptcies, two additional  governmental entities have become major stakeholders in airline  bankruptcies: the Air Transportation Stabilization Board (ATSB), which  was formed after September 11 to administer a $10 billion loan guarantee  program for airlines, and PBGC, which insures defined benefit pension  plans. Both agencies have taken ownership stakes in bankrupt and  nonbankrupt airlines through ATSB’s loan guarantees and PBGC’s taking  over defined benefit pension plans terminated in bankruptcy. The entities  that provide the financing while an airline is in bankruptcy (known as  debtor-in-possession financing) and upon its exit (exit financing) are also  major stakeholders, as are airline employees, many of whom are represented by labor unions. Other secured and nonsecured creditors and  shareholders are also stakeholders in an airline bankruptcy. The interests  of unsecured creditors (including labor) and shareholders are represented  in the process by committees appointed by the U.S. Trustee.
Among the largest cost elements for both legacy airlines and low cost  airlines are those associated with employee compensation and benefits. As  part of the retirement benefits offered, legacy airlines have tended to offer  “defined benefit plans” and supplemental defined contribution plans,  whereas low cost airlines tend to provide only “defined contribution plans.”
Defined benefit plans typically provide participants with an annuity at  retirement—a series of periodic payments over a specified period of  time or for the life of the participant. As designed, defined benefit plan  annuities are generally based on a participant’s retirement age, number  of years of employment, and salary. As of December 31, 2004, nine major  airlines sponsored defined benefit plans for their employees: Aloha,  Alaska, American, Continental, Delta, Hawaii, Northwest, US Airways,  and United. These airlines generally offered different pension plans for  different groups of employees—pilots, machinists, and flight attendants,  for example—with varying levels of promised benefits.
Defined contribution plans base pension benefits on the contributions  to and investment returns on individual accounts. Contributions may  consist of pretax or after-tax employee contributions, employer  matching contributions that require employee contributions, and other  employer contributions that may be made independent of any  participant contributions. In a defined contribution plan, the employee  bears the investment risk and often controls how the individual account  assets are invested.
PBGC was established to encourage the continuation and maintenance of  voluntary private pension plans and to insure the benefits of workers and  retirees in defined benefit plans should plan sponsors fail to pay benefits.   However, if a pension plan’s assets are insufficient to pay accrued benefits,  the plan can be terminated under certain conditions, and PBGC then  assumes responsibility for paying retiree pensions. PBGC may pay only a  portion of the benefits originally promised to employees and retirees. For  2005, the maximum statutory limit of annual benefits guaranteed by PBGC  is $45,613.68 per participant, for retirement at age 65. The amount paid  decreases at earlier retirement ages.
section_title: Bankruptcy Is a Response to the Airline Industry’s Structural Challenges
paragraphs: Bankruptcy filings are prevalent in the U.S. airline industry because of long- standing economic structural issues that have led to historically weak  financial performance for the industry. Structurally, the airline industry is  characterized by high fixed costs, cyclical demand for its services, intense  competition, and vulnerability to external shocks. As a result, airlines have  been more prone to failure than many other businesses, and the sector’s  financial performance has continually been very weak. Airlines frequently  seek bankruptcy protection because of severe liquidity pressures, but while  bankruptcy may provide some immediate protection from creditors,  airlines in bankruptcy have not always been able to reduce their costs or  avoid liquidation. Owing to the long history of airline bankruptcies, the  process is well developed, and the code includes provisions applicable just  to airline bankruptcies. Even so, the process can be lengthy and  contentious—for example, United is in its third year of bankruptcy, and its  process to date has included litigation over aircraft repossessions as well  as employee pensions.
subsections: section_title: Bankruptcies Are Endemic to the Airline Industry, and Airlines Fail at a Higher Rate Than Most Other Industries
paragraphs: Since the 1978 economic deregulation of the U.S. airline industry, airline  bankruptcy filings have become prevalent in the United States, and airlines  fail at a higher rate than companies in most other industries. This has been  particularly true for small, new entrant carriers. Since 1978, there have  been 162 airline bankruptcy filings in the United States, 22 of them since 2000. Most of these bankruptcies were chapter 11 filings by small, new- entrant airlines that eventually liquidated. Only 24 of the filings were by  airlines with over $100 million in assets; however, 12 of these large  bankruptcies were filed after 2000 (see table 1).
section_title: Airline Bankruptcies Are the Result of Long-Standing Structural Issues and Weak Financial Performance
paragraphs: Because of certain structural characteristics, including its susceptibility to  external shocks and historically weak financial performance, the airline  industry is more prone to failure than many other types of businesses.  Airlines have high fixed costs and are subject to highly cyclical demand and  intense competition. Compounding these other structural problems is the  industry’s vulnerability to external shocks—such as terrorist attacks or  war—that decrease demand and increase costs. The result is that the  airline industry has had the worst financial performance of any major  industry.
subsections: section_title: Structural Issues Hinder the Airline Industry
paragraphs: Structural characteristics of the airline industry have resulted in repeated  cycles of boom and bust as its high fixed costs and particular sensitivity to  seasonal and business cycle changes strain declining revenues. External  shocks such as the Iraq War and the SARS epidemic have exacerbated the  situation. Operating an airline requires expensive equipment and facilities  as well as large numbers of people to operate them. Aircraft are very  expensive—for example, the 2005 list price for a Boeing 777 ranges from  $171 million to $253 million—and, therefore, airlines use outside financing  to acquire a fleet. In the United States, airlines typically use operating  leases, loans, or public financing instruments to fund their aircraft.  Servicing these leases or debt instruments requires considerable and  regular cash payments regardless of how extensively the aircraft are used.  Airlines also rely on specialists like pilots and mechanics who cannot be  easily replaced, making labor force adjustments to changes in demand  more difficult. In addition, the workers of many carriers, particularly those  of the legacy carriers, are covered by multiyear collective bargaining  agreements. While such agreements may provide important protections to  employees, they may limit carriers’ ability to respond quickly to cyclical  changes in demand, much less unanticipated shocks like the September 11  attacks or SARS. Together, these characteristics result in long-term high  fixed costs for an industry whose fortunes fluctuate with the business  cycle.
The airline industry is very competitive and has become increasingly so  with the emergence of low cost airlines and the relative ease with which  new airlines gain access to capital and enter the industry. It is difficult for  airlines to reduce their capacity because of the high fixed costs and low  variable costs of providing service. Capacity increases by individual  airlines are frequently matched by competitors. Low cost airlines grew over  the last 5 years, from 10.8 percent of domestic capacity in 1998 to 17.5  percent of domestic capacity in 2004. Low cost airlines have been able to  maintain their low costs by continuing to grow. Finally, despite historic  losses in the industry, new airlines are still willing to enter the market. As of  July 2005, seven carriers were obtaining operating certificates, while at  least one other had obtained its operating certificate but was not yet  operating. It is uncertain if and when these carriers will actually begin  service. These carriers plan to provide domestic and international  scheduled and charter service. These new airlines are indicative of the  willingness of capital providers to finance aircraft despite the industry’s  continued losses.
Demand for air travel is closely tied to the business cycle and is subject to  external shocks. So while airlines’ most prominent costs—for aircraft and  labor—are locked into fixed payments and multiyear contracts, airline  revenues fluctuate because demand is cyclical. External demand shocks  can have a devastating impact on airline finances. For example, beginning  in 2000, an economic downturn precipitated a decrease in high-end demand  for air travel, while the terrorist attacks of September 11, the Iraq War, and  the outbreak of SARS compounded that trend. These events contributed to  the 22 airline bankruptcy filings since 2000.
section_title: The Airline Industry’s Financial Performance Has Historically Been Poor
paragraphs: The structural issues discussed in the previous section have contributed to  the airline industry’s historically poor financial performance and higher- than-average industry failure rate. This performance is illustrated by the  industry’s weak revenues and lack of profitability. In particular, legacy  airlines in aggregate have experienced operating losses in all quarters but  one since September 11, 2001. A return to profitability that some financial  analysts expected for legacy airlines in 2004 and 2005 has not materialized,  in large part because of historically high oil prices.
One way to measure the inherent instability of the airline industry is to  compare its operating ratio with that of other industries. The operating  ratio is the ratio of a company’s operating expenses to its operating  revenues. One study found that from 1983 through 2001, the airline industry  had the highest risk in relation to return of any industry sector when  measured using this ratio. This study found that the airline industry had  an operating ratio of 97 percent, well above the average of 83.5 percent for  all other industries.
Evidence of the volatility and weak financial performance of the airline  industry can also be found by comparing airline failure rates with overall  U.S. business failure rates. For 1997, the last year in which Dun &  Bradstreet produced these data, the overall U.S. business failure rate was  0.9 percent, while the failure rate for the airline industry was three times  greater, at 2.9 percent. Although we do not have overall business failure  rates for more recent years, there is no reason to believe that the disparity  between the rates has changed significantly since 1997 (see fig. 5).
section_title: Airlines Seek Bankruptcy as a Means to Restructure, but Are Not Always Successful in Reducing Costs
paragraphs: Bankruptcy has played a prominent role in the U.S. airline industry since  deregulation because many carriers have used the bankruptcy code in an  effort to restructure their operations and cut costs—by, for example,  terminating defined pension benefit plans and rejecting high-cost aircraft  leases. These carriers have met with varying degrees of success. Prominent  examples include US Airways, which has entered chapter 11 twice since  2002 and has merged with America West Airlines, which itself went through  bankruptcy 11 years before; United Airlines, which is hoping to emerge  from bankruptcy in 2006 after more than 3 years in bankruptcy; and TWA,  which entered bankruptcy three times before its assets were eventually  acquired by American Airlines in 2001.
Generally, major airlines have been able to reduce their costs during  bankruptcy. Reductions in operating expenses were generally achieved  through reductions in wages and in capacity. In eight of the nine largest  airline bankruptcies over the last 25 years, operating expenses and capacity  were reduced (see table 2). The exception was the first Continental  Airlines bankruptcy, when the airline’s capacity doubled but expenses rose  by only one-third. Typically, cost savings were achieved disproportionately  by cutting wages—in six of the nine cases, reductions in wages were  greater than the overall reduction in operating expenses. Most critically,  however, unit costs were reduced in only five of the nine cases, and in two  cases (TWA 1 and US Airways 1) unit costs went up and by more than the  industry average, perhaps explaining why those airlines filed for  bankruptcy again within 2 years.
section_title: The Airline Bankruptcy Process Is Well Developed and Understood
paragraphs: Most airlines file to reorganize their operations and finances under chapter  11 of the bankruptcy code, some sections of which will change under the  new bankruptcy law that comes into effect in October 2005. Given the  number of airline bankruptcies that have occurred over the last 20 years,  the process is well developed and understood by those involved, but it can  still be quite contentious.
subsections: section_title: Airlines Typically File for Chapter 11 Reorganization
paragraphs: Most U.S. airlines that are in financial distress and choose to file for  bankruptcy protection file under chapter 11 of the U.S. bankruptcy code.  Chapter 11 provides protection from creditors and allows a company to  reorganize itself and become profitable again. Management—as the debtor- in-possession—continues to run the airline, but all significant decisions  must be approved by the bankruptcy court. In a chapter 7 filing, the airline  stops all operations and a trustee is appointed to sell the assets to pay off  the debt. According to SEC, most publicly held companies will file under  chapter 11 rather than chapter 7 because they can still run their business  and control the bankruptcy process. For airlines, 148 of the 162 bankruptcy  filings since 1978 were chapter 11 filings.
Several sections of the bankruptcy code have played a prominent role in  airline bankruptcies. Section 362—the automatic stay provision—gives an  airline breathing room from its creditors by stopping all collection efforts  and foreclosure actions and permitting the debtor to attempt to develop a  repayment plan. Under section 1121, the airline’s management—or the  private trustee if one has been appointed—currently has the exclusive right  to file a reorganization plan for 120 days following the filing of the  bankruptcy petition; this period may be extended for cause. Other parties- in-interest may file a plan if 120 days have elapsed without the debtor’s  filing a plan or if 180 days have elapsed and the debtor’s plan has not been  accepted by each class of creditors. This period may also be extended for  cause. Other sections of the code govern actions an airline might take to  restructure its operations and lower its costs in order to emerge from  bankruptcy. For example, section 1113 governs the rejection of labor  contracts and requires that the airline complete certain steps before  requesting that the court abrogate contracts. Section 1110 gives an airline  60 days to accept or reject aircraft leases, which allows the airline to  continue to operate without fear that its chief assets will be repossessed.  Additionally, several subsections of section 365 currently relate to airline  leases of aircraft terminals and gates. For example, an airline that leases  more than one terminal or gate may not assume or assign the leases unless  it assumes or assigns all of them to the same entity, which limits the ability  of an airline to realize the full value of its leases. To emerge from  bankruptcy, the airline devises and obtains approval of a reorganization  plan from the bankruptcy court and obtains exit financing, which is used to  operate the company once it is no longer within the jurisdiction of the  bankruptcy court.
section_title: Airline Bankruptcies Follow a Well-Practiced but at Times Disputed Process
paragraphs: The airline bankruptcy process has been honed over the past 27 years as  carriers, large and small, have built on prior experiences and expertise. We  interviewed numerous industry experts (attorneys, consultants, analysts,  and current and former airline officials), many of whom have had  experience in more than one airline bankruptcy. Additionally, several of  these experts confirmed that the case law and documents produced by  each bankruptcy case provide a body of expertise available for subsequent  filers. They indicated that this documentation serves as precedent that is  useful even though each bankruptcy case is unique.
The process can also be contentious as the various stakeholders compete  for their share of a dwindling pie. In recent airline bankruptcies, labor  groups have disputed airlines’ right to cancel collective bargaining  agreements and terminate defined benefit pension plans while airlines have  challenged creditors. For example, United Airlines has been involved in  litigation with its flight attendants over its termination of their pension plan  and with a group of aircraft lessors over their aircraft repossessions during  its current bankruptcy.
section_title: Changes under New Bankruptcy Law Might Affect Future Airline Filings
paragraphs: On October 17, 2005, the first major overhaul of the nation’s bankruptcy  laws in 9 years will become effective. Many provisions of the Bankruptcy  Abuse Prevention and Consumer Protection Act of 2005 apply to  consumer bankruptcies, but several important provisions apply to  corporate bankruptcies. Some of these provisions may induce distressed  airlines to seek bankruptcy before the new law takes effect while other  provisions may provide more advantages to airlines in bankruptcy. The  mid-September Delta and Northwest bankruptcy filings may be an  indication that these carriers were seeking to avoid some portions of the  new bankruptcy law.
First, the 2005 law limits the “exclusivity period” for the debtor to file a  reorganization plan to 18 months after the bankruptcy filing. Currently, the  debtor has the first 120 days to file a plan, and can obtain numerous  extensions. The new limit will not force liquidations but will give other  parties an opportunity to file a competing plan somewhat sooner, thereby  limiting the debtor’s “exclusive period” of control of the business. One  bankruptcy expert we spoke with indicated that this change would not  affect the majority of business bankruptcies, since most are concluded  within 180 days. However, because airline bankruptcies tend to take longer  than those in many other industries, this change may induce airlines  considering bankruptcy to file before October 17, 2005.
Second, the new law eliminated two subsections of the code—365(c)(4)  and 365(d)(5)-(9)—that limited bankrupt airlines’ options when assuming  or assigning terminal and gate leases. This change in the law will favor  airlines that control gates and leases, because they will have the potential  to realize greater value from these assets when in bankruptcy.
Third, the 2005 act increases the time limits on assuming or rejecting  unexpired commercial and real property leases but limits extensions.  Under the current code, the debtor has 60 days from the commencement of  the case to assume or reject commercial real property leases, and this time  is often extended by the bankruptcy court. The 2005 act increases the  initial decision period to 120 days but allows for only one extension (of up  to 90 days) after that. Therefore, debtors will have a maximum of 210 days  from the commencement of the bankruptcy case to make a decision on  these leases. The court may grant a subsequent extension only upon prior  written consent of the lessors in each instance.
In addition, the new law expands the grounds on which a chapter 11 case  may be converted to chapter 7 and increases the circumstances under  which a chapter 11 trustee may be appointed. The act also encourages fast- track chapter 11 cases by making it easier for debtors to implement  prearranged plans. Finally, the new law regulates the circumstances for  approval of key employee retention plans and related severance payments  by requiring that (1) the debtor establish that the bonus is essential to  retain the employee, (2) the employee have a bona fide job offer, and (3)  the debtor prove that the employee’s services are essential to the survival  of the company. Additionally, these bonuses and severance packages are  linked to those that are paid to nonmanagement employees. This provision  also might induce pre-October 17, 2005, airline bankruptcy filings.
section_title: Airline Bankruptcies Can Differ Significantly from Bankruptcies in Other Industries
paragraphs: Airline bankruptcies can differ notably from bankruptcies in other  industries along a number of dimensions.  However, it is hard to determine  whether the differences are directly attributable to the unique sections of  the bankruptcy code specific to airlines or are the result of factors unique  to the airline industry.
Airline bankruptcies can take a long time to resolve. According to our  analysis of the Bankruptcy Research Database, airline bankruptcies  ranked fifth in overall duration (averaging 714 days), behind bankruptcies  in such industries as water transportation and petroleum refining, and  lasted significantly longer than the average for bankruptcies in all of the  industries in the database, which was 518 days. (See fig. 6).
Airlines in bankruptcy also appeared to retain assets better than other  industries, but at the cost of much greater debt; however, a limited number  of observations precludes firm conclusions. According to available data for  19 of the top 50 bankruptcies since 1970, which involved 3 airlines and 16  other companies, the airlines’ assets were 0.8 percent lower on average  after bankruptcy, while the other companies’ assets were 47.2 percent  lower on average. At the same time, the airlines’ liabilities decreased 32.1  percent while the liabilities of companies in the other industries decreased  56.9 percent.
Outcomes also differed for airline and other industry bankruptcies,  according to Bankruptcy Research Database. The airlines were more likely  than the other industries in our analysis to liquidate. (See fig. 7.)  However,  airlines are also more likely than other industries to start bankruptcy in  chapter 11, which may account for their greater tendency to liquidate once  in chapter 11. For each group, a majority of the companies had  reorganization plans confirmed by the court (i.e., the companies had exited  or emerged from bankruptcy), though for airlines this majority was smaller  because of the larger percentage of liquidations.
Our analysis of the Bankruptcy Research Database also revealed no  discernable difference between airlines’ and other industries’ likelihood of  reentering bankruptcy within 5 years. The rates at which airlines and other  industries filed again for bankruptcy were just under 15 percent. However,  these rates should be accepted with some caution and perhaps viewed as  conservative because the database captured only refilings that occurred  within 5 years and excluded companies with assets of less than $100  million. As a result, filings by companies not meeting one or the other  criterion were not counted.
section_title: No Evidence That Bankruptcy Protection Harms the Industry or Hurts Competitors
paragraphs: There is no clear evidence that airlines in bankruptcy are harming the  industry or their rivals or that bankruptcy is a panacea for airlines seeking  an easy path to profitability. Some have asserted that protecting airlines in  bankruptcy, rather than forcing liquidation, contributes to overcapacity in  the industry. They further contend that bankrupt airlines underprice their  rivals, hurting the financial well-being of healthier competitors. We found  no evidence to support either contention and some evidence to the  contrary. For example, despite many airline liquidations since deregulation  in 1978, some of which were quite large, industry capacity has continued to  grow unabated thanks to the growth of existing airlines and new entrants,  often using the just-liquidated airline’s planes. We also found that capacity  rebounded quickly in individual markets that experienced the liquidation or  retreat of a significant airline, as other carriers quickly expanded capacity  to compensate with little or no increase in overall average fares. Several  studies have also found that airlines in bankruptcy have not reduced fares  and did not harm rival airlines financially. Bankruptcies are not a panacea  for airlines, as some might believe. Bankruptcy entails significant costs,  loss of management control, and damaged relations with employees,  investors, and suppliers. Of the 162 airlines that have filed for bankruptcy,  142 (88 percent) are no longer in operation.
subsections: section_title: No Evidence That Bankruptcy Protection Contributes to Overcapacity or Lower Fares
paragraphs: Contrary to some assertions, we found no evidence that bankruptcy  protection has led to overcapacity and lower fares that have harmed  healthy airlines, either in individual markets or in the industry overall. In  1993, a national commission to study airline industry problems cited  bankruptcy protection as a cause for the industry’s overcapacity and fare  problems. Airline executives have also cited bankruptcy protection as a  reason for industry overcapacity and low fares. However, we found no  evidence to support these views and some evidence to the contrary.  Notably, both in individual markets and industrywide, the liquidation of  major airlines has had only a very temporary or negligible effect on  capacity, as other airlines have quickly replenished capacity. In part, this  short-term effect can be attributed to the fungibility of aircraft and the  notion that industry capacity is determined by the entire aviation supply  chain and not solely by individual airlines. Finally, separate academic  studies have found that airlines in bankruptcy have not lowered their fares  or harmed the financial standing of their rivals.
Both a national commission and airline executives have asserted, but  without specific evidence, that bankruptcy protection allows airlines to  avoid liquidation, thus contributing to industry overcapacity and  underpricing that harms bankrupt carriers’ rivals. According to a 1993  report by the National Commission to Ensure a Strong Competitive Airline  Industry, one of the causes of the industry’s financial problems was  bankrupt airlines. Industry executives and some publications have gone  further, stating that bankrupt airlines damage the entire industry. For  example, a former Chairman of American Airlines asserted that bankrupt  airlines contribute to industry overcapacity and are able to underprice  rivals by virtue of their bankruptcy protection. However, very little  evidence has been cited in any of these claims. In 1993, we testified that  claims and counterclaims concerning the underpricing of bankrupt airlines  had not been substantiated or considered in a larger context.
There is little evidence that bankruptcy protection has contributed to  industry overcapacity, at least in the long term. If it did, then some evidence  that liquidation permanently removes capacity from the market should also  exist. All indications are that this has not occurred. For example, industry  capacity, as measured by available seat miles (ASM), grew two and one-half  times from 1978 through 2004. Growth has slowed or declined just before  and during recessions, but not as a result of large airline liquidations (see  fig. 8).
Capacity has continued to grow despite liquidations for a variety of  reasons, including the fungibility of aircraft and the ease of entry, but  ultimately capacity in any industry can be traced to the flow of capital into  and out of the industry. For the airline industry, in which the chief asset  (aircraft) is easily resold (fungible) and heavily leveraged, capital flows  have supported the continued expansion of capacity even during industry  downturns. Except for government subsidies to airlines or manufacturers,  capital would flow to airlines only if the providers of that capital received a  return on their investments. Evidence suggests that capital providers have  profited and helps explain why airlines in bankruptcy continue to receive  substantial capital support from other members of the value chain. Experts  have espoused the notion of the value chain in understanding the role of companies in an industry. In the airline industry, the value chain  includes aircraft and engine manufacturers, such as Boeing, General  Electric, and Airbus; lessors, such as GE Commercial Aviation Service and  International Lease Finance Corporation; global ticket distribution  systems, like Sabre and Worldspan; credit card companies; airports;  suppliers; and others. There is considerable evidence that these other  members of the value chain have earned a good return on capital while  airlines have not (see figs. 9 and 10). Those companies further up the value  chain face less competition and are able to impose higher costs on airlines.  Accordingly, these companies have a vested interest in ensuring that  airlines survive and that capacity not leave the industry.
Data from sources of financing to airlines that are in bankruptcy or  financial trouble provide some evidence of the vested interests of value  chain members in keeping troubled airlines alive. Table 3 lists some of the  major injections of capital into airlines since 2004.
Our research indicates that the departure or liquidation of a carrier from a  market does not necessarily lead to a long-term decline in local traffic (i.e.,  that which originates at or is destined for the particular airport) for that  market. We contracted with InterVISTAS-ga2, an aviation consultant, to  examine traffic to and from six cities that experienced the departure or  significant withdrawal of service of an airline (see table 4). In most cases,  while total capacity and passenger traffic decreased, the reduction was  largely attributable to the loss of connecting passenger traffic from the  departing carrier. There was little diminution in local passenger traffic for  most of these markets because other carriers increased their capacity to  replace the departing carrier’s capacity. This research provides further  evidence that demand drives capacity and that the departure of a carrier  due to bankruptcy or a change in market strategy does not lead to a long- term decline in capacity. Appendix II contains additional detailed  information on each case study.
A major study of airline bankruptcies’ effects on air service also found that  bankruptcy generally does not harm individual airline markets. This April  2003 study examined all major chapter 11 bankruptcies from 1984 through  2001 to determine if and how they affected air service. The study found  that the effect of bankruptcies on large and small airports was insubstantial  and not separable from normal fluctuations in air traffic. However, for  medium-sized airports, the study found the bankruptcy of an airline with a  significant share of flights reduced service by amounts that were  statistically significant.
Two major academic studies have found that airlines under bankruptcy  protection do not lower their fares or hurt competitor airlines, as some  have contended. A 1995 study found that an airline typically reduces its  fares somewhat before entering bankruptcy. However, the study found  that other airlines do not lower their fares in response and, more important,  do not lose passenger traffic to their bankrupt rival and therefore are not  harmed by the bankrupt airline. Another study came to a similar conclusion  in 2000, this time examining the operating performance of 51 bankrupt  firms, including 5 airlines. Rather than examine fares as did the 1995  study, this study examined the operating and financial performance of  bankrupt firms and their rivals. The study found that the performance of a  bankrupt firm deteriorates before the firm files for bankruptcy and its  rivals’ profits also decline during this period. However, once the firm is in  bankruptcy, its rivals’ profits recover.
section_title: Bankruptcies Are Not a Panacea and Few Airlines Have Emerged Successfully
paragraphs: With very few exceptions, airlines that entered bankruptcy did not emerge  from it. Many of the advantages of bankruptcy stem from the legal  protection afforded the debtor airline from its creditors, but this protection  comes at a high cost in loss of control over airline operations and damaged  relations with employees, investors, and suppliers.
subsections: section_title: Bankruptcy Involves Costs
paragraphs: Bankruptcy involves many costs for airlines that file. The financial costs  include the consultant and legal fees of managing a lengthy bankruptcy. For  example, United, which filed for bankruptcy in December 2002, had spent  nearly $260 million in legal fees as of June 2005. A study of bankruptcy fees  found that large companies generally spend an average of 2.2 percent of  their assets on legal fees while in bankruptcy. The fees for United are high  for a company of its size, and they are rising as the company continues to  operate under chapter 11. These fees, thus far, make United’s bankruptcy  the seventh most costly bankruptcy of all time. Bankruptcy also wipes out  shareholders’ equity, which may mean significant losses for the original  owners, and leaves them without a financial interest in the company.  Finally, airlines in bankruptcy do not immediately receive all the cash from  credit card ticket sales because credit card companies protect themselves  against liquidation by withholding a large percentage of receipts until travel  is actually taken. For the cash-flow-intensive airline business, this wait is  difficult.
In addition to financial costs, there are many negative factors to be  considered by firms filing for bankruptcy. Notably, airline officials told us,  loss of control over the airline’s operations can be significant, because the  courts must approve important changes, such as sales of assets or  significant changes in fare structures or schedules. Rival airlines are able to  learn of strategic changes well before they may occur. There may also be  damage to public and customer perceptions of the airline. Finally,  bankruptcy damages, sometimes permanently, relations with employees if  they are made to bear a significant portion of the bankruptcy costs. In other  cases, an airline may suffer a “brain drain” when its most talented  employees seek employment elsewhere.
section_title: Very Few Airlines Have Emerged Successfully from Bankruptcy
paragraphs: Very few airlines have emerged from bankruptcy and are still operating.  Many others have gone out of business through liquidation or merger. Of  the 162 airline bankruptcy filings by 142 different airlines since 1978, 148  were for chapter 11 reorganization and 14 were for chapter 7 liquidation  (see table 5). Of the 148 chapter 11 reorganization filings, in only 18 cases  does the airline still hold an operating certificate from the Federal Aviation  Administration (FAA).
section_title: Airlines Have Shed Billions in Pension Obligations, but Structural Cost Problems Remain
paragraphs: Market factors, management-labor decisions, and pension law provisions  have played a role in airline pension underfunding of approximately $13.7  billion, with an estimated $10.4 billion in minimum funding requirements  due from 2005 through 2008 as a result. These pension obligations  contribute to the liquidity problems faced by legacy airlines that still  operate pension plans, and may help cause additional airlines to declare  bankruptcy. Remaining airline pensions expose PBGC to $23.7 billion in  unfunded pension obligations and would result in significant benefit  reductions to participants if their pension plans are terminated. PBGC has  taken over a combined $24.9 billion in pension obligations from US  Airways and United within the last 3 years, at a cost of over $9.7 billion to  the agency. While eliminating or easing pension plan obligations may help  ease legacy airlines’ immediate liquidity pressures, they do not eliminate  the structural cost imbalance between legacy and low cost airlines, or  guarantee that the legacy airlines will avoid bankruptcy. Pension reform  proposals—including extending payment time frames, changing premium  rules, and using a yield curve to calculate liabilities—would have  differential effects among airlines and implications for PBGC.
subsections: section_title: Pension Underfunding Will Require Airlines to Contribute a Minimum of $10.4 Billion to Plans between 2005 and 2008
paragraphs: Airline defined benefit pensions are underfunded by approximately $13.7  billion, according to airline financial reports filed with SEC. This  underfunding is down from $21 billion at the end of 2004 as a result of the  termination and transfer of US Airways’ remaining pension plans and all of  United’s pension plans to PBGC. Under existing law, minimum pension  contribution requirements for the remaining legacy airlines that still  operate plans are estimated to be at least $10.4 billion from 2005 through  2008. These minimum contribution requirements contribute to airline  liquidity problems. Estimates suggest the combined costs of the minimum  pension contribution requirements, long-term debt, capital leases, and  operating leases will exceed available cash.
subsections: section_title: Overfunded in 1999, Legacy Airlines’ Pensions Were Underfunded by $21 Billion at the End of 2004
paragraphs: The magnitude of legacy airlines’ future pension funding requirements is  attributable to the size of the pension shortfall that has developed since  2000. As recently as 1999, airline pensions were overfunded by $700  million, according to SEC filings; by the end of 2004, legacy airlines  reported a deficit of $21 billion (see fig. 11), despite the termination of the  US Airways pilots’ plan in 2003. Since these filings, the total underfunding  has declined to approximately $13.7 billion, in part because of the  termination of the remaining US Airways plans and all of the United plans.
The extent of pension underfunding varies significantly by airline. At the  end of 2004, before terminating its pension plans, United reported  underfunding of $6.4 billion, an amount equal to over 40 percent of its total  operating revenues in 2004. In contrast, Alaska reported pension  underfunding of $303 million at the end of 2004, equal to 13.5 percent of its  operating revenues. Since United terminated its pension plans, Delta and  Northwest have the most significant pension funding deficits—over $5  billion and nearly $4 billion, respectively—which represent about 35  percent of each airline’s 2004 operating revenues (see fig. 12).  PBGC  released estimated after Delta and Northwest declared bankruptcy on  September 14, 2005, stating that on a termination basis Delta’s defined  benefit plans were underfunded by $10.6 billion, while Northwest’s  underfunding totaled $5.7 billion.
Under current law, companies whose pension plans fail certain funding  benchmarks and are underfunded by more than 10 percent on a current  liability basis must make deficit reduction contributions (DRC), in addition  to other contributions, to remedy the underfunding. Minimum  contribution requirements, including DRCs, are estimated to total a  minimum of $10.4 billion from 2005 through 2008. These estimates  assume the expiration of the Pension Funding Equity Act (PFEA) at the end  of this year. PFEA permitted airlines to defer the majority of their DRCs in  2004 and 2005. If this legislation is allowed to expire at the end of 2005,  payments due from legacy airlines will significantly increase in 2006.  According to PBGC data, legacy airlines are estimated to owe a minimum  of $1.5 billion this year, nearly $2.9 billion in 2006, $3.5 billion in 2007, and  $2.6 billion in 2008 (see fig. 13).
section_title: Market Factors, Management-Labor Decisions, and Pension Law Provisions Have Played a Role in Airline Pension Underfunding
paragraphs: Declines in pension plan assets from investment losses and low interest  rates have been significant factors in current pension underfunding. Airline  pension asset values dropped nearly 15 percent from 2001 through 2004  because of the decline in the stock market, while future obligations have  steadily increased because of (1) declines in the yields on the fixed-income  securities used to calculate the liabilities of plans, and (2) new benefit  accruals. Management and labor decisions increased pension obligations in  profitable years, but much less was contributed to the pension funds than  could have been. In addition to these factors, pension funding rules have  not prevented plans from becoming significantly underfunded. Even  though U.S. Airways and United Airlines were in full compliance with the  minimum funding rules for pension plans prior to bankruptcy, their plans,  in aggregate, were underfunded by nearly $15 billion at termination.
subsections: section_title: Asset Declines Have Contributed to Pension Underfunding
paragraphs: Pension asset values for legacy airlines reached a high in 2000 of $35.8  billion. Investment returns turned negative in 2001 and caused the value of  airline pension assets to decline. By 2002, the value of legacy airline  pension assets dropped to $26.2 billion—a loss of over $9 billion (26.7  percent). By 2004, pension asset values recovered to $30.4 billion, about 15  percent below the high in 2000 (see fig. 14). If PBGC takes over an  underfunded plan after it has been terminated, the plan’s liabilities and  assets are transferred to PBGC. If the plan’s assets are insufficient to cover  the plan’s liabilities, PBGC, and sometimes plan participants, must assume  the loss. While the Employment Retirement Income Security Act provides  some standards of conduct for the plan sponsor’s investment practices, the  sponsor’s chosen plan fiduciary has discretionary control over the  management of plan assets. We did not examine the investment practices  of airlines or other companies; however, one union has suggested that  airline investment practices may have contributed to plan failure and has  requested that PBGC conduct an audit to ensure the integrity of asset  investment practices. PBGC, however, does not have the authority to  conduct this type of audit; this responsibility falls under the authority of the  Department of Labor.
The decline in key interest rates compounded the loss in asset value by  increasing the value of pension liabilities. Interest rates are critical factors  in calculating the level of plan assets needed today in order to fulfill  promised benefits. When interest rates are lower, projected returns on  assets are lower, requiring more money to be invested today to finance  promised future benefits. At a 6-percent interest rate, for example, a  promise to pay $1 per year for the next 30 years has a present value of $14.  If the interest rate is reduced to 1 percent, however, the present value of the  promise to pay $1 per year for the next 30 years increases to $26.
Bond yields underpinning the interest rates used to calculate pension  liabilities on a current liability basis have been trending lower since the  early 1980s, causing the value of future liabilities to grow. Until 2004, the  interest rate used to calculate liabilities on a current liability basis was  based on the 30-year Treasury bond rate. PFEA changed the basis of this  interest rate from the 30-year Treasury bond rate to a composite index of  high-grade corporate bonds for years 2004 and 2005. As figure 15 shows,  the two rates track each other fairly closely, but the 30-year Treasury rate is  lower.
In addition to market forces, decisions made by management and labor  have increased pension liabilities. Although management and labor unions  have agreed to a number of changes to collective bargaining agreements  that have limited pension and other benefits in recent years, labor  agreements have also increased pension liabilities in a number of instances  since the late 1990s. In some instances, pension benefits increased beyond  what financially weak airlines could reasonably afford. For example, in the  spring of 2002, United’s management and mechanics reached a new labor agreement that increased the mechanics’ pension benefit by 45 percent, but  the airline declared bankruptcy the following December.
In addition, legacy airlines have funded their pension plans far less than  they could have, even during the airlines’ profitable years. PBGC examined  101 cases of airline pension contributions from 1997 through 2002 and  found that while airlines made the maximum deductible contribution in 10  cases, they made no contributions in 49 cases when they could have  contributed. When airlines did make tax deductible contributions, the  contributions were often far less than permitted. For example, in 2000, the  airlines PBGC examined could have made a total of $4.2 billion in tax- deductible contributions, but they contributed only about $136 million  despite recording profits of $4.1 billion (see fig. 16).
PBGC has taken over a number of pension plans that have been  substantially underfunded even though their sponsors were in full  compliance with the minimum funding requirements. Existing laws  governing pension funding and premiums have not protected PBGC from  accumulating a significant long-term deficit and have not minimized the  impact of PBGC’s exposure to the moral hazard arising from insuring  pension plans. The minimum funding rules depend on the plan sponsor  being in good financial health and continuing operations indefinitely; the  rules do not ensure that the plan sponsor will have the means to meet the  plan’s benefit obligations if the plan sponsor meets financial distress.  Meanwhile, in the aggregate, premiums paid by plan sponsors under the  pension insurance system have not adequately reflected the financial risk  to which PBGC is exposed. Accordingly, defined benefit plan sponsors,  acting within the rules, have been able to turn significantly underfunded  plans over to PBGC, thereby creating PBGC’s current deficit. This section  addresses three aspects of the rules—the current liability measure, the use  of credit balances in meeting funding requirements, and PBGC’s premium  structure.
The current liability measure, which measures the value of a plan’s  accrued liabilities to date for funding purposes, may provide an overly  optimistic picture of a plan’s financial status and the sponsor’s ability to  fulfill its obligations. Such a picture is possible because the current  liability measure tacitly assumes, among other things, that the plan and  its sponsor are financially healthy, viable entities. For a plan whose  sponsor is in financial trouble, a more conservative measure, the  termination liability, is likely to present a more realistic picture of the  liabilities the plan has accrued to date. From 1998 through 2002, airline  pensions were consistently funded above 90 percent on a current  liability basis. By that measure, the plan sponsors were not required to  make contributions because the “full funding limitation” exemption  applied. In contrast, the funding status of airline pensions on a  termination basis during this time was under 90 percent in each year  except 2000, with a spread of more than 25 percent between the two  measures in 2003. Figure 17 illustrates the difference in aggregate  funding status shown by each measure.
The result is that pensions often are significantly more underfunded  when plans are terminated than the current liability measure indicates.  US Airways’ and United Airlines’ recent pension plan terminations  illustrate this point. When these airlines terminated their pension plans,  the plans’ combined benefit liability was $24.9 billion. Combined assets  in the funds totaled $10 billion—a 60 percent shortfall.
The ability of sponsors to use funding credits to fulfill minimum  contribution requirements has also contributed to pension plan  underfunding. Plan sponsors accumulate funding credits when they  contribute more than the minimum contribution requirement in a plan  year or when the plan’s actual experience, including investment returns  on assets, exceed expectations; these credits can then be substituted in  later years for cash contributions. In this way, funding credits can act as  a buffer against potentially volatile funding requirements and allow  sponsors flexibility in managing their annual level of pension  contributions.
If the market value of a plan’s assets declines, however, the value of  funding credits may be significantly overstated. This overstatement  occurs because credits are not measured at their market value and are  credited with interest each year. For example, a sponsor can accrue a  $1 million credit by making a $1 million contribution above the  minimum contribution requirement. Even if the $1 million in assets  loses all value in the following year, the $1 million credit balance  remains and may be used as a credit toward the plan’s minimum  contribution requirement. In addition, the sponsor would have to report  only a portion of that lost $1 million in asset value as a plan charge the  following year because of smoothing rules that allow losses to be  amortized over multiple years.
Over the past 5 years, airlines have used funding credits to fulfill  minimum contribution requirements despite significant levels of  pension underfunding. For example, starting in 2000, United used  funding credits to avoid making cash contributions to its pilots’ plan,  even though the true funded status of the plan had deteriorated. The  plan was only 50 percent funded at termination. Similarly, US Airways  avoided contributing cash to its pilots’ plan by applying funding credits  to fulfill its minimum contribution requirements. At termination, this  plan was only 33 percent funded.
Finally, the premium structure in PBGC’s single-employer pension  insurance program does not reflect the agency’s exposure to financial  risk. Although PBGC premiums may be partially based on plan funding  levels, they do not consider other relevant risk factors, such as the  economic strength of the sponsor or the plan’s asset investment  strategies, benefit structure, or demographic profile. The current  premium structure relies heavily on flat-rate premiums, which are  unrelated to risk. PBGC also charges plan sponsors a variable-rate  premium based on the plan’s level of underfunding; however,  underfunded plans are not required to pay this premium if they satisfy  the full funding limit or another exemption.
In addition, current pension funding and pension accounting rules— especially those that permit assets to be smoothed rather than valued at  their market rate—may encourage sponsors to invest in riskier assets and  potentially benefit from higher expected long-term rates of return. In  determinations of funding requirements, a higher expected rate of return  on pension assets means that a plan needs to hold fewer assets to meet its  future benefit obligations. Under current accounting rules, the greater the  expected rate of return on plan assets, the greater the plan sponsor’s  operating earnings and net income. However, higher expected rates of  return require riskier investments that lead to greater investment volatility  and risk of losses.
section_title: Airline Pension Underfunding Contributes to Airline Liquidity Problems, Threatens Employee Retirement Benefits, and Is Costing PBGC Billions
paragraphs: Estimated minimum pension contribution requirements of $10.4 billion  over the next 4 years, combined with other fixed obligations, threaten the  liquidity position of the remaining legacy airlines with pension plans. As a  result, some airlines have suggested they will be forced to declare  bankruptcy and terminate their pension plans if they are not granted some  form of pension relief. Pension plan terminations often result in significant  benefit cuts to participants and cost PBGC billions. When United and US  Airways terminated their pension plans and transferred $19.6 billion in  pension obligations to PBGC, participants lost a total of $5.3 billion in  benefits, and PBGC incurred costs of $9.7 billion to cover the gap between  guaranteed benefits and available assets. Remaining airline pension plans  expose PBGC to an additional $23.7 billion in unfunded benefit  obligations. Although pension plan terminations provide airlines with  significant liquidity relief in the near term, these terminations alone will not  make legacy airlines cost competitive with low cost airlines, which offer  401(k)-type defined contribution plans.
subsections: section_title: Pensions Obligations Contribute to Airlines’ Liquidity Problems, but Terminations Alone Do Not Solve Legacy Airlines’ Structural Cost Disadvantage
paragraphs: The size of legacy airlines’ future fixed obligations (including pensions,  long-term debt, and capital and operating leases) relative to their financial  position suggests these airlines will have trouble meeting their various  financial obligations, regardless of whether they terminate their pension  plans. Legacy airlines’ fixed obligations in each year from 2005 through  2008 significantly exceed the total year-end 2004 cash balances of these  same legacy airlines. Legacy airlines carried a combined cash balance of  just under $10 billion going into 2005 (see fig. 18) and have used cash to  fund their operating losses. These airlines’ fixed obligations are estimated  to be over $15 billion in both 2005 and 2006, over $17 billion in 2007, and  about $13 billion in 2008. Fixed obligations exceed total year-end 2004 cash  by an average of $2.7 billion during this time even when pension obligations  are not included. While cash from operations can fund some of these  obligations, continued losses and the size of these obligations put these  airlines in a sizable liquidity bind. Fixed obligations in 2008 and beyond will  likely increase as payments due in 2006 and 2007 may be pushed out and as  new obligations are assumed. If these airlines continue to lose money this  year, as analysts predict, their position will become even more tenuous.
Nor will easing required pension contribution requirements fix the legacy  airlines’ underlying structural cost disadvantage. Pension costs, while  substantial, are only a small portion of legacy airlines’ overall unit costs.  The cost of legacy airlines’ defined benefit plans accounted for  approximately 0.4 cent per available seat mile, a 15 percent difference  between legacy and low cost airline unit costs (see fig. 3). The remaining 85  percent of the unit cost differential between legacy and low cost airlines is  attributable to factors other than defined benefit pension plans.  Furthermore, even if legacy airlines terminated their defined benefit plans,  this portion of the unit cost differential would not be fully eliminated  because, according to PBGC staff and industry labor officials we  interviewed, other plans would replace the defined benefit plans.
section_title: Airline Pensions Have Cost PBGC Billions and Expose the Agency to $23.7 Billion in Benefit Liabilities
paragraphs: The cost to PBGC and participants of defined benefit pension plan  terminations has grown in recent years as the level of pension  underfunding has deepened (see table 6). When Eastern Airlines defaulted  on its pension obligations of nearly $2.2 billion in 1991, for example, the net  claim against PBGC totaled $701 million. By comparison, US Airways’ and  United’s pension plan terminations cost PBGC $9.7 billion in combined  claims against the agency.
The remaining legacy airlines’ defined benefit plans expose PBGC to  billions more in potential losses. At the end of 2004, these legacy airlines  reported $23.7 billion in total termination liabilities for their defined benefit  plans, with assets to cover 48 percent of these obligations.
section_title: Effect of Pension Plan Terminations on Airline Employees Varies
paragraphs: When US Airways and United terminated their pension plans, active and  high-salaried employees generally lost more of their promised benefits than  did retirees and low-salaried employees because of statutory limits. For  example, PBGC generally does not guarantee benefits above a certain  amount, currently $45,614 annually per participant retiring at age 65. For  participants who retire before age 65, the guaranteed benefit amounts are  less; for instance, participants who first receive benefits from PBGC at age  60 are guaranteed benefits of $29,649. Commercial pilots often end up with  substantial benefit cuts when their plans are terminated because,  according to PBGC, their benefits generally exceed PBGC’s maximum  guaranteed amount. In addition, if they elect to begin receiving benefits  from PBGC at age 60—the age at which FAA requires pilots to retire from  operating commercial service flights—their benefits are cut further. While  the loss of a defined benefit plan can be substantial for pilots, they typically  have additional and sometimes sizable retirement plans, such as 401(k)  plans, that supplement their pension plans. Nonpilot retirees are not as  often affected by the maximum payout limits. For example, at US Airways,  fewer than 5 percent of the retired mechanics and flight attendants faced  benefit cuts when their pension plans were terminated. Retirees generally  fare better than active employees because they receive higher priority  when PBGC allocates existing assets at plan termination. For example,  PBGC estimates that the pension benefits of all United’s active ground  employees will be cut, with 71 percent of these employees facing estimated  cuts of between 1 percent and 25 percent. Of United’s retired ground  employees, an estimated 39 percent will face benefit cuts; of these retired  employees, an estimated 93 percent will see reductions of between 1 to 25  percent. Tables 8 and 9 summarize the expected cuts in benefits for  different groups of United’s active and retired employees.
In addition to reducing pension plan benefits, airlines have made  significant cuts to active employees’ health care benefits. For example,  American Airlines increased its active pilots’ monthly contributions for  family health care coverage by 162 percent and began to require  contributions by disabled pilots for health care coverage. Before 2003,  United’s ramp service employees did not have to make monthly  contributions for family health care coverage; however, these employees  now must contribute $173 a month for their coverage. While active  employees’ health benefits have been cut, retirees’ health care plans have  not changed significantly. Union officials said that reductions in retirees’  health care benefit would not produce the savings sought by the airlines  and were not considered foremost during contract negotiations.
section_title: Congress Is Currently Considering Various Pension Reform Proposals
paragraphs: The decline of PBGC’s financial condition, the expiration of PFEA at the  end of the year, and pension plan terminations at US Airways and United  have prompted congressional consideration of various reform proposals  for defined benefit pensions. Currently, the three most prominent  proposals are the administration’s plan; H.R. 2830, “The Pension Protection  Act of 2005;” and S. 219, “The National Employee Savings and Trust Equity  Guarantee Act of 2005.” All three are broad reform proposals that seek to  strengthen the defined benefit pension system in the long term and attempt  to resolve fundamental problems with the system, as highlighted in this  report and other GAO reports. For example, all three proposals contain,  among others, provisions that a) modify the measurement of pension  assets and liabilities, b) increase the premiums paid to PBGC, c) restrict  lump-sum distribution provisions, and d) adjust disclosure requirements.
From the airlines’ perspective, an important difference among the bills  concerns the length of time over which they can amortize the large  minimum contribution requirements currently due over the next 4 years.  The administration’s proposal and H.R. 2830 would use a 7-year payment  period. According to a document issued by the Joint Committee on  Taxation, S. 219 would extend the amortization payment period to 14 years,  but only for airlines that “freeze” their defined benefit plans. Table 9  suggests how this provision could significantly reduce the airlines’  minimum contribution requirements in 2006. Amortizing these obligations  over 14 years would have an immediate impact on the airlines’ liquidity.
The rationale for extending the amortization period is that unless airlines  receive funding relief, existing minimum contribution requirements may  have such an adverse effect on their liquidity that they will be forced into  bankruptcy. The airlines then could terminate their pension plans and  transfer billions in obligations to PBGC. To prevent such terminations,  according to the Joint Committee on Taxation, S. 219 would decrease the  required annual contribution by allowing the airlines to extend their  payments over a longer period. Requiring the airlines to “freeze” their  existing plans is designed to limit PBGC’s exposure in case the airlines  cannot recover financially and terminate the plans before fully funding  them over the 14-year period.
Although extending the amortization period would provide some liquidity  relief to the remaining legacy airlines with defined benefit plans, it would  not solve those airlines’ overall financial problems, and the extent to which  it would limit PBGC’s exposure to additional pension liabilities is unclear.  As shown in figure 18, pension obligations are only part of a much larger  set of fixed obligations through 2008. Given these other fixed obligations  and persistent high fuel prices, pension relief alone will not solve those  airlines’ financial problems, nor can it guarantee that airlines will not  declare bankruptcy in the future. Furthermore, there is no assurance that  PBGC’s financial exposure will be limited. According to a summary by the  Joint Committee on Taxation, S. 219 requires pensions to be frozen for the  extended amortization period to apply; however, liabilities could still  increase. For example, liabilities may increase with salary increases for  existing participants because pension benefits are based on participants’  salaries. Even if liabilities are frozen, a plan’s assets could decrease, leaving  PBGC with fewer assets to cover obligations. In the short term, extending  the amortization period might prevent airline pension plan terminations,  allow employees to collect more benefits than they might otherwise  collect, and allow PBGC to avoid taking over plans that are significantly  underfunded. In the long term, however, special treatment of airlines could  potentially expose PBGC to even greater costs.
section_title: Concluding Observations
paragraphs: After 27 years, deregulation continues to affect the structure of the airline  industry. Dramatic changes in the level and nature of demand for air travel,  combined with an equally dramatic evolution in how airlines meet that  demand, have forced a drastic restructuring of the industry. Airlines have  experienced greatly diminished pricing power since 2000. Profitability,  therefore, depends on which airlines can most effectively compete on cost.  This development has created inroads for low cost airlines and forced  wrenching change on legacy airlines that long competed using a high-cost  business model.
The historically high number of airline bankruptcies and liquidations is a  reflection of the industry’s inherent instability. However, these events  should not be misinterpreted as a cause of the industry’s instability. There  is no clear evidence that bankruptcy has contributed to the industry’s  economic ills, including overcapacity and underpricing, and there is some  evidence to the contrary. Equally telling is how few of the airlines that have  filed for bankruptcy protection are still doing business. Clearly, bankruptcy  has not afforded these companies a special advantage.
Bankruptcy has become a well-traveled path by which some legacy airlines  are seeking to shed some of their costs and become more competitive.  However, the termination of pension plan obligations by US Airways and  United Airlines has had substantial and widespread effects on PBGC and  on thousands of airline employees, retirees, and other beneficiaries. The  recent filings by Delta Air Lines and Northwest Airlines only exacerbate  these concerns. Liquidity problems, including $10.4 billion in near-term  pension contributions, may force additional legacy airlines to follow suit.  Some airlines are seeking legislation to allow more time to fund their  pensions. If their plans are frozen so that their liabilities do not continue to  grow, allowing an extended payback period may reduce the likelihood that  these airlines will file for bankruptcy and terminate their pension plans in  the coming year. However, unless these airlines can reform their overall  cost structures and become more competitive with low cost competition,  this change will be only a temporary reprieve.
We have previously reported that Congress should consider broad pension  reform that is comprehensive in scope and balanced in effect. Revising  plan funding rules is an essential component of comprehensive pension  reform. For example, we recently testified that Congress should consider  the incentives that pension rules and reform may have on other financial  decisions within affected industries. Under current conditions, the  presence of PBGC insurance may create certain “moral hazard”  incentives—struggling plan sponsors may place other financial priorities  above “funding up” their pension plans because they know PBGC will pay  guaranteed benefits. Furthermore, because PBGC generally takes over  underfunded plans of bankrupt companies, PBGC insurance may create an  additional incentive for troubled firms to seek bankruptcy protection,  which in turn may affect the competitive balance within the industry.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOT and PBGC for their review and  comment. DOT and PBGC officials provided some technical and clarifying  comments that we incorporated as appropriate. DOT declined to provide  written comments, and PBGC’s written comments appear in appendix III.  We also provided selected portions of a draft of this report to the Air  Transport Association to verify the presentation of factual material. We  incorporated their technical clarifications as appropriate.
We are providing copies of this report to the Secretary of Transportation,  the Executive Director of PBGC, and other interested parties and will make  copies available to others upon request. In addition, this report will be  available at no charge on the GAO Web site at http://www.gao.gov. If you  have any questions about this report, please contact me at 202-512-2834, or  heckerj@gao.gov. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. Other key  contributors are listed in appendix IV.
section_title: Scope and Methodology
paragraphs: To examine the role of bankruptcy in the airline industry, we drew on  information from a variety of sources. We interviewed airline officials,  representatives of airline trade associations, representatives of law firms  with significant experience in representing different parties involved in  airline bankruptcies, credit and equity analysts, academic experts, and  private consultants. We reviewed relevant research obtained from these  and other sources. We interviewed government experts from the  Department of Transportation (DOT) and its agencies—the Federal  Aviation Administration (FAA) and the Bureau of Transportation Statistics  (BTS). To determine the financial state of the airlines and the extent to  which airlines were able to reduce costs during bankruptcy, we analyzed  DOT Form 41 data. We obtained these data from BACK Aviation Solutions,  a private contractor that GAO has contracted with to provide DOT Form 41  and other aviation data. To assess the reliability of these data, we reviewed  the quality control procedures applied to the data by DOT and BACK  Aviation Solutions and subsequently determined that the data were  sufficiently reliable for our purposes. To examine the prevalence and length  of airline bankruptcies and make comparisons with other industries, we  obtained data from two databases:  New Generation Research’s  bankruptcydata.com and Professor Lynn M. LoPucki’s Bankruptcy  Research Database. To assess the reliability of these data, we reviewed the  quality control procedures applied to each data source and subsequently  determined that the data were sufficiently reliable for our purposes.
To assess whether bankruptcies are harming the airline industry, we  reviewed relevant research, interviewed experts, and analyzed historical  data on bankruptcies. We interviewed airline officials, representatives of  airline trade associations and law firms with significant experience in  representing different parties involved in airline bankruptcies, airline  industry credit and equity analysts, academic experts, and private  consultants. We also reviewed relevant research obtained from these and  other sources. In addition, we interviewed government experts from DOT,  FAA, and BTS. We also contracted with InterVISTAS-ga2, a private  consulting firm, to analyze changes in air service and fares at six hub cities  where an airline exited or significantly reduced its service. The cities were  Colorado Springs, Colorado; Columbus, Ohio; Greensboro, North Carolina;  Kansas City, Missouri; Nashville, Tennessee; and St. Louis, Missouri.  InterVISTAS-ga2’s analysis included an examination of changes in capacity  (as measured by available seat miles, a common measure of the available  capacity in a market) and in passenger traffic (from 4 quarters before to 8  quarters after the airline left a given market or significantly reduced its  operations there). InterVISTAS-ga2 used DOT airline data for this analysis;  we reviewed the quality control procedures InterVISTAS-ga2 and DOT  applied to these data to assess their reliability and determined that they  were sufficiently reliable for our purposes.
To assess the effect of airline pension underfunding on employees, airlines,  and the Pension Benefit Guaranty Corporation (PBGC), we relied on a  variety of sources. We drew on an extensive body of work that we have  completed on private pension issues. We also interviewed airline officials,  representatives of airline trade associations and airline labor unions, airline  industry credit and equity analysts, academic experts, and officials from  PBGC, DOT, FAA, and BTS. We reviewed relevant research obtained from  these and other sources. To examine the current and historical financial  status of airline pensions plans, we reviewed data from PBGC (from Forms  5500 and 4010) and Securities and Exchange Commission (SEC) filings,  including funding contributions, funding status, and estimated future  funding contribution requirements. To examine the effect of pension  funding requirements on the financial status and cost competitiveness of  airlines, we analyzed DOT Form 41 data obtained from BACK Aviation  Solutions. To assess the reliability of these data, we reviewed the quality  control procedures applied to the data by DOT and BACK Aviation  Solutions and subsequently determined that the data were sufficiently  reliable for our purposes.
We performed our work from September 2004 through September 2005 in  accordance with generally accepted government auditing standards.
section_title: Case Studies Describing Market Responses to Airline Withdrawals
paragraphs: For more in-depth information on what has occurred at hubs when carriers  have significantly reduced their presence, we contracted with InterVISTAS- ga2, an aviation consulting firm, to collect and analyze data on changes in  capacity, as measured in available seat miles (ASM), and traffic, including  both local (origin and destination) and total traffic. During preliminary  analysis and consultations, we screened out cases older than 10 years and  eliminated others for which sufficient data were not available (thereby  excluding, for example, the actions taken by US Airways at Pittsburgh in  the latter half of 2004, because not enough time had passed to review these  actions’ possible effects on the market). Consequently, we selected the  following six cases for examination:    Colorado Springs, Colorado—Western Pacific moved its operations to  Denver (1997).
Columbus, Ohio—America West eliminated its hub (2003).
Greensboro, North Carolina—Continental Lite service was dismantled  (1995).
Kansas City, Missouri—Vanguard Airlines ceased service (2002).
Nashville, Tennessee—American Airlines eliminated its hub (1995).
St. Louis, Missouri—TWA was acquired by American Airlines (2001).
To eliminate the effects of seasonality, changes were measured from 4  quarters before to 8 quarters after an event for a total of 12 quarters of data.  We asked InterVISTAS-ga2 to provide us with benchmark industry data for  the same periods.
To determine changes in capacity and traffic, InterVISTAS -ga2 used data  reported by airlines to DOT. InterVISTAS-ga2 calculated 4-quarter averages  for each data element and determined percentage changes in these  averages 1 and 2 years after the event. Because dehubbing, or withdrawing  from a market, might occur over a period of time, however, there was no  single “bright line” when the withdrawal occurred for most of these cases,  so InterVISTAS -ga2 determined that the effective quarter of the withdrawal  was generally the quarter with the greatest downturn in traffic.
To determine whether a destination received service from a hub, we  obtained and reviewed the number of departures reported to DOT for the  first 4 quarters and the last 4 quarters of the period under review for each  hub city and for each carrier. If a destination received at least 80 departures  in a quarter from any one carrier (roughly the equivalent of daily service,  allowing for less service on weekends), we counted it as having received  service. To determine whether small community destinations suffered  losses of service when these hub cities were deemphasized, we assigned  hub sizes to community airports on the basis of the Federal Aviation  Administration’s (FAA) hub designation list for the corresponding calendar  year. We defined small community airports as small and nonhub airports  that are not located in major metropolitan areas.
subsections: section_title: Colorado Springs: Western Pacific Moved Its Operations to Denver
paragraphs: Colorado Springs served as the hub for Western Pacific Airlines, a low fare  airline that flew medium-haul routes from April 1995 to June 1997. By June  1995, the airline was flying an average of 14 departures daily. Western  Pacific chose Colorado Springs because it believed the airport could be an  effective alternative to Denver International. In June 1997, Western Pacific,  which was then operating 32 departures daily from Colorado Springs, left  Colorado Springs to establish a hub at Denver. However, the airline filed for  chapter 11 bankruptcy protection on October 5, 1997, and shut down in  February 1998.
Western Pacific’s departure from Colorado Springs in June 1997 resulted in  significantly lower capacity and traffic. When Western Pacific left, a  significant amount of capacity was taken from the market, resulting in  decreased total traffic. (See fig. 19.) Local traffic also decreased  significantly, by 43.6 percent. No small communities had received nonstop  service out of Colorado Springs during this period, so none were directly  affected by Western Pacific’s move to Denver. (See fig. 20.)
section_title: Columbus: America West Eliminated Its Hub
paragraphs: America West began service at Columbus, Ohio, in December 1991—6  months after its June 1991 chapter 11 bankruptcy filing—with 5 daily  departures. During February 2003, America West announced its plans to  eliminate the Columbus hub operations. At that time, America West mainline was operating 9 daily departures out of Columbus. The airline  reported the hub had lost $25 million annually and indicated that the  elimination of the hub was part of America West’s response to difficult  economic conditions. By February 2004, America West mainline was  operating 4 daily departures from Columbus.
The elimination of America West’s hub operations at Columbus, Ohio, had  little effect, since the carrier’s mainline had captured less than 15 percent  of total traffic before it withdrew. Therefore, decreases in capacity and  increases in total traffic were negligible. Total traffic increased slightly  overall because Southwest was increasing its capacity. (See fig. 21.)  However, this increase did not offset the 4.2 percent decline in local traffic.  No small communities were served nonstop out of Columbus by America  West mainline. (See fig. 22).
section_title: Greensboro: Continental Lite Service Was Dismantled
paragraphs: Greensboro was one of the focus cities for Continental’s point-to-point,  short-haul, no-frills, low-fare “Continental Lite” (CALite) service initiated in  the eastern United States in October 1993. Continental quickly ramped up  service from 3 departures per day to a high of 74 per day by September  1994. However, after operational problems and financial losses,  Continental decided to dismantle the CALite service in 1995. In June 1995,  the airline was offering 52 daily departures from Greensboro. By June 1998,  Continental had reduced that number to 6.
Dismantling the CALite service resulted in less overall capacity and traffic  at Greensboro. Greensboro’s overall capacity decreased despite capacity  increases by other airlines. Total traffic decreased nearly 30 percent with  the reduction of the CALite service. (See fig. 23.)  Local traffic decreased  10.7 percent.
Continental served 21 markets nonstop before it dismantled the  Greensboro hub; four of these were small community markets. After the  airline decreased its capacity at Greensboro, it continued nonstop service  to its three hubs but cancelled nonstop service to the small communities.  (See fig. 24.)
section_title: Kansas City: Vanguard Ceased Operations
paragraphs: Vanguard Airlines began operating in 1994 as a low fare carrier and  eventually operated a hub in Kansas City, Missouri, with 2 departures daily.  Vanguard eventually served 13 percent of the passengers in Kansas City. On  July 30, 2002, the airline ceased operations and filed for chapter 11  bankruptcy protection after being denied a federal loan guarantee by the  Air Transportation Stabilization Board. When the company stopped  operating, it had been flying 33 departures daily out of Kansas City.
When Vanguard abruptly exited the Kansas City market, overall capacity  and thus traffic declined somewhat. Vanguard had a 13 percent market  share to Southwest’s 36 percent share, and Southwest had cut its capacity  out of Kansas City during the same period while overall other carriers had  increased their capacity slightly. (See fig. 25). Local traffic decreased 6.8  percent. Vanguard served only one small community at the time it exited  Kansas City, and during the period of our review no other carriers served  that community from Kansas City, so one small community lost air service  to Kansas City as a result of Vanguard’s demise. (See fig. 26).
section_title: Nashville: American Dismantled a Hub
paragraphs: Nashville was one of six American Airlines hubs. The airline opened the  hub in April 1986, and at its peak in January 1992, it operated 135 daily  departures out of Nashville. In December 1994, just before it started  dismantling the Nashville hub, it reduced daily departures to 80. By  December 1996, American had further reduced its service at Nashville to 22  daily departures.
When American dismantled its Nashville hub, overall capacity and total  traffic declined. Other airlines increased their capacity and their traffic  substantially when American decreased its service. However, because  American had been so dominant at Nashville, a small decline in overall  traffic occurred. (See fig. 27.)  Local traffic, however, increased 28 percent.  Southwest increased its share of Nashville’s traffic from 13 percent the year  before American pulled out to 33 percent 2 years later.
When American Airlines dehubbed at Nashville, few small communities  were among those receiving service. As a result of the carrier’s actions,  fewer total destinations—and just one small community—received  nonstop air service from that city. American and American Eagle had  served 32 of the 44 total nonstop destinations out of Nashville, and 2 years  later, American served 7 of 34 total destinations. In the year before  American’s dehubbing at Nashville, eight small hubs were served out of  Nashville, five of which were served by American and American Eagle. Two  years later, American and American Eagle had eliminated their small  community service from Nashville; another carrier maintained service to  one small community. (See fig. 28).
section_title: St. Louis: American Acquired TWA
paragraphs: When Trans World Airlines (TWA) filed for bankruptcy protection for the  third time on January 10, 2001, the airline had been operating a domestic  hub out of St. Louis and offering 324 departures daily. By the end of that  year, TWA—which had reduced its daily departures to 281—had been  acquired by American Airlines. American departures out of St. Louis in  2001 decreased from 17 daily in January to 4 daily in December. In January  2002, American departures increased to 286 daily with the acquisition of  TWA.
With American’s takeover of TWA, capacity rose slightly in St. Louis while  total traffic decreased. The decrease in total traffic occurred in spite of  American’s dramatic increase in traffic as it took over TWA. (See fig. 29.)   Local traffic, meanwhile, declined 6.1 percent overall.
While TWA served a total of 27 small communities before the acquisition,  11 of these were also served by American Airlines. Of the 16 markets that  TWA served alone, American maintained service to 13 after the acquisition.  Overall, however, more small communities received nonstop service from  St. Louis after American acquired TWA. (See fig. 30).
section_title: Comments from the Pension Benefit Guaranty Corporation
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to those named above, Joseph Applebaum, Paul Aussendorf,  Barbara Bovbjerg, Anne Dilger, David Eisenstadt, Charles J. Ford, David  Hooper, Charles A. Jeszeck, Ron La Due Lake, Steven Martin, Scott  McNulty, George Scott, Richard Swayze, Roger J. Thomas, and Pamela  Vines made key contributions to this report.
section_title: Related GAO Products
paragraphs: Private Pensions: The Pension Benefit Guaranty Corporation and Long- Term Budgetary Challenges. GAO-05-772T. Washington, D.C.: June 9, 2005.
Private Pensions: Government Actions Could Improve the Timeliness  and Content of Form 5500 Pension Information. GAO-05-294.  Washington, D.C.: June 3, 2005.
Highlights of a GAO Forum: The Future of the Defined Benefit System  and the Pension Benefit Guaranty Corporation. GAO-05-578SP.  Washington, D.C.: June 1, 2005.
Private Pensions: Recent Experiences of Large Defined Benefit Plans  Illustrate Weaknesses in Funding Rules. GAO-05-294. Washington, D.C.:  May 31, 2005.
Commercial Aviation: Legacy Airlines Must Further Reduce Costs to  Restore Profitability. GAO-04-836. Washington, D.C.: August 11, 2004.
Private Pensions: Publicly Available Reports Provide Useful but Limited  Information on Plans' Financial Condition. GAO-04-395. Washington,  D.C.: March 31, 2004.
Private Pensions: Multiemployer Plans Face Short- and Long-Term  Challenges. GAO-04-423. Washington, D.C.: March 26, 2004.
Private Pensions: Timely and Accurate Information Is Needed to Identify  and Track Frozen Defined Benefit Plans. GAO-04-200R. Washington, D.C.:  December 17, 2003, Pension Benefit Guaranty Corporation: Single-Employer Pension  Insurance Program Faces Significant Long-Term Risks. GAO-04-90.  Washington, D.C.: October 29, 2003.