Unaccounted For:

 United Airlines’ Frequent Flyer Program and the Termination of
 Employee Pensions

By: Matteo Colombi, Senior Campaigner and Cassandra Ogren, Senior Research Analyst, International Brotherhood of Teamsters, Strategic Research and Campaigns Department

In February of 2006, United Airlines emerged from the largest airline bankruptcy in the history of the United States. United cut thousands of jobs, slashed salaries, and saddled the Pension Benefit Guaranty Corporation with $6.6 billion in unfunded pension obligations.  Now, the reorganized UAL Corporation has announced plans to sell off its Mileage Plus frequent flier program, valued at up to $7 billion, as well as its heavy maintenance base in San Francisco, valued at up to $600 million.  The urgency and unfairness of this situation is clear for the mechanics who sacrificed over $2.5 billion in wages and benefits, only to be repaid with the outsourcing of their jobs; as well as for all the working men and women at United Airlines who gave up their pensions, only to see United now planning to profit by cashing in on billions in assets without anything in return for their sacrifices.

United Airlines Bankruptcy

• During bankruptcy, UAL slashed $7 billion in annual expenses, shed 20,000 jobs (25%)[i] and 100 aircraft, freed itself of $8 billion in debt, and terminated its pension plans for its unionized workforce. [ii] Top executives’ retirement plans were restored following bankruptcy.[iii] 

• The termination of United Airlines pension plans in May, 2005 was the largest corporate pension default in US history.[iv]  UAL saved $645 million a year and passed its unfunded pension liability of $6.6 billion to the Pension Benefit Guaranty Corporation (PBGC), the government agency that insures defined benefit pensions.[v]

• The UAL employee pension termination increased the PBGC’s deficit by 50%, from $14 billion to $23.3 billion.

The PBGC and the Taxpayer

• The PBGC is severely under-funded relative to the liabilities it has taken on; Secretary of Labor Chao has stated that “the annual deficits at the PBGC cannot continue.  It is not sustainable…”[vi]

• The offloading of United’s pension obligations onto a troubled fund such as the PBGC is worrisome for both PBGC pensioners and taxpayers who would foot the bill in a PBGC default.

• The recent valuation of UAL’s Mileage Plus frequent flier program at up to $7 billion begs the question of whether United could have used this asset to maintain its pensions rather than offloading them onto the PBGC.  It also demands an inquiry into the accounting procedures used to report the value of Mileage Plus during bankruptcy.  

Management Extracts Resources from Workers and Taxpayers Through Bankruptcy

• With less than three months at the helm,[vii] CEO Glenn Tilton took United Airlines into bankruptcy on December 9, 2002.

• Between 2002 and 2004, United applied three times for a guaranteed loan from the Air Transportation Stabilization Board (ATSB), the governmental agency set up after 9/11 to help airlines.  ATSB denied the loans, holding that United seek financing from private markets.[viii]

• United management used the bankruptcy process to slash employee wages and benefits and, finally, to force the PBGC to take on responsibility for United Airlines’ employees pensions, in exchange for millions of shares in the new post-bankruptcy company to account for the unsecured portion.[ix] 

• The PBGC takes on pension obligations for companies that would be “unable to otherwise emerge from bankruptcy.”[x]  Accurate valuations of United’s assets, liabilities, and streams of revenue would have been key to determining United’s ability to exit bankruptcy.  

Valuing Frequent Flyer Programs (FFPs) – A Profitable Piece of Airline Business

• Air Canada, the world’s 13^th largest airline,[xi] went through bankruptcy and restructuring at the same time as United.  After emerging from bankruptcy, Air Canada spun off both its Frequent Flyer Program (now Aeroplan), which had 5 million members, and its maintenance division.

• The June 22, 2005 IPO established a valuation of CAD $2 billion ($2.14 USD)[xii] for Aeroplan alone; Air Canada sold a 12.5% stake, raising CAD $250 million ($267.60 USD).[xiii]

• Frequent Flyer Programs are a profitable piece of the airline business and, as Aeroplan’s flotation shows, are also a sellable asset.  This should have been recognized by United Airlines during bankruptcy.

• United’s much larger Mileage Plus had 48 million members in 2005.  Estimates of United’s Mileage Plus, if a portion of it were spun off, were between $5 billion and $20 billion in 2005.[xiv]

• According to Bear Stearns analyst Frank Boroch, Mileage Plus could fetch $7.5 billion against UAL’s own $5.6 billion valuation, even in current difficult credit markets.[xv]

Unaccounted For: United’s Frequent Flyer Program and the Termination of Employee Pensions

• UAL recognized over $800 million in revenue from Mileage Plus in 2005.  However, management also treated it as a source of a liability to the order of $923 million for 2005.[xvi] 

• UAL can change the terms and conditions of redemption for frequent flier miles at any time, thus controlling the extent of its ‘liability.’[xvii]

• When evaluating a hypothetical sell-off of Mileage Plus in bankruptcy, United appears to have used only a liquidation analysis, assigning a sell-off value to Mileage Plus of only $79.2 million.[xviii]

• The Assets and Estimated Realization analysis performed at the time of bankruptcy for Mileage Plus Inc. alone assumed the total amount available to creditors following liquidation of Mileage Plus Inc. would have been only about $4.2 million.[xix]

• Through its accounting procedures during bankruptcy, United painted a grim picture of its financial health, which correspondingly and negatively affected its ability to raise additional capital in private markets.  This helped United to demonstrate its inability to “otherwise emerge from bankruptcy” without terminating its pensions and offloading them onto the PBGC. 

United’s Management Was Aware of the Strategic Value of Mileage Plus

• In the first quarter of 2002, United “sold” all of its stock in Mileage Plus, Inc. and Mileage Plus Holdings, Inc. to a new, wholly owned subsidiary, UAL Loyalty Services LLC (ULS) for a $900 million unsecured promissory note payable over 12 years and bearing an interest rate of 7%, plus the assumption of about $500 million of outstanding liability on miles previously sold.[xx]

• This was an internal transaction, where no money changed hands, but it shows that United placed a $1.4 billion book value on ULS in 2002.

• ULS took over the Mileage Plus program and the gross proceeds and liabilities associated with it.  Mileage Plus was thus structured as stand-alone company, ready to sell off at any time.

UAL Management’s Contention that Mileage Plus was Worthless During Bankruptcy but Valuable Today Was Not Worthy of Belief

• The profitability and success of Aeroplan’s flotation, puts into question UAL’s claims that Mileage Plus’ value was unstable during the bankruptcy.[xxi]

• While the outright liquidation of United Airlines would have devalued Mileage Plus, it should nonetheless have been considered as having a positive valuation during bankruptcy proceedings.

• It is likely that even a partial flotation of Mileage Plus could have secured additional resources for UAL and saved much, if not all, of its pension plans.

Conclusion

• In light of prior actions, Management’s evaluation of an IPO of its Mileage Plus program since emerging from bankruptcy indicates that it has shielded the value of this asset from stakeholders.

• Workers, pensioners and taxpayers have been excessively burdened, while Management has profited handsomely from the United Airlines restructuring.  In January, 2006 an estimated $115 million[xxii] in equity was awarded by the bankruptcy court to 400 top executives.[xxiii]  Furthermore, in 2006, the top five UAL Corporation executives alone took home pay packages worth a total of over $100 million.  The combined contributions to their pensions totaled over $4.2 million. 

• Post-bankruptcy, United Airlines continues to disappoint customers.  The American Consumer Satisfaction Index found in 1Q 2007 that “United is now the lowest scoring airline [in customer satisfaction] by a considerable margin.”

• Any profit realized from the sale of current divisions of UAL Corp., such as Mileage Plus, must be used to restore pension liabilities and improve wages and customer satisfaction.

i    Peterson, Kyle. “Airline unions showing signs of revival.” 2/7/2007. USA TODAY.
ii    Adams, Marylin. “United unions protest ‘excessive’ executive pay.” 3/27/2007. USA TODAY.
iii    UAL Proxy Statement, Filed 5/3/2007, pp. 36-37.  
iv    Tisdale, Jane. 2005. “PBGC Woes Galvanize US Pension Reform.”
General Investing Essays & Presentations. State Street Global Advisors (SSGA.) 6/25/2005.
v    Hoffmann, Mark A.  2005. “PBGC’s liability for United pensions total $6.6 billion. Business Insurance.
vi    Chao, Elaine L.  2005. Statement. President’s Fiscal Year 2006 Budget for the U.S. Department
of Labor. Hearing before the Committee on Ways and Means. U.S. House of Representatives,
One Hundred Ninth Congress. First Session. March 16, 2005. Serial 109-3.
vii    Merrion, Paul. 2002. “New CEO Takes on United Woes.”  Chicago Business. 9/3/2002.
viii    Maynard, Micheline. “United Airlines Is Turned Down in Bid for Loans.” 7/18/2004. The New York Times.
ix    Wisniewski, Mary. 2006. “PBGC to add 30% of money from sale to United pension fund.”
x    http://www.pbgc.gov/about/termination.html
xi    Staff.  “Air Canada Parent Plans Spinoff As Profit Jumps.” 2006. Airwise News.  8/11/2006.
xii    Exchange Rate as of 11/6/2007 at 3:38PM.
xiii    Exchange Rate as of 11/6/2007 at 3:38PM.
xiv    “United Airlines’ undisclosed $15 billion asset.” 5/8/2006. The Travel Insider.
xv    Mandaro, Laura. 2007. “US Airways may spin off frequent flier plan.”  10/25/07. MarketWatch.
xvi    UAK Form 10-K for 12-31-2005 filed on 3/31/2006.
xvii    United Airlines. Mileage Plus Rules. Accessed on 11/2/2007 at 4:18 PM
xviii    United Airlines. Disclosure Statement and Plan of Reorganization. Appendix B: Liquidation Analysis. 9/7/2005.
xix    United Airlines. Disclosure Statement and Plan of Reorganization. Appendix B: Liquidation Analysis. 9/7/2005.
xx    UAL 10-K for 2002.  
xxi    Johnsson, Julie. “United chief chases change.”  10/29/2007. Chicago Tribune.
xxii    Staff. “United released from bankruptcy.” 1/20/2006. BBC News.
xxiii    400 Top Managers received a package, under court approval, consisting of about 8% of the
airline’s new shares, as reported by Taub, Stephen. 2006. “UAL Reorganization Plan Approved.” 1/20/2006. CFO.com