Pensions grounded?

First it was the steel industry, now it's the airlines.

United Airlines and US Airways Group Inc., both in bankruptcy protection, have warned they might terminate employee pension plans in a bid to survive. Delta Air Lines Inc. may also file for bankruptcy.

If just one of these standard-bearers terminates its plans, other legacy airlines might follow, arguing that if they don't drop costly pension benefits they would be unable to offer fares low enough to compete with upstart rivals like JetBlue.

The dominoes have fallen in steel, culminating when Bethlehem Steel and National Steel surrendered their retirement plans in December 2002 to the federal Pension Benefit Guaranty Corp. Airline terminations appear likely. Could other industries -- say, autos -- be next?

Industry-wide plan terminations, a recent phenomenon, add to growing concerns about the future of traditional pension plans that cover more than 20 million Americans. These plans, which pay a guaranteed benefit to retirees, are already losing ground to 401(k)s as corporate America lays more responsibility for retirement on employees.

"We happen to be seeing an industry problem in the airlines right now," said Richard Ippolito, former chief economist for PBGC. "But there's nothing to say the same kind of industry problem won't develop in one or two other industries within the next few years."

Industry terminations threaten the financial stability of the PBGC, which assumes responsibility for paying pensions when a plan terminates. When the agency took over retirement benefits for former employees and retirees of Bethlehem and National Steel, its deficit nearly doubled to $9.7 billion currently. If US Airways, United, or Delta follow suit, the deficit could double or triple.

The agency does not guarantee an employee's entire pension. The maximum pension paid by PBGC is $44,386 a year for a 65-year-old. For those who retire younger, it is less.

Brian Ursino joined US Airways 14 years ago. It was inconceivable then that his pension plan would cease to exist.

"It was a guarantee," said Ursino, 40, who cleans planes at Logan International Airport. Facing the prospect that his plan may be terminated, he said: "I definitely made a mistake coming into the airlines."

Traditional pensions, known as defined-benefit plans, have dominated retirement benefits in heavy industry for decades. But these plans are becoming costly, because a worker's future pension rises with his pay and years of service. And pension obligations don't end when an employee leaves or is laid off or a company goes out of business.

Plans become underfunded when stocks, bonds, and other assets invested by the company to pay future benefits do not grow as rapidly as the obligations. Underfunded pension plans rarely drive companies into bankruptcy. But they can be a financial albatross when economic forces weaken an industry.

In extreme cases, an employer's pension obligations balloon as the number of retirees exceeds its workforce. Bethlehem Steel's plan covered 95,000 workers, but 70,000 had retired and were receiving pension checks when PBGC took over after the company was sold off.

Like steel, pension obligations among traditional airlines are driven by large numbers for retirees: Of the 119,000 people covered by United's four pension plans, for example, nearly half are retired or no longer work there, PBGC said. The plans, covering ground employees, management, flight attendants, and pilots, have an $8.3 billion deficit, PBGC said.

The airline industry has a $31 billion shortfall in its defined-benefit plans, including $2.3 billion in US Airways' three plans, for mechanics, flight attendants, and other employees, the agency said. After a prior bankruptcy filing in 2002, US Airways terminated its pilots' pension plan as part of its financial reorganization.

The airlines' troubles began when air travel plunged after the 2001 terrorist attacks. Leaner competitors, such as JetBlue and Southwest Airlines, moved in and grabbed customers with their lower fares. Rising oil prices sealed the fate of some major carriers this year.

US Airways is seeking labor concessions. US Airways and United have said in court a successful plan to emerge from bankruptcy protection may also require pension plan terminations.

"It's possible that United, US Airways, and Delta would all end up terminating the pensions," said Philip Baggaley, airline analyst for the New York credit rating agency Standard & Poor's Corp.

Unions can try to block a termination, but a decision is up to the bankruptcy court judge. Richard Bank, director of the AFL-CIO's Center for Collective Bargaining, said terminations would breach past labor contracts. To secure pension benefits, airline, auto, and steel workers "gave up lots of other things in past negotiations," he said. US Airways and United "are using the bankruptcy process as an excuse to break these promises."

But analysts said the carriers' pension plans drive up total labor costs and hamper their ability to reduce fares and compete against younger carriers. JetBlue and Southwest Airlines provide retirement through annual contributions to 401(k)s and profit-sharing plans, which are less costly.

"The question is: How can legacy carriers become viable again looking forward," said Dan Kasper, managing director of LECG Corp., a global consulting firm. "That's where the pensions really squeeze."

US automakers are in no imminent danger of failing but face considerable pension obligations.

Their domestic market share has steadily dropped, from 75 percent in 1980 to 58 percent today, because of competition from Japan and South Korea.

Autodata Corp. analyst David Lucas said car companies today are supported by profits from their auto-financing arms, "which are pulling the weight." He called the industry's pension funds "a long-term problem due to the amount of retired" workers.

Automakers' future pension obligations became so large that General Motors Corp. and Ford Motor Co. were forced to pour billions of dollars into their plans. To close a $19.3 billion pension gap at the end of 2002, GM borrowed $13.5 billion in a bond sale last year and used proceeds from selling its Hughes Electronics unit. After the 2003 contribution, GM's unfunded pension liabilities fell to just $300 million; the plan has $86 billion in invested assets.

GM spokesman Jerry Dubrowski said conditions that drove up the deficit -- falling stocks and historically low interest rates -- were the "perfect storm" and are unlikely to recur. The bond financing carried a low interest rate and met GM's required plan contributions for the next five years. "The defined benefit plan structure is sustainable," Dubrowski said.

While individual companies' obligations rise and fall each year, the direction of unfunded pension obligations has been up. The unfunded liability for the companies in the Standard & Poor's 500 was $10 billion in 1993, according to Credit Suisse First Boston's estimate. At the end of 2003, the shortfall swelled to $172 billion.

The risk to PBGC of another industry failure, Ippolito said, "doesn't go away. "

Kimberly Blanton can be reached at blanton@globe.com.