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American's allies in Congress fight off pension proposal

American Airlines’ allies in Congress successfully fought off a proposal Wednesday that could have cost the airline hundreds of millions of dollars in added pension costs annually.

The Senate debated legislation to re-authorize funding for the Federal Aviation Administration.

It included a provision that would have erased some of the benefits approved by Congress last year that allowed Fort Worth-based American and Houston-based Continental Airlines to assume a higher rate of investment return when calculating their annual pension obligations, and gave them a longer time to stretch out payments.

That provision meant a substantial savings on pension payments for the two airlines, among the few that have kept pensions intact since 2001. Rivals including United Airlines and Delta Air Lines have frozen pensions or terminated them in bankruptcy court.

Sen. Kay Bailey Hutchison, R-Texas, estimated that reducing the benefits could cost American $1 billion in extra pension expenses over the next three years.

She warned the added financial pressure, combined with record fuel prices and a softening economy, could have “disastrous consequences” that could put the airlines into bankruptcy.

“The timing of this could not be worse,” Hutchison said during a speech on the Senate floor. She added that “the employees of the airlines would be the biggest losers,” because it could give incentives to American and Continental to freeze their pensions.

Last year, American pumped $380 million into its employee pension plans.

This year’s obligation is estimated to be about $350 million, according to financial filings.

“Forcing these airlines to contribute even more of their capital to their pension funds is not only unnecessary, it could potentially bankrupt them,” said Sen. Dick Durbin, D-Ill., who co-sponsored a measure with Hutchison to strip the pension language from the FAA authorization bill.

Late Wednesday, the pension provision was removed from the bill.

It was the latest twist in an ongoing drama over airline pension regulation.

In 2006, a pension reform act included a provision that allowed airlines to assume a fixed return on investments of 8.85 percent for their pension plans, and stretch the payments over 17 years. Most companies are required to use 6 percent return rate to calculate pension funding obligations, and are given seven years to pay them off.

But the benefit only applied to airlines that had frozen their pension plans. In 2007, Congress approved a measure that gave American and Continental 10 years to pay off the obligations, and allowed them to assume an 8.25 percent rate.

Mary Frances Fagan, an American spokeswoman, said the airlines need to keep their financial flexibility, a serious problem given the harsh industry environment.

“The industry is in the most severe financial crisis since 2001,” she said. “You need as much flexibility as possible to allocate your financial resources.”

TREBOR BANSTETTER, (817) 390-7064