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IPE special report May 2018

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Pension costs ‘key to world airline competition’

GLOBAL – Consulting firm Mercer has highlighted the impact of pensions costs on competitiveness in the global airline industry.

“New airlines, which are not burdened by high pension costs, add to the competitive pressures on the traditional established airlines,” said Peter Blake, principal at Mercer’s London office.

He told IPE: “When these costs are expressed as a cost per passenger mile, it shows the extent of competitive pressure on the traditional airlines.”

Union influence is a significant factor here. British Airways is standing by its defined benefits scheme, which is an extremely sensitive negotiating tool for the unions.

In the US the influence of the unions is just as strong as in the European Union. “Even though it is legally possible to freeze a scheme in the US, the strength of the unions has limited employers in their ability to manoeuvre,” Blake noted.

He added: “The US airlines do have the mechanism, however, of Chapter 11 bankruptcy. This provides a mechanism for shifting responsibility for pensions to the PBGC, the US central insolvency fund.”

The US airlines led the field in disposing of their pension liabilities. US Airways and United filed for Chapter 11 and passed their pension liabilities on the PBGC, the Pension benefit Guaranty Corp. Both have more competitive cost structures as a result.

Northwest went into Chapter 11 a day before it was due to make a major contribution to its pension scheme. American Airlines has avoided taking such action, but may be left at an unfair competitive disadvantage as a result.

Many commentators in the EU have expressed the view that such a practice should be stopped as this is effectively a subsidy.

“In Asia, airlines generally have fewer pensions issues,” Blake continued. “The Chinese, for example, do not have a tradition of providing DB plans. However, there are some exceptions in countries like Japan with significant issues with unfunded pension promises.”

What is very positive for airlines is that their skill-set makes them well suited to dealing with pensions issues. “Given that airlines already have considerable expertise in risk management, for example in dealing with the risks associated with currency and fuel price volatility, they should be better placed than most companies to deal with risk management in pensions,” Blake explained.

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