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Pension Underfunded N W Airlines961 M*

Northwest Airlines pension funds underfunded

Liz Fedor

Star Tribune

Published Nov. 7, 2002 NWA07

Two Northwest Airlines pension plans are underfunded by $961 million because of stock market declines, low-interest rates on bonds and an increase in paid benefits.

Vested pension benefits for the unionized employees' plan are worth $2.2 billion, but assets in the plan were valued at $1.3 billion on Jan. 1, Northwest spokesman Bill Mellon said Wednesday. In the management plan, benefits for salaried employees totaled $410 million while assets were valued at $349 million.

Those numbers are cited in letters mailed to about 50,000 employees Wednesday that describe the financial status of the Eagan-based carrier and its pension plans.

Also Wednesday, Northwest said that it sought permission from the Internal Revenue Service to make its 2003 pension contributions over five years, rather than 18 months. In addition, Northwest has asked the Department of Labor to allow it to contribute common stock of its regional subsidiary, Pinnacle Airlines, to its pension plans to meet its obligations in 2003 and 2004.

"We've communicated to our retirees that their pension benefits will not be impacted," Mellon said.

Northwest had a cash balance of $2.4 billion at the end of the third quarter, and it is attempting to spread out pension contributions to "reduce their cash drain," said Joel Denney, an airline analyst for U.S. Bancorp Piper Jaffray in Minneapolis.

Continuing to suffer the fallout from the Sept. 11 terrorist attacks, the airline lost $46 million in the third quarter. In its letter to employees, the company said "no meaningful recovery is in sight."

Northwest's Mellon said, "Since March of 2001, everything that [CEO] Richard Anderson and [President] Doug Steenland have done is to allow the company to retain cash so it can address operating issues during this difficult environment."

Mollie Reiley, Teamsters Local 2000 trustee, said Northwest's desire to defer pension contributions "is not going to cause any harm to any of my members." The Teamsters represent flight attendants at Northwest.

When Northwest returns to profitability, the company must make the pension funds whole, Reiley said. "That's morally the right thing to do."

By rescheduling its pension payments, Northwest said it wants to:

• Allow financial markets to recover, which would increase the value of assets in the pension plans.

• Allow interest rates to increase to more normal levels, which would reduce the amount of money needed in the pension plan to satisfy future pension payments.

• Allow time for the current economic downturn to subside.

Northwest said Wednesday that it expects to record a non-cash, pension-related charge to shareholders' equity on Dec. 31. It estimated that charge at about $700 million and Mellon said it represents a pension liability. The charge will not affect the company's earnings.

Other major airlines have announced plans to take pension-related charges this year.

Northwest shares rose 85 cents Wednesday, closing at $8.60.

Liz Fedor is at lfedor@startribune.com.

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