Source: Dow Jones Newswires
Author: Erik Ahlberg

CHICAGO -- A federal judge on Friday rejected a controversial new five-year contract between United Airlines and its pilots union, blocking at least temporarily the airline's plan to terminate all of its employee pension plans.

Judge Eugene R. Wedoff of the U.S. Bankruptcy Court for the Northern District of Illinois refused to sign off on negotiated pact that called for an immediate 15% pay cut and an agreement that the pilots won't oppose any efforts to eliminate their pension plan.

In return, UAL Corp.'s United had agreed to increase contributions to a new retirement plan and issue $550 million in convertible notes to the pilots once the company emerges from bankruptcy.

In making his ruling, Wedoff sided with several unions, United creditors and the Pension Benefit Guaranty Corp., the quasi-governmental federal agency that oversees pension benefits. Those groups on Thursday said the arrangement was overly generous and that it may actually hurt the airline's odds of emerging from bankruptcy.

“This tilts the playing field more than the law allows,” said Robert Clayman, an attorney for the Association of Flight Attendants, which has vowed to strike if the court rejects the Flight Attendant contract.

Friday's ruling adds another layer of complexity to the bankruptcy case of United, which will be in court later Friday to force flight attendants and mechanics - the two remaining unions without negotiated labor agreements -to accept a new round of pay cuts.

United must now ask the Air Line Pilots Association, which represents 6,900 active pilots and 2,100 furloughed pilots, to agree to an interim pay cut. Both sides also face the prospect of lengthy new court proceedings over a new contract if they can't reach a new agreement.

United has already pared $2.5 billion from its labor costs, but said late last year that it needs to wring another $725 million in annual cuts in order to strengthen its balance sheet during its search for exit financing.

The airline has said that it needs to implement labor cuts this month in order to avoid trouble with rules that govern its bankruptcy loans.

Chicago-based United filed for bankruptcy in December 2002 and has said that it expects to emerge from court protection sometime this year.