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Berkshire Hathaway Inc. (BRK.B): A Buffett History Lesson

Say goodbye to your retirement
United Air Lines gained a judge’s approval to end its pension plans on May 10, 2005. The airline, which had been operating under one of the longest bankruptcy proceedings in American history, thus earned another unwelcome corporate record: the largest pension default in business history. The ruling freed United from $3.2 billion in pension obligations over the subsequent five years, and burdened the Pension Benefit Guaranty Corporation (PBGC) — the federal agency charged with guaranteeing pensions — with the responsibility for paying over 130,000 employees in United’s stead. The New York Times reported on the sorry record:

Some retirees could see sharply lower pension payments as a result; others will see little change in benefits, depending on a variety of factors. Some retirees at US Airways Group, Inc. (NYSE:LCC), which has terminated its plans, have seen benefits drop by as much as 50%.

The airline, which has been in bankruptcy protection since December 2002, has been pushing to end its pensions since losing its bid for a federal loan package last year. But unions representing United’s employees fought the action, threatening to strike if the pensions were set aside.

Along with raising that prospect, the action has significant implications for the airline industry, which has lost more than $30 billion since 2000, and perhaps for other industries like automobiles, with similarly heavy legacy costs.

Analysts have predicted that if United won its case, there could be a domino effect as other airlines are forced to seek bankruptcy protection to bring their pension costs down to United’s levels. That move would probably swamp the pension agency, which was created in 1974.

The move did speed United’s exit from bankruptcy, which was completed later that year. Five years later, United merged with Continental to become United Continental Holdings Inc (NYSE:UAL), but this new company continues to face multibillion-dollar pension shortfalls. Don’t expect the PBGC to pick up the slack — the agency reported a funding deficit of $34 billion shortly after the United Continental Holdings Inc (NYSE:UAL) merger closed.

The article The Buffett Era Begins originally appeared on and is written by Alex Planes.

Motley Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends Berkshire Hathaway and NYSE Euronext. The Motley Fool owns shares of Berkshire Hathaway Inc. (NYSE:BRK.B).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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