v2.5.47

Why American Airlines’ CEO probably won’t cry over the $20 million a judge denied him

American Airlines CEO Tom Horton.
American Airlines CEO Tom Horton. AP Photo/Manuel Balce Ceneta

When a federal judge rejected $19.9 million in severance for Tom Horton, the chief executive of American Airlines, it made headlines. But Horton isn’t likely to be sweating the decision. Three reasons:

1. The company plans to try again. The judge swatted down American’s effort to clinch the payment now, as part of its merger agreement with US Airways. But he practically gave the company a blueprint for paying the severance anyway: Work it into the company’s plan of reorganization—the recipe-book for exiting bankruptcy court, which has yet to be filed—and get the approval of creditors. In a statement issued after the ruling, American said that’s precisely what it plans to do.

If the creditors balk for some reason, bankruptcy court judge Sean Lane noted, American has a second option as well: Wait until after bankruptcy proceedings are over and American has formally merged with US Airways. Then, the company’s board can “make a severance payment to Mr. Horton without any approval from this Court,” answering “only to its shareholders” for the decision. And if history is any judge, boards are more than willing to shell out once a merger is done, and shareholders usually don’t pay much attention.

2. The judge didn’t touch another big chunk of cash that American promised Horton. The $19.9 million was just one part of the Feb. 13 letter of agreement with the executive. The other part promised to pay him the executive pension he had built up at American, including various extras he had negotiated over the years.

How much is that worth? As December 2011, about $4.4 million. That isn’t $20 million, but it’s still a good chunk of change. In fact, the amount has probably grown during the past 15 months. And over the years, American has souped up Horton’s pension benefit a fair bit as well, for example, by pretending Horton worked nearly four years longer for the airline than he actually has. That added $1.5 million to the benefit at last check.

3. That pension is probably safe even if the judge does take an interest in it. Most executive pensions are simple IOUs from the company to the individual—unsecured debts, in bankruptcy-speak. Regular pension plans stash money away in an dedicated account that the company’s creditor’s can’t touch. But the outsize pensions of senior officers aren’t usually backed by dedicated assets, for tax reasons. So if the company becomes insolvent, executives have to get in line like other creditors.

But American is different: Back in 2002—a rough time for airlines—it started socking millions of dollars away in a special trust, out of reach of creditors. The decision created a stink at the time, because American was asking employees to accept pay and benefit cuts. But the trust still exists, and American has said in its federal filings that it continues to contribute regularly. (The company declined to say how much has been saved up, or when it last contributed.)

The downside of the current arrangement is that American executives have had to pay taxes on the benefits before retirement; American just pays the bill from the trust’s funds, and the executives get to keep any investment returns on the assets. In return, the benefits are safe from creditors, unless a judge concludes something underhanded was going on.

Top News

Powered by WordPress.com VIP