Bad decisions, bad deals and bad luck
all contributed to what appears to be the final demise of TWA, once
among the nation's "Big Four" carriers.
Even so, in some ways TWA's story is a story of survival. TWA
filed for bankruptcy protection twice in the 1990s, and experts
kept predicting its imminent doom.
"Most airline analysts predict TWA will become history in 12 to
18 months," Aviation Week & Space Technology reported in
February 1992, in comments typical of the time.
This also is a story, however, about how TWA's mistakes put it
in a vicious cycle.
It made poor choices after deregulation in 1978, which led to
Carl Icahn taking control in 1985, which led to a 1995 deal with
Icahn over discount tickets that still haunts the airline
today.
In the last few years, its weak cash position and poor credit
rating created a downward spiral that forced it to pay more for
fuel -- it couldn't afford to prepay at a lower price -- and
above-market rates for aircraft leases. That led to further losses
and weaker credit, which meant it would continue paying more for
fuel and leases, which meant -- well, you get the picture.
"This business," airline scholar Darryl Jenkins noted, "is not
forgiving."
A rapid descent
When deregulation arrived in 1978, TWA could proudly count
itself in the "Big Four" with American, Eastern and United. But the
fare wars that followed took their toll on everyone -- many
airlines eventually folded, including Eastern in 1991. And TWA also
had its own set of problems.
TWA entered the post-deregulation era with higher labor costs
and fewer domestic monopoly markets than its competitors. It also
had bigger planes that were too large to efficiently serve
short-haul routes in the U.S. And, while other airlines were
building multiple-hub systems, TWA lacked the resources or
commitment to build a second one to go with St. Louis.
The airline eked out its first profit of the decade in 1984. But
it still had problems and its stock price stayed low. Which opened
the door for someone like Icahn.
A white knight?
Icahn, well-known as a corporate raider, already owned 25% of
TWA's shares by 1985, when he mounted his bid to take control.
A fierce battle ensued.
Icahn had a history of selling off assets to pay off his
takeover debts, and TWA's management tried mightily -- in court, in
Congress and at the Transportation Department -- to block the
acquisition. When that failed, TWA cut a more lucrative deal to be
acquired by Frank Lorenzo's Texas Air Corp.
Lorenzo, however, had a reputation as a union-buster. In his
most notorious move, his firm acquired Continental and used a
bankruptcy filing to void its union contracts and slash wages.
The unions for TWA's pilots and mechanics, vehemently opposed to
Lorenzo, cut a deal with Icahn to back his takeover bid. Given
their choices, they saw Icahn as the airline's best hope; Icahn
even talked about expanding the carrier.
"At that point, they really saw Carl Icahn as the white knight,"
a former TWA executive recalled. "Little did they know that years
later they would see him as the dark horde."
Icahn officially took over TWA in January 1986. And in the eyes
of his critics, who are legion, he would end up irreparably
damaging the carrier.
In 1988, Icahn took TWA private by using money he had borrowed
on the junk bond market to buy out shareholders. That transaction
-- opposed by the pilots and mechanics -- put TWA deeply in debt.
Icahn recouped his original investment, and then some, and gained
complete control of the company.
He began selling off many of the carrier's assets. Planes.
Landing and takeoff rights. And -- most painfully -- the airline's
prized routes to London Heathrow, which Icahn dealt to American and
US Airways for nearly $500 million.
TWA also had its share of bad luck. The 1986 Libyan terrorist
bombing of a TWA jet scared customers away from its transatlantic
service. Iraq's August 1990 invasion of Kuwait and the Persian Gulf
war cut into overseas travel for every airline, and the concurrent
rise in fuel prices hit TWA hard. A recession and industrywide fare
discounting didn't help either.
Other carriers, however, were better able to ride it out, noted
Jon Ash, a TWA executive from 1967 to 1986 in finance, planning,
government and international relations. "The people who survive bad
luck are the people who plan for bad luck," said Ash, now managing
director of Global Aviation Associates in Washington, D.C.
In 1992 TWA filed for bankruptcy and Icahn relinquished control.
But the damage had been done, and Icahn's presence would continue
to be felt.
The ghost of Icahn
TWA went back to bankruptcy court in 1995, filing another
reorganization plan. The unions extended their wage concessions.
But to avoid defaulting, TWA also had to strike a deal on about
$200 million it still owed to Icahn.
Icahn renegotiated the terms, but only in exchange for a TWA
pact with his company, Karabu Corp., to let it buy TWA tickets at a
45% discount for the next eight years. Icahn then could resell
those tickets for a profit.
This deal -- and its widespread financial and strategic
implications -- would hardly be TWA's only problem.
The airline, for example, never could build a legitimate second
domestic hub. It made an effort in Atlanta in the early 1990s, but
Delta's frequencies and ValuJet's low fares drove it out. TWA
couldn't even reap the benefits of its St. Louis hub dominance,
because competition from low-fare carrier Southwest meant TWA
couldn't charge a hub premium.
TWA also suffered from its attempts to build a hub for its
transatlantic service at Kennedy.
Over the years, the carrier faced more competition in New York,
from carriers such as American (which had acquired TWA's New
York-London route). Competing airlines also had begun offering
nonstop transatlantic flights on smaller aircraft from their
interior gateways. Nonetheless, TWA kept trying to feed its traffic
into Kennedy -- sometimes from cities that offered nonstop service
to the same overseas destinations -- to support its transatlantic
flights.
Meanwhile, TWA's planes continued to age, guzzling gas and
driving up maintenance costs; maintenance problems and delayed
aircraft deliveries caused a rise in flight delays and
cancellations; the airline expanded its capacity too much in 1996,
forcing it to sell more cheap tickets to fill its seats; and the
midair explosion of TWA flight 800 in July 1996 dampened
demand.
Nonetheless, TWA did manage somewhat of a turnaround in the late
1990s.
The airline finally began to modernize its fleet, reducing its
average aircraft age from 19 years at the end of 1996 to about 11
years at the end of 2000, and better matched aircraft size with
demand. It eliminated some unprofitable international routes and
domestic feed service into Kennedy, while increasing flights in St.
Louis and creating "focus cities" with increased TWA service. TWA's
on-time ranking and flight completion rate improved dramatically to
at or near the best in the industry.
The airline also began marketing itself to "value-conscious"
business travelers. And in 2000 it found commuter partners to begin
to offer the regional jet service its competitors had been using to
steal passengers away from its St. Louis hub.
But the airline still had problems.
For one, there were all the tickets Icahn was getting at 45% off
and reselling via Lowestfare.com. The Karabu deal did preclude Icahn
from buying discounted tickets for certain routes, most notably any
flight into or out of St. Louis. But the impact remained
significant.
In direct costs, PlaneBusiness columnist David Levine calculated
last year, the Karabu agreement probably cost TWA $46 million in
1998 (that's based on how much TWA probably could have sold the
tickets for itself, not the full fare price). But there were
indirect impacts as well.
The carrier decreased or eliminated service in markets where
Icahn was known to purchase a lot of tickets, such as Reno, Nev., a
former TWA executive said. It increased services to the Caribbean
and tried to protect those routes from Icahn by finding tour
wholesalers and tourist boards that would prepurchase most of the
seats.
TWA also had to continually adjust the fares it offered to
account for Icahn, the former executive said. If, for example,
Icahn began purchasing a lot of tickets in a particular city pair,
TWA might lessen the number of cheap seats it offered there.
"It was constantly a game of cat and mouse," the former TWA
executive said. "The ghost of Icahn was present at all times."
TWA had other big problems, too, including all that extra money
it had to spend on fuel and aircraft leases. When fuel prices
skyrocketed in 2000, the problems became too great for a carrier
living on the financial edge.
Each year, a current TWA official said, the airline seemed to be
running out of cash at year's end but found a way to struggle
through January and February, when airline traffic and profits
historically sink.
"This year," he noted, "we didn't make it."
TWA hammered by fuel hikes
There's a reason increases in jet fuel prices hit TWA
particularly hard. Essentially, it can't hedge its bets.
In this case, TWA can't hedge on fuel prices. "Hedging," in the
airline industry, means reaching agreements to prepurchase fuel at
a set price. By signing such deals, airlines risk paying more than
they need to if fuel prices go down. But they also avoid paying
more if fuel prices go up.
Most major U.S. airlines hedge a significant percentage of their
fuel purchases. But hedging means the money must be paid up front
-- and that's money TWA doesn't have. As a result, TWA cannot hedge
at all.
That meant TWA really got hammered when fuel prices increased in
late 1999 and skyrocketed in 2000. That, of course, leaves it with
less money, which means it still can't hedge.
And at TWA's current level of fuel consumption, the airline has
calculated, every single-cent increase will cost the carrier about
$6.8 million a year.