Carole Shifrin WASHINGTON DC
Having cleared all the legal obstacles in its path, American Airlines has taken over TWA - one of the most venerable names in aviation - becoming the largest airline in the US.
Although it will operate as a wholly owned subsidiary of American this year and most of next, eventually TWA will be fully integrated into American's operations and the name TWA - which originally stood for Transcontinental and Western Air - will disappear.
TWA's roots go back to the 1920s when it began "air and rail" service on a transcontinental route laid out by Charles Lindbergh. Its interesting history included control by movie mogul Howard Hughes for 25 years. Among aviation "firsts", TWA initiated air cargo service in the US in 1931, offered the first in-flight audio entertainment in 1940 by providing individual receivers to passengers to listen to the radio, started regularly-scheduled transatlantic all-cargo service in 1947, and provided no-smoking sections on all aircraft in 1970.
TWA also had years of financial woes. It lost money annually from 1989, a year after takeover artist Carl Icahn took the company private. The privatisation took $610 million out of TWA - $469 million of which went to Ichan - and added $540 million to its debt load. Three bankruptcy filings later, American acquired TWA, closing the deal on 9 April, for $625 million in cash and the assumption of aircraft operating leases.
While the leases were originally valued at about $3 billion, Tom Horton, American's senior vice-president finance and chief financial officer, says American was able to trim TWA's lease obligations by about $800 million, bringing total value of the deal to $2.8 billion. It was, he says, a large acquisition undertaken "on exceptional economic terms".
TWA's operations are expected to be earnings neutral this year but have a positive effect on earnings in 2002 and 2003. Horton says ownership by American has had an immediate impact on the financially struggling TWA in three important ways. Because TWA had a weak balance sheet, it had expensive aircraft leases reflecting its risky financial condition and had no ability to conduct fuel hedging. Both conditions have changed. TWA also was locked into a disadvantageous ticketing agreement with Icahn who bought deeply discounted tickets and sold them at market prices, a now-void pact that cost TWA at least $100 million a year.
Robert Baker, vice-chairman of American, has been named chief executive officer of TWA Airlines LLC (the corporate entity it has created to run TWA) to oversee its integration, and former TWA president and chief executive William Compton has been named president. The airline, with 20,000 employees, has a fleet of 190 aircraft operating 800 daily flights to 100 destinations.
Horton says the goal is to minimise operational disruptions for the remainder of this year and next, phasing TWA operations into American in a careful and disciplined way. He didn't underestimate the challenges.
Source: Airline Business
