From the bottom of the pile, life offers a different perspective. While most US airlines have returned to profitability in the 1990s, the financial haemorrhage at Trans World Airlines has continued. So management was encouraged to note, after announcing 1998's first quarter results, that the words 'beleaguered' and 'cash-strapped' did not appear in any newspaper headline. 'We've finally lost those words from our corporate logo,' jokes Gerald Gitner, TWA's chairman and chief executive officer.
Although another loss was posted, the margin of red ink is thinning. A net loss of $54.1 million before extraordinary items is a $15.9 million improvement on the 1997 first quarter results. Gitner admits it is not enough. 'Quite frankly, we are not very proud of the loss,' he says. But he believes that the question of TWA's survivability is answered and the latest headlines bear testimony to that accomplishment. Instead of debating whether TWA will sink next quarter or next year, analysts are trying to pinpoint when the company might return to profitability and asking what its longer-term prospects are in the new world of airline partnerships and global alliances. To those questions, TWA still does not offer answers. But clues might be found in a new growth programme, christened the 2002 Plan, that was expected to be presented to the board of directors in May.
TWA's crawl back to respectability has been conducted under a blaze of unwelcome attention. Wall Street has mostly dismissed the company, while US newspapers have tracked mercilessly both the airline's financial woes and the lengthy investigation into the explosion of Flight 800 off Long Island in July 1996. Through most of the 1990s, TWA's icy attitude towards analysts and reporters has helped fuel those dismissals.
After a near-disastrous start, 1997 saw the beginnings of change. The posting of a $284 million net loss for 1996, after a $30 million loss the previous year, had even the most generous of analysts shaking their heads. Much has been happening at TWA since then, however, so that the 1997 full-year results saw losses slashed by more than half to $110 million.
According to Michael Palumbo, senior vice-president and chief financial officer, some analysts are now predicting that TWA could produce a small profit by the end of this year. 'We don't provide forecasts, but we don't disagree with that view,' says Palumbo.
TWA still has plenty to achieve. Yields were down in the first quarter; the company has a minefield of labour negotiations ahead of it; a demanding fleet renewal plan is underway; and a host of new marketing campaigns that were launched early in 1998 must be followed through. And while the management team juggles to keep each of these demands in the air, it cannot afford to let drop perhaps the most difficult ball of all - alliance partners. With each new partnership announced by fellow US airlines, TWA looks increasingly isolated.
One issue at a time, says Gitner, who came onboard in 1996 and identified the priorities for a recovery programme. 'We were not reliable enough then, especially for the business traveller. We said to ourselves: "Look, we're ranked number 10 out of 10 for on-time performance. Based on that, we have got to get to a point where we are at least middling - mediocre by a dictionary definition." '
An all-out endeavour was rewarded with something considerably better than mediocre. The airline came in second for 1997, just behind Southwest Airlines, according to on-time results published by the US Department of Transportation.
Gitner's next focus was the airline's large seasonal fluctuations. Between the lows of each February and the highs of each August, TWA's daily system available seat miles were fluctuating by as much as 50 per cent. Says Gitner: 'That type of seasonality was not resulting in profitability, so why continue with that sort of a programme?' This year, ASMs will flatten to a 4 per cent fluctuation, which will iron out workloads and help reduce costs.
TWA's ageing fleet was another problem. As Gitner points out, the oil price increases of 1996 hurt TWA more than any other US airline, while the fuel price declines of 1997 benefited it the least. By February this year, however, all of the airline's Boeing 747s and Lockheed L.1011s had been phased out. Since mid-1996, the company has acquired 36 Boeing 757, 767 and MD-80 aircraft to replace those older aircraft in its 185-strong fleet. Two 767-300ERs have also been delivered this year, while eight 757-200s and 32 MD-83s will arrive this year and next. That will reduce the average aircraft age from 19 years in 1996 to 12 years. Gitner will continue replacing old aircraft rather than taking the hushkit option.
The company's load factors - including a record 68 per cent in the 1998 first quarter - would be cause for celebration if yields were not declining. Average yields per revenue passenger mile for the same quarter decreased from 11.84ó to 11.74ó. Palumbo admits this is disappointing. 'We were not satisfied with yield and our goals were for more simultaneity between yield and pricing,' he says. 'But, demand has to come back first. It's a process within a process.' The company has introduced a new yield management computer system, QuickCheck, which Palumbo says, '. . . gets us into the 1990s', but it will be some time before employees are fully experienced on it and results begin to show.
Gitner says that, rather than make excuses for yield, the company is attacking the problem 'aggressively' through a number of marketing initiatives aimed particularly at the business traveller. These include a 60 per cent increase in the number of first-class seats on domestic services, a new frequent flier programme, and a market-specific service called TWQ on strong business routes.
Lisbeth Lee Mack, vice- president of marketing and services, denies that these efforts are mere window-dressing. They are born from the information gleaned from extensive passenger surveys, which showed that the market for domestic first-class ticket buyers was shrinking, but passengers paying the full economy fare expected better treatment. More first-class seats will enable TWA to give its elite frequent flyers a coveted upgrade more often. The rest of TWA's actions go back to basics, says Mack. First is schedule, then on-time performance, followed by the reputation of the airline.
Frequencies are being added to TWA's most heavily travelled business markets from St Louis to New York/La Guardia, Chicago/O'Hare, Washington/National and, from 11 May, Philadelphia. In these TWQ markets, the carrier has increased the number of flights until it offers more daily services than any other airline, including the first flights out and last flights back. TWQ gates are clustered together for easier connections, and laptop work-desks are available at those gates along with free newspapers and electronic ticketing booths. Middle seats on the first 10 rows of the economy cabin will be held back as long as possible so that elite frequent flyers allocated to those rows stand the best chance of getting more elbow room.
Mack says new US destinations and frequencies are planned both for TWQ and other services. TWA will particularly build on the St Louis hub, taking advantage of its geographically central position, its number five ranking in US hub size, and the fact that the city itself has a strong business reputation and is a popular convention site. 'We want to make our network more multidirectional from St Louis,' says Mack. The airline has recently added Palm Springs, California, and will add Anchorage, Alaska, this year.
Other destinations and a fleet plan to support them will be presented to the board of directors in May as part of a growth programme called the 2002 Plan. This will include more very long-haul, nonstop services from St Louis as well as increased service from New York/JFK. 'It's not an aggressive growth plan,' says Mack, but she believes it will be sufficient to answer criticism from analysts about the airline's weak network. 'The importance of a network cannot be underestimated,' she admits. 'Your geographical niche is controlled by where you live and, for us, it's here in the midwest. But this is an excellent niche because we can get passengers to either coast, or north and south. We plan to grow that.'
The other way to grow a network, each of TWA's managers acknowledges, is through alliances. To date, apart from a codeshare with Royal Jordanian that helps raise TWA's profile in Cairo, Riyadh and Tel Aviv, TWA's alliance portfolio remains an almost blank sheet of paper. Gitner argues that this is understandable within the one step at a time philosophy. 'Our attention and best use of our time right now is in fixing TWA,' he says. 'We have seen results from that already, but there are only 24 hours a day even if Mike [Palumbo] will tell you he's working 25. We are firm believers that a better product will be more attractive to prospective codeshares and partners. We are limited right now and we are not a big company by airline standards, so we must keep results focused. But, absolutely, we are having talks and dialogues with airlines worldwide.'
William Compton, TWA's president and chief operating officer, summarises the problem bluntly. 'We need more alliances and we are late to the game,' he says. 'But always there have been these reorganisations and a crummy operation so that no-one has been knocking at the door. Now, however, there is no question that TWA will survive and we have a lot of added value that we can bring to an alliance partner because of St Louis. That's powerful, so now the challenge is to go out and tell our story.'
Analysts also see the potential for St Louis. Brian Harris at Lehman Brothers describes the hub's catchment area as 'excellent' and points out that TWA's gate utilisation at St Louis, with an average of 8.2 daily departures per gate, beats any other US hub-and-spoke carrier. But while analysts are now less dismissive of the airline, they remain unsure of the markets that will remain to be exploited by the time TWA is fully back on its feet. St Louis' position offers great potential, but the US midwest also has a high concentration of competing hubs such as Chicago, Dallas, Houston and Minneapolis.
One New York analyst says TWA is still not an obvious choice for most US passengers, especially business travellers. Samuel Buttrick at PaineWebber is caustic. 'Yes, they are reducing the losses, but to praise that would be like a father praising his son for getting a C-minus instead of a D,' he says.
With such scepticism on Wall Street, TWA will find it tough to improve its puny equity base for a while yet, but it has been successful in the private debt markets. In the last six months it has raised $476.5 million, enabling it to pay off its remaining obligation to former owner Carl Icahn, as well as funding deposits on new aircraft. On 31 March, TWA's cash balance reached $346 million, $108 million up from a year ago.
In terms of securing TWA's long-term future Jim Martin, who joined the carrier last year as senior vice-president of human resources, has perhaps the most critical job. Of TWA's 22,000 employees - down from 26,000 since 1995 - 19,000 are unionised. This year, labour contracts are due to be settled with four major union groups representing the pilots, flight attendants, machinists and passenger service staff. The machinists and flight attendants unions have each sought mediation. Martin says the talks with the pilots have made the most progress.
Martin says he understands employee frustration about pay. 'There is no doubt that our employees are paid lower than industry standards. But we still have a very large number of people here who are dedicated to TWA and care about its health. We need to reward them. I would prefer a contract sooner rather than later, but that is tempered by our ability to pay. It's a Rubic's Cube,' he says. 'The reality of the situation is that we all have to have patience.' Compton echoes the point succinctly. 'When we get to industry standard profits, I want everyone to have industry standard wages. But profits come first.'
That is Gitner's focus, too. 'Let's be frank,' he says. 'The ultimate test of this recovery programme is profitability and we are not yet profitable. We are itching for it to happen. But in all the things we are doing, we have to catch up. When we set out to improve on-time performance, it was not our goal to get to number two because we don't set goals we don't believe we can achieve. But by reaching number two we showed how good we really can be. There has been so much change here. In 1997 we accomplished a decade's worth of change in one year. You have to remember that this was a company of neglect. I would say that it was not even benign neglect. The locusts came and went through everything.'
Gitner insists that TWA has put behind it the 'soap opera' of those days and can concentrate on the Holy Grail of profitability. 'Everything we are doing now is designed to make this company profitable and a company with a good product,' he says. The unspoken message is that 1998 might be the year when the bleeding stops and the newspaper headlines coin a new phrase for TWA - turnaround airline.
Source: Airline Business
