Though TWA has had some bouts of poor publicity, facts are facts: reports of its demise may have been exaggerated but the carrier has indeed been struggling, troubled, cash-starved and nearly bankrupt. Its management has gone through upheaval upon upheaval. Its fleet of aircraft is the oldest in the US airline industry and in dire need of replacement. Its domestic and international route structure faces severe competitive limitations. It is far away from making an annual net profit, it has no credit lines and liquidity is low; all factors that have forced the carrier into Chapter 11 bankruptcy protection twice in the last four years.
All of this weighs upon Jeffrey Erickson, TWA's CEO since March 1994, who simply wants to run an airline he believes can do well. Erickson, formerly president at Reno Air and the old, failed Midway Airlines - he left before it filed for bankruptcy in 1992 - is not the type of person who can give himself over to excessive optimism at a moment's notice.
So instead of a disingenuous patter about a new, healthy TWA whose future is beyond doubt, he says that 'TWA's ability to survive in the short and intermediate term has been managed.' And instead of considering the second trip into Chapter 11 - a prepackaged bankruptcy that took eight weeks between last June and August - as an end in itself, Erickson sees it only as part of a continuing process for the carrier to shake off its troubles: 'Do we have a lot to do? Yes, we need to do a micro look at the costs; we've done the macro look. There is plenty to be done.'
That certain sense of humility still seems odd coming from the airline whose executive office was once inhabited by Carl Icahn and his infamous bravado. Some trace the carrier's difficulties back to the early days of US deregulation, but the 1986 takeover of the company by the financier and then-novice airline industry CEO is probably a better point of reference for the carrier's life in a state of near death. Icahn's reign saw bitter labour-management strife; massive debt increases after taking the airline private in 1989; a pension liability that went unchecked and grew out of control; a failed attempt to establish a second US hub in Atlanta; a refusal to initiate capital expenditures for things such as a yield management system; and desperate asset sales to keep the airline afloat, including TWA's London-Heathrow routes, which robbed the airline of its most important international markets.
By the time Icahn opted out and its employees opted in by exchanging concessions for a 45 per cent stake in the airline, TWA's 1993 operating loss of $282 million from the industry downturn, combined with its overwhelming debt and weak revenue generating ability, had put the follow-on managers of the airline in an untenable position. Glenn Zander and Robin Wilson, the co-chairmen of the management team that brought TWA out of its first bankruptcy in late 1993, initiated a plan to attract customers and increase revenues, hoping to improve cash flow and service the debt. A vaunted marketing effort centred on first class service at business class fares - called 'Comfort Class' - took seats off aircraft and became a rallying point for employee-owners.
But it failed. Individuals in Erickson's new management team still shake their heads in disbelief at the poor vision the Zander-Wilson team had: why try to take the airline up-market in a cost-cutting recessionary travel environment? Operating losses last year were $279.5 million and the proxy for the second bankruptcy filing does not hesitate to criticise the previous management, whose mistakes included such basic miscalculations as underestimating labour costs and continuing to operate 'unprofitable, unrestricted entry international routes.'
Though a subsequent downsizing of the international network by Erickson's team saw TWA leave seven markets, fourth quarter 1994 figures compiled by BACK Associates show the scale of the carrier's problem: break even load factors for that quarter in the transatlantic market were 126 per cent.
Erickson and his team decided TWA had to retrench back to its strengths - its St Louis hub and a limited number of international markets - and reformulate a business plan. More immediate, however, was the need to alleviate the $1.5 billion debt burden, and the chronic state of near cashless reserves. The dire state of the airline's finances precipitated out-of-court negotiations with creditors to swap $500 million in debt for 'new' TWA equity, and eventually led to Chapter 11 number two in June.
The results of the financial restructuring are notable. First, employees, ponied up with $130 million in concessions, have seen their cumulative equity stake drop from 45 per cent - a result of concessions given during the first bankruptcy filing - to 30 per cent in order to make way for the creditors turned investors. Aircraft lessors have agreed to lease deferrals that by June added up to $74 million. In September, TWA successfully carried out a $55 million equity rights offer that Erickson now says will help lift cash reserves of around $135 million to $200 million-plus.
Still, TWA is facing competitive disadvantages. Though second quarter earnings have been a point of pride for the airline, the net profit of $5.2 million on revenues of $860.5 million paled in comparison with other airline results. Q3 will be solid, Erickson says, and a $65.7 million operating profit - which translates into a $237.2 million net loss - is projected for 1995, according to 'conservative' proxy figures.
The results underline TWA's vulnerability outside peak-season travel and, more generally, the weakness of a system that with one primary hub, is more susceptible to economic vagaries. St Louis, though a fortress hub, is also low-cost leader Southwest Airlines' eighth largest point in its own system, with 86 daily flights, a number that is set to grow as the Dallas-based carrier expands services to Florida from January. At the same time, St Louis is competing with the larger, network carriers with major connecting hubs nearby: United and American in Chicago, Northwest in Memphis, and, some suggest, even American's hub in Dallas.
This highlights TWA's most fundamental dilemma: what does it want to be? Erickson says the company profile is clear: an airline that offers low prices, a full service, supports lower fares with unit costs of no less than 7.5 cents per available seat mile (they currently stand at 8.5 cents), and maintains a fleet with an industry-average age. The latter point entails cutting its fleet age of 17 years in half and is already under way. Ansett Worldwide has provided the carrier with three MD-83s that have an above-market rate monthly lease cost because of the need for TWA to appear lessor-friendly.
All this is an effort to reinvent TWA, says Erickson, or at least to rehabilitate the perception of the carrier among consumers. But it is also an effort to market the carrier as a potential partner for a non-US carrier, or even, if USAir is actually sold and merged with a larger airline, a US partner.
Jeffrey Erickson: I didn't know that there was common wisdom in this industry - I'm happy to hear that you think there is. In my view, the issue of TWA's ability to survive in the short and intermediate term has been managed.
That let us go to the aircraft lessors and tell them that we had a winter liquidity problem, [but that] our numbers projected out pretty well. [We asked them] to stay with us through the winter, and they did. With the combination of employees and lessors, we could then go to the various classes of creditors and say, 'now we have a complete package.' [We had] to convince them that the place is viable as an airline. We have fixed that problem. Are we done trying to repair our balance sheet, and generate lines of credit? Absolutely not.
In terms of international performance, we are not at the bottom. It's a key segment of the business to build this company back up. We are doing a lot of things to ensure [the international] is viable. The opportunity to continue to enhance the international with an alliance is very much front burner with us. We are looking for a Pacific Rim partner.
I'm not uncomfortable with the way we are trying to position the carrier at all. I would remind you that our name is the most visible worldwide, and that is something to build upon. We have to make sure people are aware that TWA is evolving and back, despite all the turmoil and sacrifices.
Source: Airline Business
