«You learn in this business: If you want a friend, get a dog.**
WA was one of the original “Big Four,” created out of the so-called “Spoils Conference” in 1930 by the edict of Walter Folger Brown, which forced the combination of Western Airlines and Transcontinental Air Transport (TAT). TWA had participated in the major developments of American airline history under the leadership of Jack Frye, and later under the secretive and unpredictable Howard Hughes. It had pioneered both the early transcontinental routes and the early airliners used on those routes, like the DC-3 and later the Constellation. TWA had contributed significantly to the war effort between 1941 and 1945, flying the only land-based four-engine aircraft in existence at that time (the Boeing 307) on transatlantic routes to Africa from South America and to Europe. By war’s end, TWA had gained transatlantic experience that only Pan American could rival. Howard Hughes, then firmly in control of TWA, changed the name of the company. Since 1930, the initials TWA had stood for Transcontinental and Western Airlines, but after the war the company name became Trans World Airlines, still using the TWA brand.
Perhaps owing largely to its war effort, TWA was rewarded after World War II with the first transatlantic routes that went to any established American airline other than Pan American. On February 5, 1946, TWA made its first scheduled international flight, from New York to Paris. TWA was also granted access to London’s Heathrow Airport, known as the “Gateway to the World,” and it continued its international route expansion for years to come, including the polar route in 1957 from Los Angeles to London.
In 1961, TWA severed its relationship with Howard Hughes, who by that time had become a recluse, and by 1965 the company had redeemed all of his shares of stock. New management, led by Charles Tillinghast, made changes within the company that caused it to prosper. TWA’s profits in 1965 were the largest of any airline.
TWA thrived under the regulatory scheme in place during the 1960s and 1970s, but with deregulation, things began to come undone. The very nature of TWA’s routes, including many long distance ones, had mandated that its fleet be composed of large airplanes. The use of large aircraft when smaller ones would have sufficed, with the resulting substantial expense differential, increased the financial burden. TWA was also slow to appreciate the hub concept, and its
labor costs were way out of line. Its unions were not willing to grant the wage and working condition concessions that looked necessary. By the 1980s, TWA was losing money, some $100 million by the middle of the decade. TWA began to look appealing as a corporate takeover target. All of the symptoms were there, including low stock valuation, troubled management, and relatively high asset value. It had also accumulated $200 million in depreciation, which could be used as a tax deduction directly against income. This scenario drew the Wall Street raider types like sharks to blood in the water.
Carl Icahn (see Figure 27-1), like Frank Lorenzo, grew up in Queens, New York. He received his A. B. degree from Princeton in 1957, and then attended New York University School of Medicine, without graduating. As a young man, he had some talent at chess and, it was rumored, at poker as well. When he left medical school he joined the Army, where he gained a reputation for his gambling skills. By 1961, he was employed on Wall Street in New York in the stock brokerage business and drifted into the super-specialty of arbitrage, the trading of both the long and the short side of stocks and options that allows the taking advantage of slight differentials in price. This led to trading in
FIGURE 27-1 Carl Icahn began buying up shares of TWA in 1985, and by April he had acquired enough stock in the company to trigger the mandatory public filings with the Securities and Exchange Commission.
issues of companies rumored to be the object of takeover strategies, companies that usually experienced large and volatile price fluctuations.
Icahn went from simply trading the stocks of these companies to practicing strategies to gain actual management control of them. Control of a company can be gained either by outright stock purchase or through proxy fights. Proxy fights involve persuading other stockholders, usually through intensive mailing campaigns, to allow their shares to be voted by someone who is leading the proxy fight. The rationale is usually to effect a change in management through gaining seats on the board of directors.
Icahn’s aggressive corporate acquisition strategies were originally bona fide efforts to win stock proxy fights in order to gain control of undervalued corporations so that their management and value could be improved. In 1979, Icahn won his first proxy fight for a seat on the board of directors of the stove manufacturer, Tappan, by which he subsequently forced the sale of the company, rendering him a profit of $3 million for his stock.
He soon learned that he did not always have to be successful in his takeover bids in order to make money. This tactic usually involved isolating a target company, starting to buy up its stock or gaining control through a proxy fight, running up the stock’s price, and then retiring from the field with a nice profit when the target’s management successfully fought him off with counter offers for control. This practice came to be known as “greenmail,” a play on the better understood word “blackmail.” Icahn gained the reputation as a “corporate raider”1 when the business community realized that he had adopted this practice as a vocation and business lifestyle.
– Icahn followed the Tappan bid with raids I of Marshall Field’s, Anchor Hocking, American m Can, and Owens-Illinois. His image was blackened forever when he attempted to take over the textile company Dan River in 1982. Dan River was a 100-year-old Danville, Virginia company and mostly locally owned when Icahn began
buying up stock. The employees and the people of Danville got together to fight the takeover, using their retirement money to successfully buy up the stock. When it was all over, Icahn was roundly seen as a villain.
Along the way Icahn developed deep pockets for financing his deals, including the investment banking house of Drexel Burnham and junk bond king Michael Milken. Icahn next successfully acquired the rail car manufacturing and leasing company, ACF Industries, which was followed by the unsuccessful, but profitable, takeover effort of Phillips Petroleum. Icahn’s targets appeared to be getting bigger and bigger.
Icahn began buying up shares of TWA in 1985, and by April he had acquired enough stock in the company to trigger the mandatory public filings with the Securities and Exchange Commission. TWA management sprang into action. By this time one thing was known for sure: Icahn could not be a good steward for any company. Icahn’s corporate raider reputation was seen as having developed from “greenmail” to “acquisition and dismemberment,” and TWA pulled out the stops in mobilizing against him.
At first there was a combined effort by both management and labor against the takeover attempt. Suits for injunctions were filed on various grounds, the unions conducted campaigns against Icahn, and both groups lobbied Congress for help. An Employee Stock Option Plan (ESOP) was considered. TWA sought merger partners, but only Eastern made any attempt to investigate the possiblities. A TWA-Eastern merger would probably not have survived the anticompetitive test by the government anyway, but the unions at Eastern defeated that effort.
By the beginning of the summer of 1985, Icahn had invested over $100 million in TWA. With all defensive stratagems failing to prevent a hostile takeover, management began to consider alternatives to Icahn, including Frank Lorenzo (Texas Air). This is where management and labor parted company. Lorenzo’s use of the bankruptcy court to void labor contracts and cut wages at
Continental, as well as his starting his new shuttle airline in New York as a nonunion airline, were to have a long legacy. The unions were convinced that if Lorenzo won control, TWA would be folded into the Texas Air-Continental operation and would cease to exist. Yet Lorenzo was not about to go away. Management brought in Drexel Burnham to broker a deal between Icahn and Lorenzo that would have paid Icahn $95 million and given control of TWA to Lorenzo. Management believed that they could work better with Lorenzo than Icahn.
During the negotiations, Lorenzo and Icahn were about $7 million apart on the money when the unions, led by the Airline Pilots Association, began negotiations directly with Icahn. The pilots and the machinists offered concessions to Icahn that they would not offer to Lorenzo and had not offered even to TWA management— they agreed to wage cuts (26 percent) and to work rules changes in exchange for a profitsharing arrangement and stock ownership. This allowed Icahn to raise his stock offer price to match Lorenzo’s rather than sell out his stock investment in TWA under the Drexel Burnham deal. Lorenzo actually offered slightly more than Icahn for stock control, but by this time Icahn had acquired over 50 percent of the stock, and because of the bitter resentment of the unions against Lorenzo, the board acceded to the decision to go with Icahn.
In the end, it was labor that handed TWA to Icahn.2 Lorenzo, once again, pocketed a nice gain in the value of his stock acquired while pursuing control of the company—in this case $50 million. Icahn meanwhile set out to maximize his investment with further acquisitions by TWA.
TWA’s main competition in St. Louis in 1986 was Ozark Airlines. In the middle 1980s the Department of Transportation under Elizabeth Dole was in charge of reviewing proposed mergers, and the stance at DOT at that time was rather relaxed on airline mergers. This was, after all, the era of deregulation. Still, many people, like Alfred Kahn, the so-called father of deregulation, were concerned that the industry was rapidly becoming too centralized, too anticompetitive, and that the benefits of deregulation as they saw it would suffer from such lack of competition. Their views were largely dismissed as the DOT routinely signaled its approval of anticipated combinations in the industry, particularly with relatively minor players like Ozark.
Icahn closed the deal for the acquisition of Ozark for $239 million. The Justice Department decried the merger and came out against it. But it was the DOT’S call (the DOJ would not be given authority over mergers until 1988), and the merger was approved as expected. With this deal, Icahn had essentially eliminated competition out of St. Louis. It came as no surprise that St. Louis fares were quickly raised, now that the CAB no longer existed, but it was also clear that this was not what deregulation was supposed to be about. It became obvious that the anticompetitive safeguards formerly monitored by the CAB, and now by the DOT, were being ignored—another unintended consequence.
As TWA proceeded under the new arrangement and Icahn’s management practices took hold, the unions at TWA would learn what bitter fruit their deal with Icahn was about to produce. The flight attendants had not been part of the deal with Icahn, and their labor working agreement expired in 1986. When no progress was seen in their attempted negotiations with Icahn, they walked out. Icahn hired replacements, at a significant savings to the company, and when the flight attendants called off the strike a few months later and wanted to return to work, Icahn refused to rehire them. Lawsuits abounded.
The wage concessions that the pilots and machinists had earlier agreed to in their deal with Icahn provided for “snap back” wage increases when their labor agreements were to be renewed. To their dismay, Icahn insisted that they extend their contracts at present wage rates. When the unions resisted, Icahn threatened to dismantle the airline—and he meant what he said. The unions folded.
In what might be considered to be less than good faith follow through, Icahn sold all of the Ozark fleet of airplanes and then leased them back to TWA. As majority shareholder, this was like cash in Icahn’s pocket. The airplanes then had to be paid for out of operating expense.
TWA’s assets also included its computer reservation system (PARS). Icahn sold a 50 percent interest in the CRS to Northwest Airlines for $140 million, thus raising even more cash. Icahn denied that his management style included “dismemberment,” but it did bear some resemblance to what Lorenzo was doing to Eastern Air Lines at the same time.
In fairness to Icahn, the steps he took to streamline TWA’s operations, including converting hard assets to cash, laying off nonunion workers, and fighting union wage and rules demands began to show up at the bottom line. From a stock price of around $14 per share when he took over, TWA stock was trading at $34 two years later.
This was when he decided to take the company private by merging TWA into a newly formed private company, where he would own 90 percent of the stock (he held 73 percent in the public company), and which would free him from many regulatory requirements and much government oversight necessary in a public corporation. The company’s cash would go to partially pay for shares not controlled by Icahn. The 10 percent of stock not owned by Icahn would be owned by the employees. Since this deal was a leveraged buyout, Icahn was able to recover $469 million personally. TWA assumed over $539 million in debt.
This heavy debt load gave TWA a negative net worth, and it required a lot of money to pay interest on the debt. Profitability was short lived as its domestic and foreign market shares fell to new lows. TWA had failed to appreciate the necessity of the hub concept after deregulation and it did not develop adequate feeder lines to supply its long-range routes, resulting in lower passenger counts.
TWA’s fortunes did not improve over the following years, as competition increased with new entrant airlines amid rising fuel prices. The first Iraq war in 1990 coupled with an economic downturn that resulted in reduced travel demand. Airline losses as a group in 1990 were $1.9 billion, in 1991 $1.8 billion, and in 1992 they were $2.4 billion. Icahn continued the dismemberment of the airline by selling TWA’s most valuable routes. In 1991, he sold the prized Heathrow London routes to New York, Los Angeles, Boston, and Chicago to American Airlines for $445 million.
On January 31, 1992, TWA entered into Chapter 11 reorganization. As debtor in possession, Icahn still had control over TWA’s assets, and he sold its London routes to Philadelphia and Baltimore to USAir for $50 million. All that was left of the proud world-wide network of TWA was the London-St. Louis route.
During reorganization, Icahn agreed to step down and sell his shares to the employees and the creditors. The deal was solidified with TWA’s three primary unions taking a 45 percent equity stake in the company in return for concessions. TWA’s creditors would forgive some $1 billion in debt in return for 55 percent of company stock. Icahn would loan the airline $200 million for operating cash, secured by TWA’s remaining assets, until the company emerged from bankruptcy. Everyone, it seemed, was tired of Icahn, and Icahn was tired of the airline business.
TWA came out of bankruptcy in November 1993 and a succession of senior executives went through the head office until Jeffrey Erickson, from Reno Air, took over as CEO. Over the next two years, management and the labor groups, the latter of which owned 45 percent of the company, together made extraordinary efforts to see TWA succeed, but it was not enough as share prices continued down, reflecting the lack of profit. TWA entered Chapter 11 for the second time in 1995 under a prearranged deal with its creditors to shed some $500 million in debt, so the company was able to reemerge quickly from reorganization in August 1995.
In 1996 things looked up for TWA, with plans to purchase new aircraft and to make new hires of around 10 percent. But on July 17, 1996, flight 800, a Boeing 747 bound from JFK to Paris, exploded over Long Island killing all 230 people on board. Theories abounded as to the cause of the explosion of flight 800, including a rocket attack by terrorists, conspiracy theories of various kinds, as well as a fuel tank detonation. The cause was ultimately determined by the NTSB to be due to a short-circuit spark in the center wing fuel tank, but that did not really matter to the profit and loss question that controlled the fate of TWA. At the end of 1996, all TWA had to show for its efforts was a $259 million loss. Erickson resigned and was replaced by Gerald L. Gitner, who ironically had previously been with Lorenzo at Texas Air.
The late 1990s were good times for United States airlines, yet TWA was unable to post a profit for 1997, the only airline, in fact, that lost money for the year. It lost money the next year too, the 10th straight year in the red. The board of directors appointed one of their own pilots, William Compton, as president in 1998 to bring a hands-on approach to operations, with Gitner remaining as chairman of the board.
Compton ventured out on an airplane buying spree, concentrating on smaller aircraft like the Boeing 717-200s, to replace TWA’s large aircraft and aging fleet. He ordered 125 planes and took options on 125 more. Still, TWA had not turned a profit since 1988. TWA lost $353 million in 1999 and over $115 million during the first nine months of 2000.
TWA finally threw in the towel and reached an agreement with AMR Corporation, American Airlines parent company, to acquire the airline. TWA entered Chapter 11 for the third time in 2001 in order to be able to finalize the AMR takeover. The Justice Department approved the acquisition and the proud and historic Trans
World Airline, the “Lindbergh Line,” became just TWA Airlines, LLC. AMR Corporation now controlled 22.6 percent of the entire airline market, another unintended consequence of deregulation.
In September 2001, operations of TWA were consolidated with those of American Airlines, 138,000 TWA employees were let go, and the TWA terminal at JFK was closed. The brand TWA ceased to exist.