When I was a kid, I remember TWA was my families airline, and while I have vaguely positive memories of my flights in retrospect it’s obvious I was flying an airline in decline. And then, one day, it was gone. It didn’t hit me at the time, in fact, I don’t think I even noticed, to be honest, I recently wondered: what happened to TWA?
It’s rare in history that you can pick a specific date for the start of a decline, but October 24, 1978, is a close as one can get for TWA, on that date President Jimmy Carter signed the Airline Deregulation Act and blew up the airline industry as it existed at the time.
Deregulation hit the legacy airlines like a semi-truck. It allowed new airlines to start which, due then not being unionized, had considerably lower labor costs. Those lower costs allowed them to launch a price war the legacy airline kicking off a race to the bottom for ticket prices. These upstart competitors were a worst-case scenario for legacy airlines as they were already loaded up with debt from buying new giant airplanes in the 70s, those same airplanes left them incredibly sensitive to the rising fuel costs of the 70s. Suddenly the titans of transport found themselves loaded with debt and struggling to compete.
It didn’t take long for things to get worse for TWA, it posted pre-tax loses in 1979, 1980 and 1981. Finally, in 1983, the airline’s parent company Trans Work Corporation voted to spin-off TWA into its own company in an attempt to avoid a repeat of the hostile takeover bid they had fought off the year before. Like a sacrificial lamb, TWA was set to lose to fend off the 80s wolf of streets all anxiously looking for the next company to take over and break up. TWA managed to last one year, officially becoming its own company in 1984 and then succumbing to Carl Icahn in 1985. But not without putting up a fight.
Carl Icahn takes over
On May 11, 1985 legendary corporate raider Carl Icahn filled with the S.E.C. that he had bought 20.5% of TWA TWA management was not exactly thrilled about that with C.E. Meyer Jr., the president and C.E.O. at the time saying “Mr. Icahn’s presence is uninvited and undesirable.” Unfortunately for TWA that did nothing to slow Carl Icahn down and by June 3, 1985 he owned 31.6% and on August 8th announcing he had increased his ownership to 45.5%.
With Carl Icahn was steadily acquiring TWA shares the companies management realized it was unlikely to avoid being taken over, but it tried to maintain some control over its destiny.
On May 20, 1985, it put out a full page ad in the New York Times taunting Carl Icahn, exclaiming “If you thought we’d just stand by and do nothing while you try and take over our company, think again!”
Eight days later the company put itself up for sale, looking for a white knight buyer to save it from Carl Icahn. Just two weeks later the company accepted an offer from Texas Air Corporation for $930 million. Though management didn’t know it at the time this move practically guaranteed Icahn would win control of the company.
While the board continued to try and find and suitor and work through the Texas Air sale, it launched other salvos in its defense. It initiated legal action against Icahn, asking the Department of Transportation to label him “unfit” to run an airline and it sued him for extortion. The D.O.T. didn’t even take up their case, and on May 28th they lost their extortion case.
Texas Air looked like the last card TWA had to avoid Icahn but its owner Frank Lorenzo had just shutdown down Continentals unions and was the last person TWA’s unions wanted to tangle with. So, opposing management, they started working with Icahn offering him considerable concessions which allowed him to outbid Texas Air. With the pilots and machinist unions offering up millions of dollars in concessions Icahn took officially took over TWA on January 3, 1986, with 52% of the stock.
Icahn’s TWA
Icahn won TWA, but the airline was still in dire trouble. Despite having reduced its headcount by 11,000 employees, and it’s airplane fleet by 38 planes since 1979 it was still hemorrhaging a million dollars a day in losses, and he hadn’t been able to win any concessions from the Flight Attendant’s union.
In 1986 Icahn bought Ozark airlines and merged it with TWA, this helped grow and cement its domination of its St. Louis hub. That was the good news. On March 7, 1986, TWAs flight attendants kicked off a brutal ten-week strike. Icahn had been preparing and wasted no time bringing in strikebreakers, hiring 2,800 non-union flight attendants and inciting 1,400 union flight attendants to break ranks and return to work. With the defeat of the flight attendant union, Icahn solidified his control of TWA and proceeded to move to the second phase of his TWA ownership.
In 1988 Icahn took TWA private, ultimately upping his ownership to 90% of the company giving employees 10% ownership. The unions took one more stab at trying to slow Icahn down, asking the government to investigate the airline fitness but Regan’s government was having none of it. The D.O.T. once again dismissed the suit with no action, stating that “TWA continues to be fit, willing, and able to perform its certified operations.” As in most of his deal, Icahn got the better half, walking away for $645 million in profit, in exchange TWA was loading up with $540 million of debt bringing its total debt land to nearly$4 billion.
Loaded up with this new debt TWA continued to struggle, as is often the case with leverage full-page its cash flow was not enough to meet its interest payments and debt continued to spiral out of control. In December of 1989, Icahn sold TWA’s Chicago-London routes to American Airlines.
TWA in the 90s
Then just a month later in January of 1990, he sold 11 jumbo jets to improve the companies cash holdings and try and reduce its debt load. In 1991 he did the unthinkable and sold the remaining valuable London routes to American, including JFK-London. TWA’s international presence was permanently crippled by these sales which would haunt the company for the rest of its days.
All those sales were just delaying the inevitable, bankruptcy loomed in the airlines future, and though most of 1991 was spent trying to avoid it the explosion of debt created in 1998 was too much for the airline to handle. In February of 1991 the airline missed its first payment to creditors, and by July of ’91 creditors were ready to call their collateral, effectively shutting down the airline. With the headwinds of the Gulf War and the corresponding rising fuel costs, the airline was crumbling.
On February 1, 1992, TWA declared bankruptcy Bondholders agreed to exchange $1 billion in debt for Icahn’s shares, leaving T.W.A with $700 million in cash and significantly reduced interest rates. At the time Icahn said: “I’ve lost TWA It has been the worst investment I’ve made in the last decade.” In January of 1993 Icahn officially stepped down as Chairman and C.E.O., though critically TWA still owed him $193 million.
In August of 1993 TWA won approval to emerge from 18 months of bankruptcy with a new chairman: William R. Howard. Unfortunately for the airline all the excellent morale and positive energy could only go so far, and TWA still struggled with structural issues. In January of 1994, Howard was ousted for a new chairman. Then in August of 1994 TWA had to lay off 3,000 workers, followed in October with the airline announcing yet another debt restriction plan. By November there was talk of another TWA bankruptcy. How two years after emerging from bankruptcy was TWA heading toward another one? Poor management and a perpetual reluctance to replace their aging aircraft.
Robert A. Peiser, TWA’s CFO at the time explained “The companies business plan was overly aggressive, and management, for whatever reasons, was not functioning properly.”
At the end of 1994, TWA’s average fleet age was 19.2 years, the highest of the major carriers and it only had $111 million cash on hand against $1.8 billion in debt, a precarious position to be in.
In June of 1995 TWA went bankrupt again. This bankruptcy was “prepackaged” as with creditors forgiving another $500 million in debt in exchange for stock lifting their stake in the company to 70% from 55% with TWA employees seeing their shares diluted to 30% of the company. On August 12, 1995 it emerged from bankruptcy but the airline still wasn’t done with Carl Icahn.
The Karabu Ticket Agreement
After it’s 1992 bankruptcy, TWA still owed Icahn $190 million and had no way to pay him. To clear the debt, they allowed Icahn to purchase tickets from TWA at 45% off and sell them at a discount for eight years. At the time they put the considerable restriction on the sales, banning Icahn from using travel agents to sell them. Critically, however, the agreement didn’t mention anything about the Internet and Icahn launched lowestfare.com selling TWA tickets lower than the airline itself causing yet another race to the bottom as the airline competed against itself.
TWA Flight 800
Even with the Karabu ticket deal hurting TWA they were beginning to turn around, after emerging from the 1995 bankruptcy, in fact, they had just announced that profits had since a 5x growth that year when the very same day, TWA flight 800 to Paris exploded. After the explosion, TWA ousted it’s then C.E.O. Jeffery Erickson and replaced him with William F. Compton. Compton then immediately placed an order for 125 planes. That was an impressive gamble which reduced the airlines average fleet age to from nearly 20 years to just over 16, still over the industry average of 13 but TWA was no longer operating the oldest fleet. It also improved TWA’s fuel efficiency and dramatically improved TWA’s on-time performance. In 1999 TWA even had a Super Bowl ad touting it adding one new plan to its fleet every ten days.
From an outside perspective TWA looked like it might make it in the 21st century.
TWA in the 21st Century
Sadly for TWA the issues that had been hounding it since 1978 came with it into the new millennium. Having a single hub in St. Louis and a weak international presence severely hampered their route choices. The new plans they so proudly touted where purchased with odious credit terms which rapidly added debt to the airline and of course, the Karabu agreement with Icahn was draining its funds as it competed against heavily discounted tickets. By the end of 2000 it was clear the airline could not survive, and on January 9, 2001, it was announced that American would purchase TWA in what was then the biggest airline merger in history.
The airline wound down throughout 2001, including a third and final bankruptcy. On December 1, 2001, TWA made its last flight scheduled from St. Louis to Las Vegas, as well as a ceremonial flight from Kansas City to St. Louis. At 10 PM CST all TWA signage was taken down and replaced with American signage, and at midnight of 12/2, after 76 years, TWA ceased to exist.
Whatever happened to Trans World Corporation, TWA’s ordinal parent company that spun it off? It was purchased in a hostile takeover in 1989, and then in 1992, it was renamed The Flagstar Companies, predeceasing its airline by almost ten years.
So that was a tremendously detailed look at the decline and fall of TWA, ultimately thought what killed it? I would argue the explosion of debt pushed on it by Icahn when he took it private in 1988. Like many leveraged buyouts the interest rate on the debt took so much of its cash flow to pay it down it could never adjust to the new market realities of air flight after deregulation and despite its best efforts, TWA was never able to shake that debt and thrive.
