AMR''s debt-laden purchase of TWA


Sep 6, 2002
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AMR''s debt-laden purchase of TWA could prove less of a hindrance in time


By: ERIC TORBENSON / The Dallas Morning News

When AMR Corp. bought the remnants of Trans World Airlines Inc., no one could have predicted that the deal would become the scapegoat for AMR''s financial woes.

The $742 million acquisition announced in January 2001 was perceived as a masterstroke.

Thirty-two months and a maelstrom of industry woes later, it''s been called a colossal blunder by critics such as Steven Baumert, an American Airlines Inc. flight attendant who tracks the carrier''s parent company and publishes a monthly AMR report.

And analysts such as Sam Buttrick at UBS said AMR wouldn''t have gotten into its mess had it stayed away from TWA, which others said was doomed anyway.

If American wanted the best of all worlds, they could have just closed their eyes to it and TWA would have gone away by itself, said Tom Parsons, head of, an online ticket discounter and magazine. They should have just let it die.

But time may reveal a less punitive view on the AMR-TWA deal.

In buying TWA, AMR eliminated a competitor that was practically giving away tickets to stay in the air. It also gave the Fort Worth-based company relatively new planes, a bundle of landing slots at key airports, a hub in St. Louis and a valuable chunk of one of the top computer reservations systems.

What sticks out today, especially in light of AMR''s near-bankruptcy in April
, is the price: $742 million that AMR could have used to shore up its cash balance.

The deal also saddled AMR with more than $3 billion in fresh debt, now part of a $20 billion debt load AMR is struggling to service.

In the last two years, AMR has shed, parked or disposed of many TWA assets. And it announced in mid-July that it would slash TWA''s former hub in St. Louis in half. Observers say they won''t be surprised if the St. Louis cuts go even deeper.

But AMR also collected $219 million in July by selling TWA''s stake in the Worldspan computer reservation system.

American will carry its TWA scars for years, but some aviation consultants say the carrier will also reap dividends down the road.

The deal also made AMR the world''s largest airline company, a title it will keep despite the latest cuts, and that''s a good market position to hold as the economy continues its modest recovery.

I think you have to look at it now as AMR getting some quality assets without much personnel expense with them, said Stuart Klaskin, head of an aviation consulting firm based in Coral Gables, Fla., and a former TWA consultant. It''s creating zero constraint on American''s operations going forward. It was a deal that was done well and ultimately is going to bear fruit for the airline.

A different world

The AMR-TWA negotiations began informally in the fall of 2000, a time that from today''s vantage point seems almost make-believe.

Nearly all U.S. carriers – though not TWA – were enjoying record operating profits. The majors also had pricing power, meaning they could raise fares to boost profits without dimming demand. And few corporate travelers blinked an eye at four-figure airfares.

The competitive landscape was also shifting quickly that fall.

United Airlines had an agreement to buy US Airways. Such a deal would have given the Chicago-based carrier a firm grip on more than a quarter of U.S. air travelers and solidified its rank as the world''s biggest carrier.

At the same time, the Internet-fueled economy was packing airports and crowding the skies with flights. The resulting delays at American''s biggest hubs
– Chicago''s O''Hare International Airport and Dallas/Fort Worth International Airport – were costly.

Needing to both counter the possible United-US Airways merger and relieve traffic pressure at O''Hare and D/FW, American saw TWA and its St. Louis hub as tempting targets.

No one doubted that TWA, once a global ambassador of American aviation, was just months from filing for a third bankruptcy, from which it would probably never emerge. The other carriers were banking profits, but TWA struggled to pay its bills. The carrier had just $100 million in spare cash as 2000 ended.

From the perspective of the industry looking for solutions to the delay problem, and because airlines could extract a premium from passengers at the time, the deal made some sense, said Robert Mann, an airline consultant who has worked with American''s pilots union. I don''t know if it made enough sense, but I''m sure there''s an analysis over there at AMR that showed it did.

Standing by the deal

AMR executives stand by the deal, considering the circumstances at the time.

There were some fantastic reasons why we did this, said Dan Garton, American''s executive vice president for marketing.

No one, he said, could have forecast what would happen to the nation and the industry before the year was out.

Former AMR chairman and chief executive Donald Carty, the deal''s architect, said he would not have pursued TWA if he had had a crystal ball.

We not only would not have bought TWA, we would not have bought some airplanes we have bought over the last decade, Mr. Carty said in a question-and-answer session with employees based in Tulsa, Okla., in March, about a month before he was forced out during AMR''s bankruptcy crisis.

Still, Mr. Carty blamed the economic downturn, not TWA, for his company''s woes. In fact, he said, the extra planes and facilities AMR inherited from TWA made it easier to adjust American''s schedule to fit the changes brought on by recession and 9-11.

Mr. Garton agrees.

It gave us the flexibility to pick and choose where we were going to optimize, he said Friday. It also gave us some very valuable slots at constrained airports we wanted to serve.

The keepers

Other TWA assets that AMR is keeping include:

• 103 MD-80s and 27 Boeing 757s, many of them relatively new.

• Landing and takeoff slots at key airports. AMR acquired TWA slots at Washington''s Reagan National Airport, Chicago''s O''Hare International Airport, and New York''s JFK International Airport and LaGuardia International Airport.

Without those slots, AMR couldn''t have increased its service to Reagan National or LaGuardia, the company said.

Strategically, those slots have great value, said Mr. Mann.

• Gate leases and hangars at St. Louis Lambert International Airport. Some of those facilities will be sold off as the hub shrinks. American will keep 19 of its original 50 gates at St. Louis.

• Several thousand veteran employees. Of the original 20,500 TWA employees
, about 7,500 remain with AMR. An additional 2,200 employees – most from TWA – will be cut as the St. Louis hub shrinks this fall.

The TWA deal also gives American a larger customer base than we did before,
Mr. Garton said. It also added cities to American''s route network and increased the number of flights it offers every day.

Both of those benefits are popular with business travelers, American''s best customers, who will determine how quickly the carrier''s fortunes improve. American is betting that it can give them options that the fast-growing, low-fare airlines can''t.

American doesn''t want to play around on the low end of the yield curve, said Mr. Klaskin. I don''t think you''ll ever be able to get on JetBlue and fly from Dubuque, Iowa, to Paris. You can do that on American, and there''s going to be a number of people who are going to want to fly on those markets.

The critics'' view

But buying TWA created no shortage of critics as the industry changed.

And some suspect AMR''s corporate ego overwhelmed its business sense, especially where archrival United Airlines was concerned.

It was a retaliation deal for American, Michael E. Levine, a former airline executive who now teaches at Yale, said in an April interview.

United, through mergers, had taken American''s mantle as the world''s top carrier in 1961, and American had spent the last 40 years trying to catch up, he said.

American leapfrogged United with the TWA deal, and its No. 1 position was secured in July 2001 when regulators nixed United''s push to buy US Airways.

American now has 21 percent of all U.S. passenger traffic, compared with 18 percent for United, and is the world''s top airline when it comes to revenue.

The AMR-TWA merger was relatively smooth, but there were other troubles almost right away.

Even as negotiators for the two carriers hammered out details in the winter of 2001, the economy began to show signs of illness.

By the time AMR sealed the agreement in April, the recession was wrapping its fingers around the aviation industry''s throat. Suddenly, free-spending corporations were balking at paying those high-dollar airfares.

A fare boost?

The deal was supposed to be healthy for the industry as a whole because it eliminated TWA, the industry''s bottom feeder in terms of ticket pricing.

TWA carried only about 6.5 percent of all domestic passengers, but its impact on the average ticket price was substantial.

It was selling round-trip transcontinental tickets for as little as $198 and was heavily discounting its flights to Europe, where bigger carriers such as American counted on higher average fares. But American, United and other carriers were forced to match those prices.

TWA''s finances were hamstrung by a ticket pricing agreement hammered out with its former owner, Carl Icahn, during the airline''s 1995 bankruptcy.

The arrangement, called Karabu, gave Mr. Icahn access to tens of thousands of dirt-cheap TWA tickets to sell through an online site called

For ticket wholesalers such as Mr. Parsons, the deals got even better.

I would be able to sell those $198 fares for up to 45 percent off, he said
. It was incredible. But TWA was only getting $138 or so for the ticket I sold, and it really hurt them.

TWA''s low-ball pricing was spreading like a pox, said Mr. Klaskin, the consultant.

AMR could have let TWA perish, but there was the possibility that a white knight would buy the assets and continue to sell cheap fares.

One of the advantages here for AMR was the ability to deny the assets and opportunities to someone else, Mr. Klaskin said. Your nightmare scenario for American is that TWA gets carved up and the assets are still out there flying or perhaps being used by competitors.

Industry benefits

In the end, the industry as a whole, rather than AMR specifically, may reap the biggest benefits from the TWA deal.

It eliminated the weakest carrier at a time when – in mid- recession and post 9-11 – the industry badly needed to reduce the number of planes in the air.

Had TWA survived or been reborn as a different carrier, the industry might be flush with hundreds flights than it couldn''t support.

The industry''s history is replete with examples of airlines that bought competitors simply to shut them down. American itself followed that model to some degree with its 1998 acquisition of Reno Air and its 1987 deal to buy AirCal, said Mr. Mann.

When the competitor is an low-fare annoyance, the best strategy is to extinguish it, he said.

American''s Mr. Garton said he can''t predict how others will perceive the deal as the industry recovers. And he doesn''t want to try.

I don''t want to be an armchair quarterback, he said. Given the conditions that existed, it made a lot of sense. Conditions changed dramatically, and what their final conclusion will be, I''d rather not guess.

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