Hi everyone. The following article is by Darryl Jenkins, the Director of the Aviation Institute at George Washington University, Washington, D.C. He writes about Icahn's destructive behavior toward TWA.
Commentary: Don't put Icahn in the pilot's seat
by Darryl Jenkins
WASHINGTON, D.C. - The 15-year wound from Carl Icahn's cash-draining stab at Trans World Airlines has finally brought the once-proud airline to its knees. Down to its last few dollars, TWA declared bankruptcy and proposed to sell its remaining assets to American Airlines. This reluctant and considerate move will, if successful, preserve thousands of jobs and critical air service. Icahn, the craftiest of all corporate raiders and still a significant TWA creditor, however, wants to go out with TWA the same way he came in: by depriving the airline, its customers and its employees a future of stability and success.
Icahn is maneuvering in the courts to block American Airlines' bid to buy TWA and its assets, proposing a plan of his own to purchase the airline. His bid, a combination of financial smoke and mirrors cobbled together after American's initial offer, would stymie the only real hope TWA employees have for employment security. It is ironic that the guy who got TWA into this mess is asking for permission to control its future.
TWA's "Icahn problem" began in 1985. When Icahn took over TWA, some saw him as a white knight financier trying to restore the sagging airline to financial and operational health. In 1988, Icahn took the company private through a leveraged buyout, putting $469 million in his own pocket and loading the company's balance sheet with debt. That was the last year TWA made any money. The leveraged buyout added approximately $1.2 billion in debt to the company. The cash withdrawal by Icahn deprived TWA of working capital needed to grow the airline. The debt, the economic recession of the early 1990s and the spike in fuel prices were the reasons TWA filed for its first Chapter 11.
TWA lost market share to other airlines at the same time that Pan Am and Eastern were closing down. Again, this was caused by Icahn's focus on finance rather than growing the airline. By the early '90s, TWA had the oldest, least cost-efficient fleet in the industry. If Icahn had lived up to his promise to invest in the airline, perhaps TWA would not have ended up in the deep financial pit that led to what appears to be its last bankruptcy filing.
As fuel and interest costs escalated during the early '90s, once-profitable routes were sold to make payments on the Icahn loans. The assets he sold -- access to Heathrow, in particular -- are now some of the most profitable in the industry. Ironically, these assets are now controlled by American Airlines.
During the first TWA Chapter 11 reorganization, Icahn lost control of the company to creditors. But Icahn's departure was not complete. He remained a TWA creditor. As the price of extending repayment of a $180 million debt, Icahn was allowed to purchase TWA tickets at 55 percent of full retail price until 2003. Some reports indicate that Icahn's Karabu Corp. has paid $514 million to buy TWA tickets with a retail price of $925 million. The airline has been unable to recover from Icahn's double whammy: huge debt costs and loss of a significant amount of seat inventory, which strangled its revenue stream.
Despite these and other financial problems, TWA and its employees have rallied in recent years, improving operations and on-time performance. But it wasn't enough. Now Icahn is trying to throw a roadblock into what could be the last hope for TWA's employees and customers by asking the courts to grant financing power to him, not American. A Delaware court approved the American plan to keep TWA operational, but a final hearing on the issue is set for Jan. 27. The judge made the right decision to allow American to provide the financing and the overall structure to improve service to the flying public.
Liquidating and selling off TWA's assets might give Icahn a cent or two more on the dollar, but it makes no sense for TWA employees, for St. Louis or for the other communities the airline serves. American Airlines has put together a sensible, sound proposal with solid financial terms that would serve to shore up TWA's customers, employees and the nation's aviation system.
Giving Icahn the right to bid for TWA would, in effect, turn control of the airline to Icahn once again. It will be sad to lose TWA, but it would be sadder still if Icahn stands in the way of a last, best offer that will preserve jobs and air service and some measure of TWA's great aviation legacy.
Darryl Jenkins is director of the Aviation Institute at George Washington University, Washington