NEW YORK (CNNfn) -
American Airlines parent AMR Corp. unveiled its widely-expected acquisition of Trans World Airlines Inc. Wednesday, agreeing to buy most of the financially troubled airline's assets for about $500 million cash. TWA, one of the oldest carriers in the United States, filed for bankruptcy as part of the arrangement.
The deal, which first surfaced in press reports last Sunday, has already sparked strong opposition from some regulators and consumer groups concerned about rapid industry consolidation and the possibility of higher air fares for consumers.
Separately, AMR (AMR: Research, Estimates) also agreed to acquire certain assets from US Airways for approximately $1.2 billion, and to purchase a 49 percent stake in the newly created DC Air for approximately $82 million.
Those deals, if approved, are designed to ease regulatory concerns that have thus far stalled UAL Corp.'s $4.3 billion planned purchase of US Airways (U: Research, Estimates), and will effectively create two massive airlines in UAL (UAL: Research, Estimates), the parent company of United Airlines, and American, the No. 2 U.S. carrier, that will dominate the U.S. air travel industry.
They also will effectively bring an end to TWA, an airline whose roots date to the 1925 founding of Western Air Express. The carrier catered to popes and movies stars, once ruled skies around the world with Pan Am, and held the world in rapt attention during a 1985 hijacking and the 1996 crash of a flight from New York to Paris.
But some politicians and consumer groups are already lining up to oppose the deals in Washington, D.C., where Congress and federal antitrust regulators will closely scrutinize the proposals.
"Losing competitors in this highly-concentrated industry is disastrous," said Mark Cooper, research director for the Consumer Federation of America, one of several consumer groups already on record opposing the transactions.
"We've gotten to the point where the number of national carriers is so small, it's impossible to have competition," he said.
The expected opposition to the agreements announced Wednesday helped push shares of AMR down for the third consecutive day Wednesday. In late morning trading, AMR shares lost 13 cents to $38.81. However, renewed optimism about the United/US Airways union helped push US Airways up $2.31 to $45 while UAL shares stood unchanged $42.
Still, AMR Chairman and CEO Donald Carty Wednesday expressed few concerns about the expected opposition to the deals, stressing that he believes competition in the airline industry will remain vigorous even after the transactions are completed. He said if the review and bankruptcy approval processes run smoothly, the transactions could be completed by late April.
"This is an enormously competitive business, including intense competition between American and United," Carty told CNNfn. "What these deals this week represent, however, is an attempt to deal with that issue. By United divesting themselves of some of the assets that are of concern to the Justice Department and other regulators, I think they've gone a long way to curing the kinds of concerns that [have been] raised.
"The TWA transaction is quite different. TWA is one way or another going to disappear as a corporate entity. So what we're doing by acquiring TWA is simply preserving 21,000 jobs and a very important and vital hub operation in St. Louis."
Indeed, the TWA transaction will provide American with a critical new hub in St. Louis, significantly bolstering its position as an east/west carrier.
"I think they looked at this in terms of making a response to the United/US Airways deal," said Robert Milmore, airline analyst with Arnold and S. Bleichroeder. "I think they deserve credit for creativity announcing this."
Terms of the transaction call for AMR to pay approximately $500 million for about 190 TWA aircraft, 175 gates, and 173 slots across the country. TWA, the No. 8 carrier in the United States, operates some 800 daily flights.
AMR also has agreed to provide TWA with $200 million of debtor in possession financing, which is subject to approval from the bankruptcy court.
This marks the third time cash-strapped TWA has filed for bankruptcy protection. American, the second-biggest U.S. carrier after United Airlines, said it will offer jobs to nearly all of TWA's 20,000 employees.
Still, some analysts believed that by going through bankruptcy court, which allows AMR to obtain more favorable financing on the company's outstanding loans and debt, the possibility exists that TWA assets could be poached by other carriers.
"If another bidder comes in the stakes could be raised on TWA to where AMR doesn't think it's worth it," Milmore said.
But Carty countered that while that risk existed, he believed TWA's creditors would find AMR's proposal more than fair. (646K WAV) (646K AIF)
Carty said in a conference call AMR has the right to match or make the last offer on any competing bid. That provision must be approved by a bankruptcy court, but Carty said the provision must be in position for the deal to go through.
A strong presence in Washington
The deal with United calls for AMR to buy up to 86 aircraft and 36 airport slots from UAL, as well as assuming approximately $300 million in aircraft leases. The assets were to be part of UAL's planned purchase of US Airways (U: Research, Estimates), which also has caused concern among regulators.
American will get slots in key airports such as New York's La Guardia, Boston's Logan and Washington's Reagan National and boost its already strong position at New York's John F. Kennedy.
The agreement with DC Air, a new airline led by Black Entertainment Television Chairman Robert Johnson, includes an exclusive marketing agreement that will permit DC Air passengers to participate in American's frequently flyer program.
The deals, if completed, would give United and American each about a quarter of the domestic airline market. American would grow by about 20 percent, greatly increasing its presence in busy East Coast cities including New York and Washington.
"This is both a sad and exciting day for TWA," TWA chief executive Bill Compton said. "It is sad because we are starting a process that will culminate in the retirement of the oldest and proudest name in the U.S. airline industry. I am, however, heartened by the fact that we have been able to work out a solution with American that we believe to be the best possible outcome for our creditors."
TWA lost $115 million in the first three quarters of 2000 after losing $353 million in 1999, making it the only major airline not to show a profit last year.
Bush administration to take lenient stance?
The Clinton administration has resisted airline mergers in recent years. Although the incoming Bush administration is expected to take a somewhat more lenient stance, many still expect a stiff fight for the latest deal on Capitol Hill.
"I don't prejudge this administration," Cooper said. "I don't assume they are going to be worse [about protecting consumer interests]. If we can convince Republicans to be pro-competitive, then we can make some real progress here."
Cooper said if the transactions announced Wednesday are ultimately permitted to go through, he believed Congress would once again need to consider bringing the airline industry back under a government-related structure to keep consumer fares and satisfaction at reasonable levels.
"The answer they have given us is competition cannot protect the public," he said. "So we believe that Congress should propose new rules that protect the public. If they are going to have a managed cartel, then the public interest should be at the table and right now, they are not."
Travels agent groups likewise expressed their concerns Wednesday. The American Society of Travel Agents Wednesday called American's purchase of TWA the latest example of what it says is "unchecked airline arrogance."
The trade association says the deal is bad for consumers. The ASTA said with less competition in the airline industry there will be higher prices, decreased customer service and the likelihood of serious service disruptions.
But Carty said at a press conference competition would remain stiff, the widening of networks will result in more consumer choices, and price competition in the business will always be strong.
"You may have fewer total number of airlines, but you have airlines who are more competitive because they are covering a network over the entire country," Carty said.
One bright spot for the airlines so far is that TWA and American Airlines labor unions appear at least initially comfortable with the transactions.
Robert Roach, general vice president of the International Association of Machinists, which represents 16,000 TWA employees, said management informed him American will protect the jobs of substantially all of TWA's employees.
However, a spokesman for the Allied Pilots Association, which represents American pilots, said the company has yet to contact that union's management to provide any information about the deal.
"Labor is always a big issues and the pilots union is one of the toughest unions to integrate," Milmore said. "There's a lot of moving pieces and a lot of questions in this deal."