Airlines: Struggling to Stay Aloft

By Janice Castro

TWA owner Carl Icahn may not know much about running an airline, but then, many of those who did have gone out of business during the past few tumultuous years. Unlike most of them, Icahn is a crafty dealmaker. Last week, cornered by bondholders who threatened to push his troubled airline into involuntary bankruptcy, he struck an agreement that may save it. Before the deal can fly, though, it must pass inspection by both the Securities and Exchange Commission and a bankruptcy court. Even then, TWA will face a steep climb against extremely powerful competition. Admits the blunt-spoken financier: "This is not an investment for a widow. How it will fall out, I don't know. But I think that we have a good shot."

The key to Icahn's strategy is a so-called prepackaged Chapter 11 agreement under which TWA will shed almost half its $2.4 billion in debts and emerge from its reorganization with $400 million in operating cash. Similar to the arrangement that Donald Trump fashioned with his bankers earlier this summer, such a deal eliminates much of the uncertainty that managers face when they surrender control of a tattered enterprise to a bankruptcy judge. Instead, the owner and creditors present the judge with a solution acceptable to all. If the complex TWA agreement is approved, the carrier may swoop in and out of Chapter 11 in a couple of months, escaping the kind of cloud that now hangs over Pan Am, Continental, America West and Midway as they endure lengthier bankruptcy proceedings. Says Icahn: "A free-fall Chapter 11 kills your revenues. The way we're doing it, TWA will survive."

Maybe so. Icahn won't do badly either. Even though owners of TWA's common stock would get nothing under the proposed deal, Icahn, who owns 90% of the stock, will benefit. Another portion of the agreement gives most of the stock in the restructured firm to owners of TWA's mostly worthless bonds. As the airline's largest bondholder, Icahn will receive a 20% stake in the company. He has agreed to pay $35 million for bonds and stock worth an additional 25%. All in all, Icahn has managed an impressive financing feat, maintaining control and getting 45% of a healthier company for a pittance.

While TWA will emerge with a cleaner balance sheet, it is still stuck with a frayed route structure and one of the oldest fleets in the world (80% of its jets are more than 10 years old, vs. 35% for industry leader American). Says Edward Starkman, who follows the airline industry for PaineWebber: "TWA is one of the great weaklings of the business. The capital required to turn this company around would make your head spin: tens of billions of dollars in new planes alone."

Icahn dismisses such criticism. One reason so many of his competitors have gone under, he argues, is the very fact that they invested too heavily in new planes. Says he: "Most of these airline guys, if they're feeling down one day, if they're sick, you know what they do? They buy a plane. It's like an alcoholic buys a drink. Today you have a glut of planes." Icahn insists he can spruce up his fleet by leasing planes at bargain-basement prices.

Having tentatively stabilized TWA's finances, Icahn is bidding against industry giants Delta and United for choice Pan Am routes to Europe. He may have help from American, which does not want its large rivals to capture those assets. TWA could finance the deal by selling some of the routes to American and keep some to bolster its own strength. Icahn has always insisted that an executive with his own money on the line makes a better manager. Now he's got to prove it.

With reporting by Jerome Cramer/Washington and Michael Quinn/New York