TWA Agrees to American Airlines Buyout

Jan. 10, 2001 -- The oldest name in passenger flight will soon disappear, as American Airlines has confirmed reports it will pay $500 million to acquire most of the assests of Trans World Airlines.

The complex deal, which also includes American agreeing to take over part of US Airways, will leave American with nearly a 25 percent market share of the airline industry.

Under the multipart agreement announced today, TWA's board of directors has approved a plan to file for Chapter 11 bankruptcy protection and will sell most of its assets to American, a subsidiary of AMR Corp., for $300 million in cash.

American will also assume responsibility for TWA's plane leases and will also provide $200 million in immediate financing for the St. Louis-based airline.

"We've agreed to purchase substantially all the assets of Trans World airlines for approximately $500 million and the assumption of aircraft operating leases," American Airlines CEO Donald Carty said at a press conference today in New York.

"And we have included in the transaction up to 190 airplanes, 175 gates and 173 slots."

American to Grow by 20 Percent

In a concurrent move, American is acquiring certain US Airways assets for $1.2 billion in cash and the assumption of $300 million in aircraft leases. It will also pay $82 million for 49 percent of startup DC Air, which will fly out of Reagan National Airport in Washington.

The latter portions of the deal are contingent on federal regulators approving United parent UAL's $4.3 billion proposal to purchase US Airways. Antitrust regulators have pressed United, the largest carrier in the world, to sell off some of its operations before they approve its purchase of US Airways, the nation's No. 6 carrier.

If everything is approved, it would leave the Chicago-based United and American, the nation's No. 2 carrier, head and shoulders above the rest of the U.S. airline industry, each with roughly 25 percent of the U.S. market. They are currently slightly larger than No. 3 Delta, which has 15 percent, according to industry figures.

American would add TWA's hub in St. Louis to its hubs in Dallas-Fort Worth and Chicago and greatly increase its presence in busy East Coast cities including New York and Washington.

"The agreement will protect air service in St. Louis and maintain St. Louis's role as a major transportation center," TWA said in a statement. "The agreement also calls for American to offer employment to almost all of TWA's 20,000 employees."

TWA to Disappear

The deal would bring an end to TWA, which traces its roots to the 1925 founding of Western Air Express, 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.

TWA, the nation's eighth-largest carrier, has failed to turn a profit since 1988 and has filed for bankruptcy twice before. It's possible that had fuel prices not almost doubled last year, the airline might have finally made money.

Instead, TWA lost $115.1 million through the first three quarters of 2000. That comes after 1999, when the carrier's $353 million loss made it the only major airline not to show a profit.

"I'm particularly pleased that our agreement to purchase substantially all of the assets of TWA means that TWA is going to be integrated into American with continued opportunity for TWA employees on a continued hub operation in St. Louis," said Carty.

"The addition of approximately 300 aircraft and 200 gates across the country allows us to achieve a level of growth that would otherwise take our company literally years to achieve."

A Kinght in Flying Armor?

The decision by TWA to seek a white knight in American comes after the airline started the fourth quarter with just $157 million in cash.

AMR Corp. executives said the planned purchase would "modestly" detract from earnings in the first year after closing but add to earnings after that. By 2004 or 2005 earnings will be 23 or 24 percent higher than they would otherwise have been, Tom Horton, chief financial officer of American Airlines parent AMR, said in a conference with analysts.

"I think everybody on our management team is committed" to keeping the initial earnings hit to a minimum, Horton said. The company is assuming the deals close at the end of the first quarter, "which is probably a little aggressive," Horton said.

Consumer groups criticized airline consolidation immediately after news of American's planned deals became public earlier this week, and the American Society of Travel Agents said the result would be higher prices and lower customer service.

But MONEYScope editor Andy Serwer says the airline industry has to act. "Airline fares have not kept pace with inflation since 1978," he said on Good Morning America this morning, "so flying today is actually a better deal than it was over 20 years ago."

"The only really profitable company out there is Southwest and these companies have to do something to improve their businesses," Serwer said.

Analysts and airline industry officials said American's unusually bold moves could prompt more mergers.

"I think the carrier that will be under the most pressure [to expand through acquisition] is Delta," said William Franke, chairman and chief executive of Phoenix-based America West Airlines. "If it does nothing, it'll be significantly smaller than the other two."

Labor Trouble Ahead?

American could face labor trouble digesting the large acquisitions. Pilots held a costly sickout to protest the carrier's purchase of much-smaller Reno Air in 1998.

The airline must integrate TWA and US Airways pilots on American's seniority list, which can threaten the carrier's current pilots. Seniority determines pilots' schedules and whether they fly as captain, co-captain or navigator.

"If you take on an airline the size of TWA or any part of US Airways, there's some shuffling of the seniority list — there are only so many seats on the left side of the cockpit" — the captain's seat, said Jim Philpot, a spokesman for the Allied Pilots Association, which represents American's 10,700 pilots.

Philpot said the pilots wouldn't automatically oppose the TWA and US Airways deals.

"If our corporation can be improved by this acquisition, then it's a good thing," he said.

The Associated Press and Reuters contributed to this report.