Gremlin on the Wing

Why TWA keeps losing money and how Carl Icahn keeps cashing in at the airline's expense

In March 1999, Icahn, wanting to raise money and expand the company, filed to take Lowestfare.com public. TWA would have none of it. On April 30, 1999, TWA sent Lowestfare.com a notice saying that the company was in default under the ticket agreement and that TWA would sue if Lowestfare went public. Lowestfare.com filed a lawsuit in Las Vegas against TWA three days later, accusing the airline of interfering with its plans to go public. That suit is pending and the public offering has been delayed.

Airline consolidators like Lowestfare.com work with published fares bought from the airline and resold cheaply to the public. Consolidators agree to prepurchase an agreed-upon number of tickets. They receive a really low fare for these tickets because they pay the airline regardless of whether they're able to resell the tickets. The upside for the airline is that it gets a guaranteed payment whether the consolidators sell the tickets or not. Whether this helps or hurts the airline depends on the economy.

If the economy is way up, as it is now, the airline has made a mistake in using consolidators because the airline has basically sold its tickets cheaper to the consolidators than if it had peddled them on the open market. In a down market, when the airline has presold its tickets to consolidators, some of the burden of filling the seats is taken off its hands. Whether or not the consolidators can sell the tickets is a moot point: The airline has already received money for these seats.

TWA's domestic hub is based at Lambert International Airport in St. Louis.
Jennifer Silverberg
TWA's domestic hub is based at Lambert International Airport in St. Louis.

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Thanks to the strong economy, which has spurred an increase in air travel, airlines have been enjoying higher "load factors" -- in other words, they're flying with fewer empty seats. So consolidators haven't been as helpful, especially for an airline like TWA, which these days is flying smaller planes and running a leaner operation.

"Part of the problem is, these consolidators are not helping TWA as much as they were in the early '90s, because everybody has load factors that are so high that they run the risk of turning away higher-yield traffic," says industry analyst Barbara Beyer, president of Avmark, an aviation-consulting firm in Arlington, Va. "If load factor is the problem, that is not driven by consolidator tickets, because it wouldn't matter what the load factor was; they would still have paid for the seats. Where TWA does have a problem and what they're actually trying to express, even though they're probably not doing it in the right terms, is the question of average yield. TWA's load factors internationally for the first six months of 1999 were averaging 82.8 percent. That's unbelievably high. And their load factors domestically were averaging 77.1 percent, so I think the question now becomes what their yield is." In short, TWA's problem isn't the number of passengers it's flying, it's the amount of money the airline is making from them.

As a rule, deals with consolidators are a good thing, says Brian Simpson, an aviation analyst with the Boyd Group in Denver. "What they do is, they fill seats that would otherwise go empty at prices that the market will bear. Where it becomes a liability is when the airline itself doesn't have control over the inventory that it allows to be sold.... If they're having to sell seats that could otherwise be sold at twice or three or four times the fare at a rock-bottom discount fare, then that's basically a dilution of yield, and that can be disastrous."

That's clearly what's happening with Lowestfare.com, Simpson adds. "I do know that Carl Icahn's deal has put enough downward pressure on TWA's yields that it has a substantial impact on their earnings," Simpson says.

The airline's most recent quarterly report, which showed deep losses, appears to support Simpson's view. TWA said "yield per revenue passenger miles," a key measure of airline performance, slipped almost 6 percent in the fourth quarter of 1999 compared with the year-earlier period.

Icahn agrees he's having an impact on TWA, but he contends it's a positive one.

"What's better -- having a slightly better yield with many less passengers or having $200 million?" Icahn asks. "For the most part, the seats we are selling are empty seats."

According to Icahn, he is putting passengers on TWA flights that would otherwise not be there. Most of the revenue Lowestfare.com brings in, he says, comes from passengers who would not fly TWA because of a St. Louis layover. "If TWA wants to blame us, then why do they go out and make similar deals with other consolidators?" Icahn asks. "For the most part, the $200 million or so that we bring in to TWA's bottom line is extremely important to TWA; it's money they would not have. For the most part, these passengers would not be flying TWA if it weren't for us. The guy in Minneapolis going Minneapolis-St. Louis-New York would be going Minneapolis-New York direct (on Northwest Airlines) if I didn't give him a rate off."

Icahn may be right. It's tough to say where cash-strapped TWA would be if it didn't have Icahn's $200 million. At this point, they are in such dire need of money that currency of any kind should take precedence over passenger loading.

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