Gremlin on the Wing

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

But what Icahn doesn't say is that the Karabu deal with TWA isn't the same as the airline's deals with other consolidators. Darryl Jenkins, director of the Aviation Institute at George Washington University and a longtime TWA watcher, says that because Karabu can buy an unlimited number of TWA tickets during the life of the agreement, inventory control is effectively removed from TWA's hands, intensifying pressure on the airline.

And though Lowestfare.com's discounts are putting a dent in TWA's revenues, they're doing nothing to benefit air travelers who fly out of the airline's hub at Lambert. As a result, a customer can book a round-trip flight on Lowestfare.com, say, from Chicago O'Hare to London with a stop in St. Louis, for $127.13 less than it costs to fly from St. Louis to London on the same flight.

The Karabu agreement keeps the company from offering discounts on any TWA flights originating here -- an exclusion Icahn says the airline wanted.

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.

TWA is one of 15 carriers that serves Lambert, but the airline and its regional commuter affiliate, TW Express, operate about 500 of the approximately 700 flights that depart each day. TWA now accounts for about 73 percent of passenger boardings in St. Louis. The next-biggest airline at Lambert is discount carrier Southwest Airlines, which accounts for only about 11 percent of total boardings. Rather than shrinking here, TWA's dominance in -- and dependence on -- the St. Louis market has grown in recent years.

Likewise, St. Louis -- especially its business and political community -- leans heavily on the hometown carrier, which provides thousands of jobs and dozens of nonstop flights daily. To help the airline emerge from bankruptcy protection in 1993, then-St. Louis Mayor Freeman Bosley Jr. negotiated a deal agreeing to buy TWA's gates and other facilities at the city-owned airport for $64.7 million and forgiving $5.3 million of TWA's debts to the city. And Civic Progress, the group of corporate heavy hitters, agreed to buy 110,000 tickets, an infusion of cash valued at $22 million-$66 million. TWA, in turn, agreed to move its reservation operations into the city limits (it was previously located out in St. Louis County). All in all, TWA brought another 1,400 jobs to downtown.

Bosley's successor, Mayor Clarence Harmon, has also gone to bat for the airline. Last year, when unions threatened to strike, Harmon publicly urged workers to settle. This year, Harmon has taken credit for pushing a lease renewal that kept TWA's corporate headquarters in the One City Centre building downtown. And Harmon has stood foursquare behind the airport's ambitious $2.6 billion expansion, a controversial project that he describes as essential for TWA's operations. "I believe it will turn their bottom line from red to black," Harmon tells the RFT.

St. Louis has been TWA's hub city for 14 years. The airline has become an integral ingredient in the city's development. From its sponsorship of the Trans World Dome to the 9,000 jobs it accounts for locally, TWA is a fundamental component of the St. Louis economy. Regional Chamber and Growth Association senior vice president Jim Farrell says that St. Louisans, who benefit from the availability of dozens of nonstop direct flights, must do whatever it takes to ensure the airline's success.

But St. Louisans, as well as TWA employees, have had to watch helplessly from the sidelines as TWA management has consistently disappointed.

The latest bad news came Jan. 31 with the release of TWA's fourth-quarter and year-end earnings. The airline, which has not had a profitable year since 1988, reported a whopping quarterly net loss of $271.9 million, including special charges, and a total net loss of $353.4 million for all of 1999. The losses unnerved investors -- the company's already weak stock hit a 52-week low after earnings were released. Share prices have drifted even lower in recent weeks.

"The '90s came and went and TWA never turned a profit," says Sam Buttrick, the New Jersey-based PaineWebber analyst. "The last five years have been the most profitable for airlines in modern aviation history, and industry profits are now under pressure as jet-fuel prices surge; if you didn't make money when jet-fuel prices were low, it's difficult to see how you'll make money when jet-fuel prices are much higher."

Buttrick says PaineWebber is forecasting continued and significant losses for TWA in 2000. And though he doesn't blame TWA officials for high oil prices, Buttrick says TWA has been much less effective in hedging its jet-fuel costs than most other carriers. As a result, TWA is feeling the pain of higher jet-fuel prices.

But notwithstanding high fuel costs, to which no airline is immune, why is TWA losing so much money?

"The simple mathematical answer is because their costs are too high and their revenues are too low," Buttrick says. "TWA ended the 1990s 35 percent smaller than it was going into the decade. It's very difficult for any airline to reduce its costs per seat while it's shrinking.

"On the revenue side, while TWA has a classic fortress hub and dominant position in the St. Louis market, many of the top short- to medium-haul markets are priced at Southwest Airlines levels, so they have above-average discount-carrier presence in their hub." If Southwest didn't serve St. Louis, TWA could charge higher ticket prices to fly those routes. St. Louis suffers as a consequence because, compared with other hubs, the yield here is very low.

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