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Gremlin on the Wing 

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

Flight 551 is scheduled to leave Boston for St. Louis this morning at 8:25. Aboard the Trans World Airlines MD-80, sitting in coach, are the Jones and Smith families. Their ultimate destination: the sun and sand of Honolulu. It is, after all, nearly springtime, and winter-weary Bostonians need to bask in the tropical Hawaiian sun. After an hourlong layover at Lambert International Airport, the Joneses and the Smiths will board TWA Flight 1, a Boeing 767 that will whisk them from St. Louis to the land of grass skirts, pineapples, black-sand beaches and Don Ho.

But let's forget paradise for a minute -- and instead do a little math. Let's say the Smiths bought their round-trip Boston-to-Honolulu tickets last month from TWA's Web site for $1,050.47 per ticket. And the Joneses purchased their tickets -- for the identical flights -- from, a discount air-travel Internet site, for $645.82 per ticket. So how much did the Smith family save? The answer: $404.65 per ticket.

The Joneses paid almost 40 percent less than the Smiths to sit in the same planes, an unusually good deal. offers similar savings on dozens of other TWA flights. But there's a catch -- not for the Bostonians but for St. Louisans. The deals don't apply to travel originating at Lambert. When the Webster family of Kirkwood, seeking a beach escape, bought their round-trip St. Louis-to-Honolulu tickets last month from TWA's Web site, they paid $882.47 per ticket to sit on the same TWA Flight 1 taken by the Joneses and the Smiths. Of course, the Websters could have logged on to, where the tickets were priced at $882.46 each -- and saved a whole penny per ticket.

In short, for the privilege of living in the St. Louis area, the Websters had to pay $236.65 more per ticket than the Joneses did -- even though they traveled 2,400 fewer miles.

Welcome to the weird world of airline-ticket pricing, discounts, deals and consolidators. Thanks to the Internet, companies like are able to market cheap fares directly to the public, bypassing travel agents and airlines' own reservations centers. They're helping fill airplane seats, but they're also keeping a lid on airline profits. For a struggling airline like TWA, the discount fares represent even more pressure on the bottom line.

But in TWA's case, it's about more than just money. What makes the situation unusual is that behind its deal with stands Carl Icahn, the corporate raider who at one time was celebrated as TWA's savior but is now widely regarded by TWA management, employees and most St. Louisans as the airline's chief nemesis, a veritable gremlin on the wing.

Icahn has been peddling discount TWA fares since 1995 as part of an eight-year deal the airline negotiated with his Karabu Corp. to pay off a $190 million loan. The airline and Icahn have been locked in lawsuits over the terms of the agreement; so far, Icahn has been winning.

There's no love lost between Icahn and the airline -- Icahn privately fumes about TWA's current management; airline executives, off the record, complain bitterly that Icahn is continuing to hurt its operations.

But officially, both sides measure their words carefully.

"TWA makes it a policy not to discuss consolidators or Carl Icahn," says Julia Bishop, TWA manager of media relations. "We just have to be very, very careful about anything we say publicly," adds airline spokesman Jim Brown. TWA instead pointed The Riverfront Times to its corporate filings with the U.S. Securities and Exchange Commission (SEC).

Icahn, for his part, denies that the Karabu deal is hurting TWA; he insists it is actually helping the airline's financial health. "If they didn't have us," he says in a telephone interview from New York, "they would be much, much worse off than they are today."

He's right about one thing -- TWA is hurting. Industry analysts, who have watched as TWA struggled to improve its operations in the 1990s with the help of union concessions, cash infusions from St. Louis corporations and public subsidies, wonder how Icahn's deal could possibly help an airline that has just reported massive losses and seen its stock tumble in recent weeks to new lows. For TWA, the issue becomes even more urgent now, thanks to skyrocketing jet-fuel prices, which have more than doubled in the past year.

Respected aviation analysts such as Sam Buttrick of PaineWebber forecast continuing steep losses for TWA this year.

And many others are even less optimistic.

Cheating corporate death is nothing new for the folks at TWA. If anything, Trans World is one tough airline. It's sought bankruptcy protection twice in the 1990s, and as recently as 1997, many industry analysts predicted -- incorrectly -- that it would be heading back to bankruptcy court a third time.

Once upon a time, TWA was among the nation's elite passenger carriers. The airline, once the nation's biggest and now the eighth-largest, was the first in the industry to offer air-cargo service in the U.S. with a shipment of livestock from St. Louis to Newark in 1931. It was also the first airline to fly coast-to-coast on a route laid out by Charles Lindbergh. Other notable achievements include being the first airline to operate a pressurized all-weather aircraft (the Boeing Stratoliner), the first to brew fresh coffee and offer in-flight movies, the first to fly the Boeing 747 in the U.S. and the first to fly transatlantic using twin-engine jet planes. But in recent history, TWA's image and reputation have been nothing short of turbulent.

In the 1980s, TWA was one big flying complaint. The planes were dirty, aging and rarely punctual, and the airline was showered with complaints from angry passengers. In 1985, TWA became embroiled in a hostile takeover battle with Frank Lorenzo, then CEO of Texas Air Corp. Lorenzo was reviled by airline unions because of his anti-union proclivities, and Icahn rode in like a knight in shining armor. Supported by employees, he began buying TWA shares and took control of the airline in 1986.

In September 1988, Icahn used $1.1 billion in borrowed money to complete a buyout he had begun three years earlier. Not long thereafter, Icahn took the company private. The move took $610 million out of TWA, of which about $469 million went to Icahn, and added nearly $540 million to TWA's debt. What Icahn and others couldn't foresee were the difficulties that lay ahead for the passenger-airline industry.

With Iraq's invasion of Kuwait, oil prices spiked and a recession took hold in the U.S. in 1991. Six major airlines, including the heavily indebted TWA, were forced to seek bankruptcy protection. Three of them -- Pan Am, Midway and Eastern -- didn't survive. TWA did, but Icahn took a beating and was forced out. "I've lost on TWA," Icahn said at a New York press conference in 1992. "They were the worst investment I made in the last decade."

The airline emerged from the first of two bankruptcies in January 1993, leaving it in the hands of creditors and angry employees. Icahn was out as chairman but still on the hook for the airline's pension obligations. He agreed to lend TWA $190 million for working capital to keep the airline flying. Two years later, TWA had to go back to bankruptcy court for protection against creditors. And when the Icahn loan came due in 1995, TWA didn't have the cash. So TWA agreed to give Karabu Corp., an Icahn company, the right to buy (and resell) tickets over a 99-month period.

Under the terms of the "Karabu Ticket Program Agreement," dated June 14, 1995, Icahn could purchase a limited number of "domestic consolidator tickets" -- up to $610 million in total retail value at a 40 percent discount. The number of consolidator tickets Karabu could buy was staggered -- no more than $120 million worth during the first 15 months; then no more than $70 million worth in each year of the contract. Karabu was also allowed to buy an unlimited number of "system tickets" at 55 percent of full retail price throughout the life of the agreement.

In an effort to safeguard its interests, TWA restricted how Karabu could market the discount tickets. According to the agreement, Karabu had to sell the tickets "without any public advertisement or public promotion referring directly or indirectly to TWA in any way." That restriction, TWA figured, would blunt the competitive advantage for Icahn. They figured wrong.

To sell the tickets, Icahn in August 1995 launched Global Discount Travel, which initially sold the TWA discount tickets by way of a toll-free telephone number and through its affiliations with other travel agencies. But the growth of the Internet offered a promising alternative. In October 1996, Global started a Web site, www.Lowestfare. com, as a way to book tickets on TWA. Within two years, the company was putting much of its effort into developing the Web business, and in August 1998, Lowestfare. com Inc. was incorporated with Carl Icahn as chairman and principal shareholder. Global would become a subsidiary of the new privately held "" company.

At first, TWA likely didn't foresee the long-term consequences of the Karabu deal. The agreement restricted how Icahn could sell its tickets, and in 1995, few businesses had gauged the possibilities of e-commerce. But the numbers, according to the airline's filing last month with the SEC, tell the story. Karabu bought TWA tickets with a retail price of $16 million in 1995, $139.7 million in 1996, $236.1 million in 1997, $247.4 million in 1998 and $286 million in 1999. In all, the report shows that since the agreement, Karabu has paid $514 million to buy TWA tickets with a retail price of $925 million.

Although Karabu passes along much of the savings to customers, it's still a profitable undertaking. According to its SEC filing in March 1999, generated 98 percent of its revenues from the sale of TWA tickets. And it made gross profits of $141.5 million -- roughly 25 percent of revenues -- from 1996-98.

TWA has tried to put a stop to the hemorrhaging, without success. Less than a year after the agreement was signed, the airline filed a suit in St. Louis County Circuit Court alleging that Icahn violated conditions of the deal by selling tickets directly to the general public and through travel agents. But in May 1998, a judge found in Icahn's favor, saying that TWA's legal arguments just didn't add up. TWA, Judge Kenneth M. Romines ruled, failed "to acknowledge that monies generated by Global (now sales have paid down TWA promissory notes.... In sum, TWA has not proved a breach of the "Ticket Agreement.'" The airline is appealing the decision and has warned investors in its SEC filings that the ruling, unless overturned, could have a significant "adverse effect on revenue."

In March 1999, Icahn, wanting to raise money and expand the company, filed to take public. TWA would have none of it. On April 30, 1999, TWA sent a notice saying that the company was in default under the ticket agreement and that TWA would sue if Lowestfare went public. 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 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.

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, 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 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.

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'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, 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 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.

Southwest's presence here, combined with TWA's less extensive domestic network and its lack of significant alliances with international airlines, limits TWA's revenue potential, Buttrick says.

And there's another issue, adds Jenkins of the Aviation Institute. If St. Louis lost TWA, it would be unlikely to entice another airline to operate a hub here, he says.

"For one, I don't think anybody will come and take over St. Louis as a hub," Jenkins says. "The workforce is kind of disgruntled. Take American Airlines, for example: Those who have taken over workforces from bankrupt airlines -- it's never been pleasant. Nobody wants to take over their problems."

Of course, "disgruntled" may be an understatement. The Air Line Pilots Association (ALPA) is frustrated with TWA's current financial condition, believing that though Icahn may still be a problem, current management -- under the leadership of chief executive officer William F. Compton -- is not helping matters much, either. A TWA spokesman said Compton, the fifth CEO to run the airline since Icahn's departure, was not available for an interview.

"Anytime a company performs as bad as they're performing while the employees are performing as well as we're performing, you're going to get a little bit of frustration," says Howard Coldwell Jr., chairman of the TWA branch of ALPA. "We've done everything we can to make sure that TWA has the tools it needs to do well, so it's frustrating when they don't."

Jim Marino, grievance-committee chairman of the International Association of Machinists, says that although Icahn helped put TWA "in the hole," at least Icahn had an agenda when he ran the airline. Marino says he can't see the mission of the airline now. "What everybody forgets is that it was between Icahn and Lorenzo at the time, and I thank God we ended up with Icahn," Marino says. "Icahn was in it for a day-to-day operation.

"But now I'm starting to think that these people in there now are over their heads."

Given TWA's financial straits, the airline's management is, at the very least, between a rock and a hard place. Their options for generating cash and cutting operating costs are limited.

Not that they haven't tried. In recent years, TWA has launched an aggressive program to replace its wide-body jets with smaller aircraft -- a strategy Icahn blasts -- and moved to improve its marketing efforts. And the airline has made important strides toward polishing its customer-service performance by addressing its old punctuality problems. Last year, TWA ranked first among major airlines for on-time performance. And it's made the tough decision to retreat from some markets where it once was a dominant U.S. player.

In January, TWA announced it was ending daily service between New York and Rome, Barcelona and Madrid, saying those routes were unprofitable. Instead, TWA is putting its emphasis on the Caribbean. A blitzkrieg promotion heralded the new service to tropical hot spots like the Turks and Caicos Islands. "The Caribbean is a place right now that is booming," says TWA's Bishop.

The move appeared, in part, an effort to soften the effect of the Karabu deal, which won't expire until 2003. The Caribbean strategy, a source at the airline tells the RFT, involves deals with third parties, such as tour wholesalers, who front the money for a bulk purchase of tickets and other cooperative marketing agreements. With these deals, TWA essentially determines what the minimum profitability of a particular route will be before it begins and gets more control over its inventory.

But TWA, which was once a dominant player in European service, may need to take even more drastic steps, analysts say. "They are still in a position where some of the difficult decisions, such as maybe getting rid of New York (the hub at JFK Airport) altogether, are going to have to be made before they can consistently turn it around," says analyst Brian Simpson.

And this, perhaps, could be coming down the road.

"New York Kennedy is an expensive airport from which to operate," Simpson says. "If you're Delta and you're operating out of Kennedy, and you can go to a corporate client in New York and say, "Hey, we can not only offer you three times as many destinations, we can offer you connections on our partner destinations; we can get you where you want to go -- let's make a deal,' that has a lot more sway than if you're TWA and you go and say, "Hey, we can offer you seven destinations.' So it puts them at a competitive disadvantage when they're trying to get high-yield customers."

Jenkins, the George Washington University professor, says TWA may want to consider selling its stock in Worldspan, a computer-reservation system, to generate some quick cash. "Worldspan would give them some breathing room and would more or less take them through the time period until 2003, when they get Icahn off their back."

But whether those steps are enough remains to seen.

Jenkins isn't hopeful. He's spent 20 years in the airline-travel business, was tapped by Vice President Al Gore in 1997 to chair the White House Conference on Aviation Safety, and has studied TWA for years. Comparatively speaking, Jenkins says, TWA is in a serious hole.

"I don't know how they're going to get out," he says. "They still have the ghost of Icahn over them, no ifs, ands or buts. Icahn is dragging them down even eight years after he's been out of there."

The discount tickets, he says, are the problem. Though TWA executives won't publicly point the proverbial finger at Icahn, Jenkins does so without hesitation. With the problems the airline is facing, Jenkins says, he won't rule out a liquidation of TWA if the airline doesn't get a handle on things soon.

"As long as the Karabu deal is in effect," he says, "there is almost no hope of TWA getting back on their feet and becoming any sort of an airline at all."

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