Trans World Airlines, Inc.

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Trans World Airlines, Inc.

605 Third Avenue
New York, New York 10158
U.S.A.
(314) 589–3000
Fax: (314) 589–3000

Public Company
Incorporated: 1928 as Transcontinental Air Transport
Employees: 20,871
Sales: $3.15 billion
Stock Exchanges: New York
SICs: 4512 Air Transportation, Scheduled

In the early 1990s Trans World Airlines, Inc. ranked as the United States’ seventh–largest airline company. The firm’s near seventy–year history has been influenced by such well–known personalities as Charles Lindbergh, Amelia Earhart, Jack Frye, and Howard Hughes. But under the late 1980s and early 1990s stewardship of corporate raider Carl Icahn, the company widely known as TWA squandered its reputation for innovation and plunged into bankruptcy. Icahn took the airline private in 1988, then sold it to its employees and creditors as part of a 1992 bankruptcy reorganization. While TWA returned to public ownership in the mid–1990s, it had not recorded a full year of profitability since 1987.

TWA was established through the merger of several small airline companies in the 1920s. One of those small companies was Maddux Air Lines, which began a luxury passenger service between Los Angeles and San Diego on July 21, 1927. Maddux and a number of other carriers were organized by a group of investors who sought to establish a transcontinental passenger line using a combination of airplane flights and railroads. The group, Transcontinental Air Transport, hired Charles Lindbergh to survey the route. On July 7, 1929, TAT inaugurated the “Lindbergh Line,” offering coast–to–coast transportation in about 48 hours. The journey departed New York in the evening and crossed the eastern U.S. by the Pennsylvania Railroad. The next morning passengers flew from Columbus, Ohio to Waynoka, Oklahoma. From there the Santa Fe Railroad took them overnight to Clovis, New Mexico. From Clovis the passengers flew on to either Los Angeles or San Francisco.

In those early days of commercial aviation, airlines made most of their money hauling mail for postal services. The United States Postmaster, Walter Folger Brown, was responsible for assigning three transcontinental airmail routes. American Airlines won the southern route, Northwest Airlines won the northern route, and TAT was awarded the central route, but only on the condition that the company merge with Western Air Express. In 1930, the two companies joined to form Transcontinental and Western Air Lines, or TWA. That October the new company covered the coast–to–coast route completely with airplanes, in light of the failure of the previous scheme. The trip was reduced to 36 hours and then later to 24.

Bill Boeing manufactured what were generally regarded as the best airplanes of the day; however, he refused to sell them to any air transport company except his own. Excluded from the Boeing market, TWA’s general manager Jack Frye solicited designs from a number of manufacturers. A small California operation run by Donald Douglas proposed an impressive design which outperformed Frye’s basic specifications. TWA accepted Douglas’s offer, and the first DC–1 was built. The DC–1, however, became obsolete before it could be mass produced, so it was lengthened and otherwise improved. The new plane, the DC–2, was every bit as practical as the DC–1, but more difficult to fly.

Air travel was a risky business in the 1930s. Breaches in pilot discipline and frequent equipment failures caused a number of TWA airplane crashes. At one point, the airline was losing 5 percent of its personnel annually to such accidents. The company was further troubled when the Roosevelt administration decided to cancel all government airmail contracts with private carriers in 1934. Many airlines, including TWA, depended on mail contracts for their profitability. During this crisis TWA was sold to a group led by the Lehman Brothers and John Hertz of the Yellow Cab Company. The government decided to restore the airmail contracts a few months later and reopened the bidding. Curiously, companies that had held contracts before were barred from bidding. In order to get around this stipulation, the company responded by merely adding “Incorporated” to its name. It was re–awarded 60 percent of its original airmail system and, over a period of a few years, recovered the rest.

Under the new owners, Jack Frye, a vice–president and former Hollywood stunt pilot, was promoted to president. The new management instituted major improvements in TWA’s training and flight efficiency and also upgraded its airport facilities. The airline employed directional “homing” radar and installed runway lights to facilitate night flying. The DC–3 became the company’s new workhorse while business improved significantly.

In the 1930s airline companies became especially vulnerable to buyouts. General Motors Corp. acquired Eastern Airlines in 1933 and American Airlines was taken over by the auto magnate E. L. Cord. When General Motors purchased stock in TWA, the airline worried that it would be forcibly merged with some other GM interest. In 1938, when TWA had fully recovered from the airmail fiasco, the Lehman/Hertz group sold the airline to another group of investors. During this time Frye personally convinced millionaire Howard Hughes to invest in TWA. It is very likely that Frye wanted Hughes’s interest in the company so that he could help to defend it from any hostile takeover bids, especially from GM.

At the outset, Frye and Hughes respected each other as aviators and businessmen. Frye was a daredevil flier, a man totally enthralled with aviation and its possibilities. Hughes was an equally eccentric young man who was devoted to breaking aviation records. From his father he inherited ownership of the extremely lucrative Hughes Tool Company, the primary supplier of oil well drilling bits. Using this large fortune Hughes purchased 25 percent of TWA’s stock. In 1941 he gained a controlling interest in the airline and later increased his share to 78 percent.

One of Hughes’s first activities at TWA was to begin development of a new airplane, the L–049 Constellation, in association with Lockheed. While the Constellation was still being developed, Hughes approved Frye’s proposal to buy another new airplane, Boeing’s 307 Stratoliner, for the interim. The Strato–liner had a pressurized cabin and was able to reach an altitude of 20,000 feet. As a result, it could fly over bad weather rather than be forced to navigate through it.

TWA was one of the first American airline companies to serve during the Battle of Britain in 1940. Even before the U.S. government had committed itself to the war effort, TWA was helping the Army Air Corps assist the British. When the U.S. became fully involved in 1941, TWA was assigned two military supply routes: the North Atlantic route to Prestwick, Scotland, and the South Atlantic route from Brazil to Liberia and points east.

The airline had the distinction of flying President Roosevelt and a number of other government personnel to and from various meeting places during the war, most notably, Casablanca. The war gave TWA the opportunity to upgrade and expand its facilities worldwide in anticipation of the allied victory. The U.S. War Department actively supported the airline’s activities during the war. It would be fair to say that TWA served the country well and that it also profited handsomely. When TWA’s military service was over it had flown 40 million miles for the Army, and was exposed to hundreds of new destinations.

The major overseas carriers after the war were Pan Am, American, and TWA. All these airlines requested licensing for commercial use of much of their wartime network. TWA was granted two transatlantic routes to Europe, one via the “great circle” near the Arctic, and the other via the Azores to the Mediterranean. From there TWA flew on to India, Southeast Asia, and Japan. The company also enjoyed a government subsidy in the immediate postwar years.

Hughes and Frye had grandiose, but divergent, plans for their company, whose name they had changed to Trans World Airlines. The Constellation they helped to develop first flew in 1944, served briefly during the war, and entered wide commercial use in the postwar era. However, it was at this time that the two men began to disagree. Hughes, who was injured in the crash of a test plane during the war, had developed a very difficult personality and was known to hold up major business decisions for weeks while he agonized over minute details. He even disappeared for several days with a Constellation, only to turn up in Bermuda making endless test landings.

TWA soon found that it did not have enough business on its 21,000 miles of postwar international routes to generate a profit. Frye’s efforts to rectify the problem collided with the plans of Hughes’s financial manager, Noah Dietrich. Dietrich charged that Frye had mismanaged the airline into a financial crisis and dangerous overexpansion. Hughes offered to provide money for TWA from the Hughes Tool Company, but only on the condition that Frye resign. Thus in January of 1947 Frye left TWA.

TWA suspended many of its plans for further expansion. The headquarters was moved from Kansas City to New York. Ralph Damon, who had previously been with American Airlines, was brought in to replace Jack Frye. Damon was an old–school engineer and airplane manufacturer known for his careful attention to detail. Damon’s numerous successes at the airline, however, were shrouded by Hughes’s continued interference and manipulation. Hughes insisted that the company reduce its advertising and promotion at a time when it was probably most needed. Regardless, TWA went off its postwar government subsidy in 1952, and a year later was healthy enough to declare a 10 percent stock distribution. Two years later Damon died at work, a victim of pneumonia and exhaustion. Doctors suggested that his poor health was exacerbated by the unrelenting pressure of running an airline for Howard Hughes.

Damon’s successor was Carter Burgess, a former Assistant Secretary of Defense. Burgess lasted only 11 months, during which time he had never even met Hughes. TWA’s next president was Charles Thomas. Thomas kept a low profile, followed all of Hughes’s orders, and kept the company in good financial condition. When Thomas took over in the mid–1950s, all of the airlines were competing to be the first to have jetliners in their fleets. While the other leading companies were laying their plans and placing orders, TWA’s order was delayed by Hughes’s indecision over which airplane to buy, the Boeing 707 or the DC–8. Weeks later he finally decided to order 76 airplanes from Boeing and Convair. The jetliners would cost $500 million, much more than TWA could afford. Hughes’s plan was to have his successful tool company purchase the planes and lease them to the airline. He wanted to keep TWA’s profits low, channel money out of the Tool Company, and thereby avoid paying large penalty taxes.

Unfortunately, a world oil glut hurt the Hughes Tool Company so badly that it was unable to pay for the new airplanes. As a result, TWA was forced to turn to a group of Wall Street investment bankers for financial support. The bankers were aware of Hughes’s reputation as a successful tycoon, but also recognized that his interests were probably not the same as those of the airline. As a condition for their financial assistance, they required that Hughes’s majority voting interest in TWA be placed in a trust under their control. Negotiations lasted until the bankers’ deadline, when Hughes finally conceded.

One of the investment group’s first actions was to install Charles Tillinghast as president of TWA. Tillinghast, a lawyer, promptly filed an antitrust suit against Hughes, alleging violations of the Sherman Act and the Clayton Anti–Monopoly Act, and accusing him of monopolizing aircraft purchases for his own benefit and to the detriment of TWA. Hughes responded with a countersuit, charging that they swindled him out of his airline. The litigation continued for many years and cost TWA over $10 million. In the end, the courts returned no clear decision.

Tillinghast reorganized the airline quickly and completely. Management was restructured and pared down. TWA placed orders for newer B–727s and French–built Caravelles. In addition, Tillinghast attempted to change the company’s public image. In light of its association with Hughes, TWA was regarded as being overly concerned with speed, glamour, and style, and not enough with dependability, efficiency and safety. TWA emerged from its troubles with stable and consistent profits through 1966, largely due to the direction of Charles Tillinghast. Ironically, the chief beneficiary of TWA’s improvement was Howard Hughes. In 1966 he sold his stock in the airline for $546.5 million, or $86 per share. Three years earlier TWA stock had sold for a paltry $7.50.

Aside from the large profits and the Hughes fiasco, the 1960s were important in another way. It was at this time that Tillinghast made perhaps his most important contribution. Hoping to provide the company with protection against the unpredictable and unstable airline business, he initiated a diversification program aimed at strengthening the airline’s capital structure and cash flow.

TWA’s diversification began in 1964 with a contract to provide base support services to the National Aeronautics and Space Administration at Cape Kennedy. In 1967 TWA purchased Hilton International, the operator of all Hilton Hotels outside the United States. Later, TWA acquired the Canteen Corporation, Spartan Food Services, and Century 21, a real estate firm. The company was the first to diversify into non–airline businesses, and its timing was auspicious, as the industry was suffering from the recession of the early 1970s. TWA’s B–747s and L–1011’s were flying with nearly empty passenger cabins. The original decision to purchase the jetliners was made in response to Pan Am’s huge orders, and not based on TWA’s needs. As a result, the airline was plagued with overcapacity; it owned too many big, inefficient planes.

To make matters worse, TWA suffered a crippling six–week flight attendants’ strike in 1973. By 1975 several payrolls could only be met with the immediate sale of six 747s to the Iranian Air Force. It was an unfortunate financial transaction for TWA (which sold the jetliners for about one–sixth their actual value), but the airline was desperate for cash. TWA was also losing money on its trans–Pacific route, which had been awarded during Lyndon B. Johnson’s presidency. For the first time in its history, TWA’s network stretched around the world, but even this would soon come to an end.

Tillinghast retired amid these numerous crises. He was succeeded in January of 1976 by Carl Meyer. Meyer navigated the airline through a series of changes in the airline passenger market. Costs were reduced as international traffic expanded. The Airline Deregulation Act of 1978 allowed TWA to establish a more efficient dual hub system: St Louis for domestic traffic and New York for international traffic. Moreover, under Carl Meyer TWA reduced its fleet and its staff. The company purchased more fuel–efficient airplanes while selling the “gas–guzzlers” as soon as their value had completely depreciated.

On January 1, 1979, TWA created a holding company called the Trans World Corporation, which assumed ownership of the airline and the various subsidiaries. Several years later, facing financial difficulties, Trans World Corporation decided to sell its airline. Thus TWA was acquired by the “corporate raider” Carl Icahn early in 1986. Icahn’s style of “raiding” usually involved buying up enough of a company’s stock to threaten the other stockholders with a controlling interest or takeover. This drives the price of the stock up to a point where the raider decides to sell, usually at a large profit. In his battle with Texas Air Corporation (parent of Eastern Airlines) for control of TWA, Icahn enlisted the support of the target airline’s labor unions with pledges to honor their numerous demands. With their support, Icahn was able to hold out with a bid of $ 18.17 per share and ultimately took over. Icahn fired the airline’s popular president, Richard Pearson, and replaced him with Joseph Corr.

Icahn’s apparent commitment to TWA and hands–on approach surprised many observers. He launched a new subsidiary, the Travel Channel, acquired Ozark Airlines, pared expenses to the industry’s lowest cost–per–available–seat–mile (8.50), and turned 1986’s $106 million loss into a $106 million profit for 1987. That success, however, was fleeting. A number of intractable problems—including an insufficient number of hubs and feeder lines, a rapidly declining market presence, heavy debt load, and price wars—plagued the airline.

By the end of 1988, when Icahn took TWA private, the firm’s nearly $4 billion debt load gave it a negative net worth and contributed to the growing dissatisfaction of TWA’s labor unions. Both the Air Line Pilots Association and the Independent Federation of Flight Attendants filed suits against Icahn alleging poor management. The financier in turn threatened to liquidate the airline in a long, drawn out bankruptcy if he didn’t get wage concessions from the unions and cooperation from creditors.

From 1985 until January 1992, when TWA declared Chapter 11 bankruptcy, its share of the domestic market had slipped from 7 percent to 5.5 percent and its slice of the international market was halved from 20.9 percent to 10 percent. The company’s bankruptcy reorganization plan called for its 28,000 employees to make 15 percent ($660 million) wage and work rule concessions in exchange for an additional 35 percent stake in the company, raising their share of TWA’s equity to 45 percent. Creditors forgave $1 billion of the airline’s $1.5 billion debt in exchange for the remaining equity. Icahn gave up his entire 90 percent share of the company, left it $200 million in cash, and paid the federal government’s Pension Benefit Guaranty Corporation $240 million to prop up TWA’s pension plan, which was underfunded by an estimated $1.2 billion. About 2,000 jobs were eliminated, domestic capacity was reduced by 13 percent, and international volume was cut by 38 percent. The company even relocated its headquarters from Mt. Kisco, New York, to the more centrally–located St. Louis, Missouri.

Robin H. H. Wilson and Glenn A. Zander were selected to run the company on an interim basis in the fall of 1992. Wilson had been with TWA for most the 1960s and 1970s, and Zander was a 28–year veteran of the company. In February of 1993, the joint chief executives traveled around the United States to explain their plan to bring the company out of bankruptcy, which included a major image overhaul, from low–budget to quality–conscious. A new advertising campaign launched TWA’s “Comfort Class” seating, with more legroom than any other leading airline. Although the effort raised customer satisfaction, TWA continued to lose money in 1992 and 1993.

TWA emerged from bankruptcy protection months later than it had hoped to, in November of 1993, after the peak summer season. Wilson and Zander became executive vice–presidents of operations and finance, respectively, and former Piedmont Airlines chief William R. Howard took the airline’s helm. Within just two months, however, Howard and Zander resigned after a dismal winter season, leaving TWA with yet another dilemma. Although board member Donald F. Craib, Jr. had no airline experience (he was formerly chairman and CEO of Allstate), he was selected to succeed Howard.

As new owners, TWA’s employees made heroic efforts to sustain their company, improving service and timeliness and donating their own pay to fund advertising and capital expenses. Yet they watched the value of their shares decline by over one–third in the first six months of 1994. That June, two of the airline’s three largest unions agreed to another $200 million in concessions to help the company survive yet another harsh winter. The company also started post–bankruptcy negotiations with creditors, including the Pension Benefit Guaranty Corp., offering a swap of about 15 percent in equity for about $800 million of debt. Late in 1994, when the plan was unveiled, Anthony L. Velocci, Jr. of Aviation Week & Space Technology, who had long followed the saga, related analysts’ general skepticism that the offer would be accepted.

TWA’s continuing problems have raised the question of its ability to continue as an independent airline. Throughout this difficult period in the firm’s history, mergers with Eastern Airlines, America West, USAir, and British Airways have been speculated on and reportedly negotiated.