Trans World Airlines, Inc.

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Trans World Airlines, Inc.

605 Third Avenue
New York, New York 10158
U.S.A.
(212) 692-3000

Public Company
Incorporated: 1928 as Transcontinental Air Transport
Employees: 20,871
Sales: $3.145 billion
Market value: $608 million
Stock Index: New York

Trans World Airlines, or TWA, has a long and eventful history which dates back to the mid-1920’s. From rather humble beginnings the airline has grown to serve airports on four continents and operate a complete round-the-world route system. Such well-known people as Charles Lindbergh, Amelia Earhart, Jack Frye and Howard Hughes were closely associated with the company. The company established a reputation for leadership and innovation and was widely regarded as one of the United States’ leading airlines. In recent years, however, TWA has been forced to reduce its size in order to remain competitive.

TWA was established through the merger of several small airline companies in the 1920’s. 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.” It began by boarding the Pennsylvania Railroad in New York in the evening. The next morning passengers flew from Columbus, Ohio to Waynoka, Oklahoma. From there the Sante Fe Railroad took them overnight to Clovis, New Mexico. From Clovis the passengers flew on to either Los Angeles or San Francisco. TAT offered coast-to-coast transportation in about 48 hours.

In the 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. By the end of August of 1930, the two companies joined to form Transcontinental and Western Air Lines. In October the new company, “TWA,” mastered 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 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’ offer, and the first DC-1 was built. The DC-1, however, became obsolete before it could be mass produced. 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.

Since there were breaches in pilot discipline and frequent equipment failures, a number of TWA airplanes crashed. At one point, the airline was losing 5% 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 depended on mail contracts for their profitability, and like them, TWA was adversely affected.

During this crisis TWA was sold to another 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% 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. Under this new management TWA made major improvements in its training, flight efficiency and also upgraded its airport facilities. TWA 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 1930’s airline companies became especially vulnerable to buyouts. General Motors 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 forceably 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’ interest in the company so that he could help to defend it from any hostile takeover bids, ostensibly from GM.

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 his large fortune Hughes purchased 25% of TWA’s stock. In 1941 he gained a controlling interest in the airline and later increased his share to 78%.

One of Hughes’ first activities at TWA was to begin development of a new airplane in association with Lockheed. The airplane was the L-049 Constellation. 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 Stratoliner 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 to Prestwick, Scotland; and the South Atlantic 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 commerical use of much of their wartime network. TWA was granted two transatlantic routes to Europe, one via the “great circle” near the Artie, and the other via the Azores to the Mediterranean. From there TWA flew on to India, Southeast Asia and Japan.

Hughes and Frye had grandiose plans for the airline 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 was now in wide commercial use. 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 changed. He 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 didn’t 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’ 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. 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. The man brought in to replace Jack Frye was Ralph Damon, who had previously been with American Airlines. Damon was an old-school engineer and airplane manufacturer. He was known for his careful attention to detail. Damon’s numerous successes at the airline, however, were hindered by Hughes’ 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% 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 and followed all of Hughes’ orders. He worked hard to keep the company in good financial condition.

When Thomas took over in the mid-1950’s, 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’ 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’ 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.

However, 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’ 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’ 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 first actions of the bankers 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 to the bankers 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, there was no clear decision by the courts.

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; he received $86 per share. Three years earlier TWA stock sold for only $7.50.

Aside from the large profits and the Hughes fiasco, the 1960’s 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. The airline was suffering from the recession of 1970-71. In addition, 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 of the wrong kind of airplanes.

To make matters worse, TWA suffered a crippling six-week flight attendant’s strike in 1973. By 1975 several payrolls could only be met by 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 transpacific route which had been awarded during 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.

Amid these numerous crises Tillinghast retired. 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. “TWC” assumed parent ownership of the airline and the various subsidiaries. Four years later, a curious thing happened. Other airline holding companies have been known to sell their non-airline subsidiaries in periods of financial difficulties. When hard times came to Trans World Corporation, however, it sold the airline.

TWA was acquired by the corporate “raider” Carl Icahn early in 1986. Icahn’s style of “raiding” usually involves 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. With TWA, however, Icahn was battling Texas Air Corporation. He enlisted the support of the airline’s labor unions by pledging to honor their numerous demands. With the unions behind him, Icahn held out with a bid of $18.17 per share and found himself the new owner of the airline. Unfortunately, the company Icahn purchased was not fully prepared for the trauma of a corporate raid. As owner, however, Icahn was free to reorganize management as he thought necessary. He fired the popular president, Richard Pearson, and replaced him with Joseph Corr.

TWA’s labor relations and economic condition deteriorated after Icahn took control. 4,000 striking flight attendants were more or less fired, which reduced the number of flights at a time when TWA should have experienced a period of growth. In response, Icahn purchased TWA’s smaller competitor, Ozark Airlines. TWA had long considered acquiring Ozark, but it took Carl Icahn to finally commit the airline to the purchase. In accordance with the terms of the acquisition, TWA would receive four dozen older, but popular, jetliners which could be sold for cash. TWA also sold 50% of its successful IBM Pars computerized reservations system to Northwest Airlines. Joint use of the Pars system will introduce a significant degree of cooperation between TWA and Northwest. In addition, Northwest’s payment for Pars in installments will guarantee TWA scheduled infusions of cash for some time to come.

At the present time TWA no longer operates its transpacific routes. Despite a brief rash of terrorism in 1985, TWA continues to fly in the Mediterranean, but has reduced its routes there. Instead, the airline has shifted its excess capacity to European and domestic routes, following the popular demand for alternative vacation spots.

Presently, TWA is in the middle of a series of changes: changes in identity, purpose, size and character. Icahn has surprised many of his critics by devoting the time and money necessary to return the airline to profitability. The conditions created by deregulation hinder any airline from carving out a niche which guarantees security or certainty. TWA is by no means an exception to these prevailing conditions.