TWA tries to defy perceptions, show it can indeed turn a profit

Last summer, Wall Street feared Trans World Airlines was headed for yet another emergency landing in bankruptcy court -- its third since 1992.

Speculation about bankruptcy has evaporated, though, as TWA scored impressive gains in efficiency and pulled off a string of refinancing deals that raised nearly $225 million.

Memories of the still-unexplained explosion of Flight 800 off Long Island, N.Y., in 1996 have faded. And after TWA reported third quarter earnings that were the best since 1989, its stock soared more than 60 percent, and several analysts added it to their buy lists. But don't mistake Wall Street's relief for long-term optimism. The company reported a fourth quarter loss of $31.2 million, and ended 1997 -- a year in which other airlines rode the strong economy and low fuel prices to record profits -- $110.8 million in the red. TWA can survive, but will it prosper? "We still have to prove we can make money," acknowledges Gerald Gitner, the lanky, balding 52-year-old Texan who has led the recovery since being named the St. Louis-based carrier's chairman and chief executive late in 1996. To gain financial altitude, TWA will have to confound the industry experts. Once the United States' biggest airline, it is now No. 7, just ahead of rapidly expanding Southwest. At Oklahoma City's Will Rogers World Airport, TWA is in a tight contest for third place in total boardings with American and United airlines. All three recorded December enplanements at the 14,000 level -- trailing Southwest with 40,000+ boardings and Delta Air Lines in the 19,000 range. The common wisdom is that there is no such thing as a lucrative niche for a relatively small carrier like TWA that is saddled with entrenched unions and the hub-and-spoke structure of the industry giants. And in an industry where there is constant talk of mergers and of deals like last month's alliance of Continental and Northwest, TWA's name is usually among the last mentioned. Indeed, most analysts and airline-industry insiders see TWA's recent rebound as little more than the latest evidence that it is almost impossible to kill an established airline when the economy is growing. One industry joke, both a comment on TWA's prospects and a backhanded compliment to its survival skills, has it that the airline business in the year 2025 will consist of three prospering giants created through mergers "and financially strapped TWA." TWA, not surprisingly, has a rosier vision, based on two core assumptions about the nature of the airline business. The first is that the worst battles of the industry's civil war following its deregulation in 1978 are history, leaving TWA and other established airlines organized around impregnable hubs. "There's not a whole lot anybody can do to compete but get a lot better where they are," says Michael Palumbo, TWA's chief financial officer. The second assumption is that TWA is strategically blessed with its major St. Louis hub in the heart of the nation and a strong presence at New York's chief international gateway, Kennedy International Airport. Profits will roll in, TWA believes, if TWA can beat other airlines at the fundamentals like on-time service, getting the right-size planes for each route and marketing plans that reward frequent, full-fare passengers. Put it together, and you end up early in the next century with a flourishing airline, according to Palumbo. Revenues might be about $4 billion, not much larger than today and just a fourth the size of the giants like United Airlines. But if everything goes right, profit margins could top the industry, Palumbo says. "I wouldn't apologize for that," he adds. Signs of a turnaround Even after TWA's impressive strides last year, such a rewarding scenario seems far-fetched. But a gradual return to solid profitability at least seems possible. TWA's most startling gains have been in on-time service. After starting 1997 as the worst performer among the nation's 10 biggest airlines, it vaulted to first by summer. Though bad weather, wildcat strikes and a breakdown in the federal air-traffic-control computer covering St. Louis knocked it back into the pack in the final two months of the year, it continued to outshine its own recent past, completing every scheduled flight on six days of November, for example, compared with none for all of 1996. "It's so basic," says William Compton, a longtime TWA pilot whom Gitner put in charge of operations and recently promoted to president. "As soon as the on-time figures began shooting up last February, so did all our measures of customer satisfaction." One key to more timely service and cutting costs was replacing wide-body Boeing 747s and Lockheed L1011s with new 757s and a mixture of new and almost new MD-80s, which have less than half the capacity. TWA is also phasing out its aging 727s. With fewer seats to sell, TWA has experienced a 10 percent drop in operating revenue. But operating profit in the third quarter jumped to $63.8 million from $26 million a year earlier, and for the fourth quarter the airline posted an operating profit of $537,000, compared to an operating loss of $232.4 million in the 1996 fourth quarter. The improvement is because the new planes are fuller and more efficient, requiring smaller crews and less fuel and maintenance. The average age of TWA's fleet has dropped from over 19 years to just over 16. That is far from the best in an industry that averages 13 years -- but it is no longer the worst. Getting rid of the wide bodies saves $20 million in annual training costs. It also cuts TWA's vulnerability to higher fuel prices: Each 1 cent increase now adds $7.1 million to the airliner's annual fuel bill, down from $8.4 million before. TWA also is rebounding on the marketing front. It recently became the first airline to deploy a computer program tracking how much customers spend with the company as well as how many miles they fly. Those data have given it a tool to track -- and reward -- full-fare business customers who fly frequently but rarely on long hauls. The carrier has also renovated lounges for its frequent and full- fare fliers in St. Louis and in New York and recently expanded its first-class seating and upgrade programs as a further inducement. Problems Analysts give Gitner's team high marks for these and other improvements. So why is there so much skepticism that they can build on such successes to the point that TWA can sail comfortably above the turbulence when the next downturn hits? After all, Continental Airlines, which has also been through two bankruptcies since deregulation, now has a $1 billion cash hoard, and Northwest Airlines, which narrowly averted bankruptcy in 1994, is flying high. One problem is that not many people outside the company buy TWA's assumption that there is a host of unexploited benefits from its particular route structure. TWA already accounts for more than 60 percent of the traffic originating at St. Louis' Lambert Field. Southwest, which cannot be beat on budget prices, holds much of the remainder. St. Louis businesses are already pulling out all stops to support TWA. Each spring in recent years, Civic Progress, which brings together the local business community, has organized a drive in which companies like Monsanto and Anheuser-Busch buy tens of millions of dollars worth of tickets in advance to help the airline stay aloft until the summer season. This leaves TWA extremely dependent on getting more customers flying between other cities to come through St. Louis, especially those with no direct flight options. TWA calls it the Portland, Ore., to Jacksonville, Fla., market. But such "trans-hub" customers already account for two-thirds of TWA's business at Lambert, more than any other airline has running through a major hub. St. Louis' central location makes the potential trans-hub market worth tens of billions of dollars, but TWA acknowledges that this does not reflect Lambert's current physical limitations. It is already the fifth-busiest airport in the nation despite being reduced to one runway when weather is bad. A planned additional runway will not be ready before 2003 at the earliest. TWA's second hub, at Kennedy Airport, is no help. It is a reminder of the glory days when the TWA of Charles Lindbergh and Howard Hughes was rivaled only by Pan Am as an internationally renowned symbol of American aviation. But after Carl Icahn, the Wall Street financier who took control of the airline in 1985, sold the valuable London routes to American Airlines in 1991, Kennedy and the routes feeding international traffic into it became money losers. Icahn was forced out after TWA went bankrupt in 1992, but efforts to return TWA's Kennedy operations to profitability have not worked. TWA can claim it flies to more American cities from Kennedy than does any other airline, but most business travelers heading to or from New York prefer La Guardia or Newark, N.J. That is why Continental's heavy investment in expanding its Newark hub has contributed so much to that airline's rebirth. "TWA's board thinks their problem is that people avoid them, but I believe people don't even think about them," says Glenn Engel, an airline-industry analyst for Goldman, Sachs. "Outside of St. Louis, they are a nonentity." Beyond such fundamental strategic problems, TWA also faces tough labor negotiations this year, and the continuing challenge of keeping up with wealthier rivals when it comes to investing in new technology and renewing its fleet. Ultimately, analysts say, TWA's best hope is to attract bigger and healthier airlines as marketing partners so that it can link its routes, schedules, frequent-flier programs, clubs and other attractions to theirs. TWA, says Samuel Buttrick, who follows the industry for Paine Webber, "has to become part of a true network."

Copyright 1998
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