TWA on final approach: Where will your miles land?

If travel has generally seemed a lot like a roller coaster ride recently, just imagine that you?re a TWA customer, by choice or necessity. Or worse, a TWA stockholder. Now that?s a wild ride! And while TWA?s end is near, it?s still not altogether clear what that end will be.

Before discussing the endgame, and how it will affect your miles, TWA?s passing deserves at least a thumbnail obit.

That Was TWA Then…

Little did we know when TWA celebrated its 75th anniversary in the summer of 2000 that the company wouldn?t be around to celebrate its 76th.

The airline traces it roots to the 1925 incorporation of Western Air Express, the ?WA? in what would become TWA. Five years later, Western Air merged with Transcontinental Air Transport to form Transcontinental and Western Air. That same year, 1930, TWA launched coast-to-coast service?a 36-hour trip requiring an overnight in Kansas City. In subsequent years, TWA became identified, alongside Pan Am, with the Golden Age of flying and with the evolution of air travel from a service that only the rich could afford to a mass-market phenomenon.

Over its long history, TWA was responsible for a number of significant firsts. TWA was the first airline to serve fresh-brewed coffee inflight. In 1961, TWA introduced in-flight entertainment as we know it with the screening of Lana Turner in ?By Love Possessed.? The no-smoking section (now superceded by the no-smoking plane) was a TWA invention. TWA was the first airline to operate an all-jet fleet. And it may be the first and only airline to declare bankruptcy three times (1992, 1995, 2001).

Part of TWA?s legacy will always be linked to the high-profile personalities whose characters have informed the airline, for better or worse. In the beginning, it was legendary aviator Charles Lindbergh, the first pilot to fly solo across the Atlantic. Post-Lindy, TWA?s star-in-residence was the enigmatic Howard Hughes?Hollywood producer, aviator, entrepreneur, certifiable eccentric?who acquired a controlling interest in the airline in 1939 (which he retained until 1965). And more recently, TWA has been associated with corporate raider and all-around bad boy Carl Icahn. Icahn gained control of TWA in 1985 and resigned as chairman in 1993, after adding $540 million to TWA?s debt load and taking the company into bankruptcy for the first time.

…This is TWA Now

TWA?s last profitable year was 1988. The events of the past few weeks are the result, perhaps inevitable, of that long stretch of financial incontinence.

On January 7, 2001, the American Stock Exchange halted trading of TWA?s common stock.

On January 9, TWA entered into an Asset Purchase Agreement with American Airlines, allowing American to purchase most of TWA?s assets for $500 million (plus the assumption of various operating leases). The agreement includes a Termination Payment clause, according to which TWA would pay American $75 million in the event that the agreement could not be effected. So, for example, if Carl Icahn?s bid trumped American?s, Icahn would be responsible for the extra millions.

On January 10, TWA filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

In the days following the agreement between TWA and American, it came to light that former TWA chairman Carl Icahn is trying to line up a team of investors to bid against American. Icahn has a multi-year contract with TWA to purchase highly discounted tickets to be sold on his Lowestfare.com website. The bankruptcy filing obviates that contract, and American has said publicly that they have no intention of honoring it.

And, as if Icahn?s looming presence didn?t muddy the waters enough, Continental is reportedly interested in bidding for various TWA assets.

So, here we are in the early days of the year 2001 and TWA is operating, déjà vu all over again, under the protection of bankruptcy. Only this time, there will be no refinancing, reorganization, and relaunch. This time, bankruptcy is a prelude to liquidation. This time, farewell is forever.

Here?s what TWA?s chief Bill Compton had to say about the liquidation:

?This is both a sad and exciting day for TWA. It is sad because we are starting a process that will culminate in the retirement of the oldest and proudest name in the U.S. airline industry. I am, however, heartened by the fact that we have been able to work out a solution with American that we believe to be the best possible outcome for our creditors because it extracts franchise value by selling the company as an operating concern.?

?American has agreed to protect the jobs of substantially all of our thousands of employees in St. Louis, Kansas City, New York, and elsewhere. American also agreed to take responsibility for our retirees? medical and dental benefits now provided by TWA. And, this agreement will be beneficial for our customers, who will enjoy uninterrupted service.?

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What Happened…?

In essence, TWA overreached and underachieved.

It can be argued that the overreaching traced back to Icahn?s early-90?s finagling, which sapped the airline?s financial strength and diverted resources away from much-needed capital investment. In particular, TWA?s aircraft fleet was among the industry?s oldest, a fact that played prominently in media coverage of the crash of TWA flight 800 in 1996.

So in 1998, forced into catch-up mode, TWA committed to the largest aircraft order in its history: 125 aircraft, and options for 125 more. With the economy booming and demand for air travel at all-time highs, it must have seemed like the perfect coincidence of need (to upgrade the fleet) and opportunity (healthy cash flow).

What TWA couldn?t have foreseen was the increase in fuel costs, which we now know with the benefit of hindsight would spike precipitously during 2000?up 40 percent to 50 percent over the previous year.

Add prospects of a slowing economy to the rise in fuel costs and increased labor costs (thanks to the domino effect of United?s new contract with its pilots), and TWA?s future looked bleak indeed.

It?s the Miles, Stupid

When American?s proposed acquisition of TWA was first announced, the two airlines addressed a few of what they knew would be the many concerns of affected customers:

1. Memberships in TWA?s Ambassador Club airport lounges would be honored and transferred to memberships in American?s lounge network.
2. St. Louis would retain its status as a hub city, guaranteeing local businesses and individuals access to many flights to many destinations.
3. And, according to TWA?s public statement, ?TWA passengers who are AAdvantage frequent flyer program members will soon be able to accrue AAdvantage miles on TWA flights.?

Conspicuously missing from the joint policy statements was a commitment by American to honor miles in the accounts of members of TWA?s Aviators program. From a marketing standpoint, it seemed obvious that the liability represented by Aviators members? miles would be a small price to pay to gain their continued loyalty to TWA?s successor. But American spokesmen would only say, off the record, that American would do ?the right thing.?

On January 18, American delivered on that promise and publicly committed to transferring accrued Aviators miles into the AAdvantage program. According to Mike Gunn, American?s marketing chief, ?Once we have the necessary court and governmental approvals to proceed, Aviator members will receive AAdvantage miles for the full balance in their TWA portfolio.?

This would be a positive outcome for Aviators members?and not just in the sense that AAdvantage miles are better than no miles at all. In fact, on balance, AAdvantage miles are better than Aviators miles. Because, while Aviators has its charms, AAdvantage, with its unrivaled network of earning and awards partners, is clearly the superior program overall.

End of story? It would be, except for the wild cards…

Alternative Endgames

The smart money is on American. Their bid has the support of TWA?s management and employees. And the $75 million breakup penalty will be a significant deterrent to any would-be spoilers. Plus, it?s good for customers. But it?s not a lock.

The Icahn threat is two-pronged. On the one hand, he is expected to file suit against American, seeking compensation for losses resulting from his future inability to secure discounted TWA tickets to resell on Lowestfare.com. On the other hand, Icahn may bid against American to acquire some or all of TWA?s assets. There?s a chance, albeit a small one, that Icahn?s intervention could derail American?s effort.

There is also a chance that one or more other bidders could come forward when TWA?s assets go on the block. In addition to the interest expressed by Continental, other airlines might also raise their hands. Delta, for example, which faces the prospect of being relegated to second-tier status if American buys TWA and United buys US Airways, has both a compelling reason and the necessary financial resources to enter the fray.

And then there?s the outside chance that regulators would deny American the needed approvals to proceed with the TWA acquisition.

If I were an Aviators member, I?d bet on American and wait for my miles to convert to AAdvantage miles. But I would do so knowing?as should you?that there remains the possibility of a completely different outcome. If you?re risk-averse, and have enough Aviators miles for an award, cash them in now and save yourself the anxiety of an uncertain future, mileage-wise.