- The Washington Times - Thursday, January 11, 2001

A sharp rise in the cost of oil ended up killing Trans World Airlines, a carrier with a history of troubles. The airline's bankruptcy protection filing yesterday was its third in a decade.

The $500 million deal announced yesterday would merge TWA into American Airlines, second only to United Airlines as the nation's largest air carrier. After the merger, American Airlines would control one-fourth of U.S. passenger air traffic and become a 49 percent shareholder of DC Air, the regional airline planned to be based at Ronald Reagan Washington National Airport.

Ironically, progress TWA has made in recent years apparently contributed to its undoing.

To compete with other airlines, TWA invested heavily in new airplanes and other infrastructure. Since 1996, it replaced more than 40 percent of its fleet, including 39 new jets in 1999. Another 15 new Boeing 717s arrived last year.

At the same time, service improved. A 1999 J.D. Power and Associates survey of business travelers found TWA was the most on-time major airline. The survey classified TWA as America's best short-haul airline.

The improvements, however, required TWA to assume heavy debt. In announcing its bankruptcy filing yesterday, a TWA statement said, "Fleet improvement efforts and improvements to TWA's route system, as well as productivity improvements helped to improve revenue and reduce controllable costs. However, the timing of the company's recent capital investments, coupled with the unanticipated fuel increases, caused a drain on cash flow" and drove the company to bankruptcy.

Crude-oil costs soared to more than $30 a barrel last year and hovers just under that mark.

Another contributing factor appears to have been TWA's choice of routes. Most carriers, like Arlington, Va.-based US Airways, have some routes with little or no competition. TWA, however, has almost no exclusive routes. Fliers have a choice of major carriers in nearly all markets served by TWA.

Stiff competition in the airline industry has forced carriers to either find a market niche, merge or close down. The rapid consolidation has whittled the industry down to a handful of major airlines and several smaller low-cost carriers. The trend is causing concern that fewer choices will lead to higher fares.

Robert Johnson, DC Air chairman, downplayed concerns by federal regulators that industry consolidations are reducing competition among airlines.

"I think two large airlines are going to compete far more vigorously than four weak airlines and one strong airline," Mr. Johnson said. "I don't see that as a big issue. I think the public is looking for competitive prices, seamless transportation and global access. I think that's what this merger will give them."

Sam Buttrick, an airline-industry analyst for the Wall Street financial firm of UBS-Warburg, said TWA had little choice but to sell out.

"TWA is clearly a failing carrier. Salvaging those assets is better than liquidating them," Mr. Buttrick said. The American Airlines-TWA merger "has to be looked at in terms of the alternatives, one of which is outright liquidation of the company," he said.

Tara Hamilton, spokesman for the Metropolitan Washington Airports Authority, said the merger could change the number and destinations of air routes available at Ronald Reagan Washington National Airport and Washington Dulles International Airport.

"Our concern as an airport operator would be that we continue to serve the markets that people in the region can reach," Miss Hamilton said. "We would be very interested to know what those plans are once the decisions are made by the airlines."

TWA operates eight jet departures per day out of Reagan National and four out of Dulles. American operates 41 departures per day out of Reagan National and 13 out of Dulles.

The biggest carriers at the two airports are US Airways and United Airlines. US Airways operates 127 departures daily out of National. United operates 168 departures daily out of Dulles.

Before the American Airlines-TWA merger can be completed, the Transportation Department must review it and the Justice Department must approve it.

TWA said the increasing fuel prices added more than $50 million to the company's costs in 1999 and nearly $250 million in 2000. In its filing in federal bankruptcy court in Delaware yesterday, TWA listed total assets of $2.1 billion. Debts were listed at $2.4 billion.

Under the merger agreement, American will assume the debt along with about $3 billion in aircraft-operating leases.

TWA has not posted an annual profit in 12 years. Officials said it lacked the cash flow to make a $100 million debt payment due next month.

The deal with American includes a $75 million breakup fee and other measures designed to safeguard American's bid during TWA's bankruptcy process. If other bidders surface during the bankruptcy proceedings, they would need to top American's offer by $10 million, plus the breakup fee. American reserves a right to match any other bids.

Union leaders, who said they prefer a buyout to liquidation, are still reviewing details of the merger to determine how their members will be affected. Industry analysts, however, said some labor-management conflicts, particularly on seniority issues, are likely.

• This article is based in part on wire service reports.

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