Icahn's Tar Baby

By THOMAS McCARROLL

To celebrate his victory in the hostile takeover battle for Trans World Airlines in August 1985, corporate raider Carl Icahn donned a pilot's cap and uniform jacket and paraded triumphantly around his Manhattan office. The parade didn't last long. Plagued by labor strife, mounting losses and bruising competition, TWA became more of a financial straitjacket for the erstwhile wizard than the trophy he had envisioned. In recent years, as he struggled to keep the now bankrupt carrier aloft, Icahn groped for a graceful way to bail out. Despite near frantic efforts, he was unable to find a willing buyer or merger partner, until now.

In a deal that allows him to save some face and salvage what's left of his investment, Icahn agreed last week to step down and turn over the controls of TWA to the company's union-led employees in return for major concessions that are designed to keep the airline flying. Under the tentative agreement, TWA's 28,000 flight attendants, baggage handlers, mechanics and pilots would swap a 15% pay cut for a 45% equity stake in the carrier. The airline's creditors would acquire the remaining 55% in exchange for forgiving more than $1 billion in debts. Icahn currently owns 90% of TWA's stock, but he would gladly dispose of his holdings if it means freedom from the financially troubled carrier. Says Robert Joedicke, an investment analyst at Shearson Lehman: "Icahn will do just about anything to extricate himself from this mess."

The deal is probably as good as Icahn can get, given TWA's bumpy flight path since he came aboard. Less than three months after he officially gained control, the airline's 6,000 flight attendants walked off the job for 10 weeks. In April 1986, a month after the strike began, a terrorist bomb exploded in mid-air on a flight bound for Athens, killing four passengers and wounding nine others. TWA's overseas business never recovered. Neither did its relationship with labor. Icahn's zeal to cut costs has also led to confrontations with TWA's mechanics and pilots.

His abrasive style has touched off an exodus of top managerial talent. In the past two years, TWA has lost its chief operating officer, general counsel, senior vice presidents of finance, marketing, flight operations and strategic planning, plus its vice presidents of advertising, government affairs, compensation, public affairs and maintenance operations. Perhaps Icahn's biggest managerial blunder was engaging in a series of unwinnable fare wars with the industry's big eagles: United, American and Delta. Subsequent price cutting helped land TWA in bankruptcy court last January.

Despite the airline's dismal performance, many Icahn watchers have assumed he would still come out ahead. Not so. After leading a group to acquire the airline for about $400 million, he was able to recoup the investment in a complicated leveraged buyout valued at $469 million in 1988. The LBO left Icahn's group with 90% of the common stock, plus preferred stock worth about $390 million. Icahn also held junk bonds with a face value of $190 million. As TWA's financial condition nose-dived, the bonds plunged 87%, while the preferred stock lost 83% of its value. Outside investors who helped Icahn finance the buyouts have also taken a beating. Although Icahn is mum about his total outlay in the carrier, he claims to have personally lost at least $100 million in what he describes as "the worst" investment he ever made.

If the new deal is done, Icahn has agreed to give up his common stock, now practically worthless, and invest yet another $150 million to help the airline operate until a reorganization is completed. The federal Pension Benefit Guaranty Corp. maintains that as majority owner, Icahn must make up a $1.1 billion shortfall in TWA's pensions. Even if Icahn managed to parachute out of TWA, the pension agency says it would enforce a new law sponsored by Senator John Danforth that would make Icahn's non-airline businesses liable for the underfunding. That would place the pension burden mainly on ACF Industries, the Missouri-based railcar leasing company that Icahn uses as his cash cow to fund outside investment activities. Although he expects to resolve the pension dispute, Icahn argues that the Danforth legislation is unconstitutional.

Turning TWA over to its employees is no guarantee of a happy landing. The airline is losing about $1 million a day. Wage concessions alone, say analysts, won't be enough to reverse the company's fortunes. While the carrier has enough cash on hand to continue flying for at least another year, analysts say it will be forced to unload more assets. With a fleet averaging 17 years in age, the oldest in the business, TWA is in need of a massive capital infusion for a complete overhaul. And even that assumes travelers will still want to fly with TWA. After years of leading the industry in customer complaints, for instance, the once proud carrier has all but lost what was once a sterling image among customers. Says Kevin Murphy, an airline analyst at Morgan Stanley: "TWA's problem isn't just ownership. It hasn't made money; it's not making money; it will never make money. Changing owners is not going to change that."

So while Icahn may finally have wriggled out of his tattered uniform, he may well still lose his shirt. As for the employees left behind wearing the real TWA uniforms, they too seem scheduled for a ride that will certainly continue to be bumpy.

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