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Twa Executive Says High Fuel Prices Brought Down Airline Source: St. Louis Post-Dispatch Publication date: 2001-01-11

Trans World Airlines has had a bumpy flight since its first trip to bankruptcy court in 1992. It has weathered labor unrest, gone through eight chief executives and survived the disasterous crash of Flight 800.

It also has faced the daunting task of rebuilding what once was the oldest fleet in the airline industry and has coped with the cash drain caused by a discount-ticketing agreement with former owner Carl Icahn.

Despite all those challenges, TWA Chief Executive William Compton was talking optimistically last summer about the airline's chances for long-term survival. "TWA has to fix itself, and we're doing it," he told a Post-Dispatch reporter in June.

So what pushed the resilient but ailing airline over the edge, into a third bankruptcy filing that will finally take its proud logo out of the air?

Compton, speaking at a news conference Wednesday, placed the blame on fuel prices. The price of jet fuel rose about 85 percent last year, adding $250 million to TWA's fuel bill.

TWA was able to make it through the year, he said, only because of its newer, more efficient planes and the operational improvements it has made in recent years. "The TWA of old, earlier in this decade, would not have survived that kind of an increase," Compton said.

"We were able to fund that expenditure, but what happened was that it depleted our cash resources."

TWA had just $157 million in cash last Sept. 30, down from $180 million at the end of 1999, and its losses typically are highest in the winter months.

Compton said he first talked to Donald Carty, American's chief executive, about a buyout last spring. The two held more talks in the fall, and the discussions really heated up in mid-December, Compton said.

The cash crunch was becoming apparent by October, when the airline missed a payment to an employee retirement fund. TWA officials say they expect to make that payment as part of bankruptcy proceedings.

A much bigger obligation was looming next week. On Monday, TWA was due to begin repaying $100 million that it owed on some secured bonds. Such bonds, issued after TWA emerged from its second bankruptcy in 1995, were sometimes called "light bulb" bonds because they were backed by a hodge-podge of assets, from spare jet parts to leases on airport gates.

"What finally pushed them over the brink is they ran out of assets to pledge," said Raymond Neidl, an airline analyst at ING Barings in New York.

Richard Bittenbinder, vice president and senior credit officer at Moodys Investors Service, said TWA presumably tried unsuccessfully to renew or replace the bond financing. "It would seem that they were unable to find a better alternative than the one they chose," he said.

Meanwhile, American was feeling pressure to grow after rival United Airlines agreed to buy US Airways. "I would say that the prospect of United dramatically increasing in size . . . may have enticed American to be a bit more aggressive in its approach to TWA, and TWA's liquidity crisis may have enticed it to be more aggressive in its negotiations with potential acquirers," Bittenbinder said.

Some analysts believe that fuel prices have peaked. Timothy Moloney, senior airline analyst at Banc of America Securities in St. Louis, said fuel prices have come down a bit and probably won't hurt airlines' earnings as much this year as they did last year.

But TWA couldn't afford to wait. And higher fuel costs hit TWA harder than they hit its bigger rivals.

Robert W. Baker, vice chairman of American, said that his airline's fuel costs rose by $1 billion last year, but that a hedging program offset about half of that amount.

Airlines hedge their fuel costs by buying futures contracts or other financial instruments. As oil prices go up, they pay more for fuel but make money on the futures contracts. If prices go down, the hedging program loses money -- it's like buying insurance you didn't need. But airlines value predictability, so many of them hedge at least part of their fuel costs.

Moloney said American, Delta and Southwest all have strong hedging programs that minimized the effects of last year's price increase.

Baker said American uses a lot of experts and an elaborate mathematical model to craft its hedging program. "But it takes cash and good credit to do that," he said. "TWA didn't have the ability to do that, so they paid essentially pump price."

Publication date: 2001-01-11

-- Rachel Gibson (, January 11, 2001


High fuel prices the nail that sealed the coffin? It figures.

-- Wayward (, January 11, 2001.

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