American to Get Key TWA Routes for $515 Million : Airlines: Carl C. Icahn’s carrier also makes its second bid in a month for ailing Pan Am--this time for $375 million.
Seeking to raise badly needed cash, Trans World Airlines said Sunday that it had agreed to sell all of its London routes and other assets to American Airlines for $515 million. Simultaneously, TWA made a new offer to acquire ailing Pan American World Airways for $375 million.
The two moves further illustrate how weak U.S. airlines are getting weaker and stronger carriers are taking advantage of it. Struggling TWA said it needs to merge with Pan Am to help ensure both carriers’ survival. And the sale to American of some of TWA’s most coveted routes will make American an even stronger force internationally, while giving TWA cash to finance the Pan Am bid and survive the economic downturn.
TWA had offered to buy Pan Am last month for $450 million, but the overture was quickly rejected because Pan Am felt it could go it alone following an agreement to sell its London routes to United Airlines.
In a letter delivered Sunday to Pan Am Chairman Thomas G. Plaskett, TWA Chairman Carl C. Icahn offered to enter into a definitive merger agreement with Pan Am in which TWA would pay $1.50 per share in cash and $1 per share of either a preferred stock or a promissory note.
A Pan Am spokesman said “the letter was received too late on Sunday, so there is nothing we can say tonight.”
In its earlier unsuccessful bid, TWA offered $1 in cash and $2 in stock or notes for each share of Pan Am stock. Analysts were skeptical of the TWA proposal because of the low cash offering.
In its deal with TWA, American agreed to buy for $445 million certain TWA routes between London’s Heathrow and Gatwick airports and six U.S. cities, including Los Angeles. The routes agreement is subject to Department of Transportation approval.
American also agreed to purchase from TWA for another $70 million a total of 40 landing slots and three gates at Chicago’s O’Hare International Airport and some other facilities. American hopes the deal will enhance its competitive position in Chicago, its second-largest domestic hub, where it now runs second behind archrival United.
As part of the deal, TWA and American will mesh their frequent flier programs.
Dallas-Ft. Worth-based American said it planned to finance the transaction by the sale of common stock in the first quarter of next year.
The TWA-American deal continues a trend whereby strong carriers are gaining “by taking advantage of the current environment in which the financially ailing carriers need to raise cash to maintain their viability,” said Hans J. Plickert, an airline analyst with the Transportation Group, an affiliate of Paine Webber, the New York-based investment house.
But Plickert added that the current American-TWA deal and others like it might provide cash transfusions to allow weaker carriers to survive.
“People have been predicting that some of the weaker carriers--and TWA is one of these--will not survive,” Plickert said. “Now their disappearance is not a given.”
Icahn said that while he was “reluctant” to part with the London routes, “over the last two years earnings from these routes have seriously deteriorated.” Icahn said those earnings “will almost certainly continue to erode,” thanks to new competition brought on by United’s recent agreement to buy Pan Am’s London routes.
Icahn said cash from the sale of the routes would “generate additional cash . . . which will enable us to position ourselves for growth, despite these extremely difficult times.”
Icahn, who owns all but about 10% of TWA stock, said that in addition to the Pan Am offer, he is continuing his talks with bankers and creditors to buy bankrupt Eastern Airlines’ Atlanta hub and its Miami maintenance base.
Most of the sale to American involves routes to London’s Heathrow Airport, a development bound to perpetuate a major controversy. Under bilateral agreements between the United States and Great Britain, only TWA and Pan Am are specifically mentioned as being allowed to use Heathrow, the major British gateway to Europe.
Because Heathrow is so congested, the British have attempted not to transfer the route authority there from one U.S. carrier to another. Instead, it has insisted that any new routes go into Gatwick Airport. Gatwick, though closer to downtown London, doesn’t have as large a European feed. Talks on the subject are under way between the two governments.
A similar situation exists in Pan Am’s agreement to sell certain routes to United Airlines for $290 million. Pan Am also sold United two Boeing 747 jetliners, making the entire transaction worth about $400 million.
In a statement issued late Sunday, American Chairman Robert L. Crandall said the purchase “will enable us to become a more effective competitor on both transatlantic and domestic routes.”
American is fast becoming a vast global airline. It already had routes to Asia and Europe, and earlier this year purchased Eastern Airlines’ Latin American routes. Recently it greatly expanded its operations to the Caribbean. American has a fleet of 546 planes and operates 2,400 flights a day to 184 destinations worldwide. It has 81,000 employees and another 500 planes on order or option.
An American spokesman said the announcement was made so late on Sunday because the negotiations with the Icahn group “were not completed and signed until the last minute.”
In December, 1989, American had agreed to acquire the Chicago-London route from TWA but that transaction has yet to be approved by the Transportation Department. It is not known why it has been held up so long.
In the deal announced Sunday, American said it also will acquire TWA routes between Heathrow and Boston, Los Angeles, Philadelphia, Newark and New York’s Kennedy International Airport. It also gives American Airlines routes between Gatwick Airport and St. Louis and Baltimore-Washington.
