A Whole New Chapter

American uses TWA's bankruptcy filing skillfully in its acquisition, adding pressure on rival United.

AMR Corp. quite literally courted Trans World Airlines Inc.–by insisting that TWA file under Chapter 11 as a precondition of its $500 million acquisition. But while blessed by a bankruptcy judge, this marriage may well have been made in heaven.

The integration of TWA with AMR’s American Airlines unit was designed to give American a strategic advantage, of course. Still, airline-industry watchers suggest that AMR may have had another motive for acquiring TWA. “American’s principal purpose is to try to derail the UAL deal,” which would combine United Airlines and US Air Inc. into the world’s largest carrier, says Marc-David Seidel, assistant professor at the University of Texas’s McCombs School of Business, and an expert on airline industry mergers.

Taking a financially ailing takeover target through bankruptcy court isn’t exactly an unusual approach. Indeed, it’s “quite common,” says Denver bankruptcy attorney Brent Cohen, who adds that “there are endless possibilities under Chapter 11 to reorganize and emerge, or not emerge, as an entity.” For example, he says, “it allows the reorganization and restructuring of the relationship with creditors, the issuance of stock for debt, and the liquidation of assets.” Some similar recent cases include the purchase of the United Artists theater chain by Denver billionaire Philip Anschutz’s company; Vlasic Foods International Inc.’s acquisition by H.J. Heinz Co.; and the proposed $6 billion bailout of Finova Group by Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp.

In the TWA case, AMR spokesperson Tim Doke confirms that without the bankruptcy-court filing, buying the St. Louis­based carrier would have been “very unattractive.” Among the complications facing American was an agreement between TWA and investor Carl Icahn that allowed him to buy airline inventory at hugely discounted prices and resell it at prices that he set. TWA estimates that this agreement cost it more than $90 million last year. Also, AMR would have had to deal with “facility issues,” such as an outmoded hangar at JFK International Airport. Indeed, American has already renegotiated aircraft leases that had been negotiated with TWA’s bad credit rating. Before the airline’s filing, “lessors had no reason to give TWA favorable terms,” says Doke. “We estimated TWA was paying $120 million more than what we would have had to pay with our credit ratings for the same leases” without the filing. “We’ve already negotiated savings well north of that.”

AHEAD: A PILOT ISSUE

Chapter 11 filings are used by other companies in the acquisition process to help them sell assets free and clear of liens, allowing the target to start with a clean slate. Leases and other contractual obligations, including, in some cases, collective-bargaining agreements, can also be rejected by the acquiring company. AMR has accepted amended versions of TWA’s labor contracts, but pilot seniority may be a tough issue. “Typically, there’s a ‘fence’ that keeps pilots of the smaller acquired airline from moving over to the acquiring airline’s ranks,” says Doke. He predicts it will take three to four years for that transition to be completed; however, TWA pilots can expect a “significant wage increase” no later than January 1, 2002.

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