TWA Buy, United-US Airways Merger Still Up In The Air

<B>TWA Buy, United-US Airways Merger Still Up In The Air</B>

By David Jonas

The fate of Trans World Airlines hung in the balance last week as several groups submitted competing offers for the bankrupt carrier. At the same time, the U.S. Department of Justice again delayed a decision on the United Airlines/US Airways merger proposal, which had been scheduled for April 2. As the regulatory process continued, several new congressional bills were introduced to further scrutinize industry consolidation.

All auction proceedings and alternative bidding for TWA were set to culminate last Friday as a federal judge was to determine the winning bid or bids. American Airlines parent AMR Corp.'s original $500 million offer for essentially all of TWA's assets, plus assumption of leases and debts, was upped to $742 million and was approved by TWA's directors. However, despite AMR being the only bidder seeking all of TWA's assets and fulfilling all prerequisites for an auction last week, other bids were being considered by the presiding judge.

Jet Acquisitions Group of Phoenix, for example, offered $889 million, plus assumption of liabilities, which still exceeded American's new bid. Most analysts, however, are skeptical of JAG's bid because of the mysterious nature of the financial backing.

A New York group, TWA Acquisition Group, last week also raised its bid to a total of $1.1 billion in financial backing primarily from former TWA chief Carl Icahn. The group claimed to have developed a reorganization plan to keep TWA a "viable stand-alone" carrier.

In a statement, Brian Freeman, an investment banker and head of the newly formed group, said, "With the requisite concessions from labor and the airline's aircraft lessors, TWA can be returned to profitability."

The statement further asserted Icahn's participation in the bidding only after two TWA labor unions filed objections to the AMR proposal and that the Department of Justice would reject AMR on anticompetitive grounds.

However, both the pilots and the machinists unions dismissed Icahn's bid. TWA's board of directors did likewise, citing unfavorable concessions that would be necessary by employee groups. Still, the TWA Creditors' Committee lent some credence to the Icahn-backed overture, stating that it "seems to present an opportunity for a financial recovery to all unsecured creditors," whereas the AMR proposal does not.

Icahn led TWA to bankruptcy a decade ago and still receives an unlimited number of heavily discounted tickets from the carrier. Reports stated that Freeman would become TWA chief and Icahn merely is providing financial support for the bid. AMR said Icahn's ticket deal would not be honored if it assumes control over TWA.

Yet another potential bidder, Global Airlines--which last year offered to buy TWA on two separate occasions--also did not participate in last week's auction, but is said to have put a $505 million offer on the table for TWA assets excluding the St. Louis hub.

Meanwhile, global distribution system Galileo International submitted its own bid, but only for TWA's 26 percent stake in competing GDS Worldspan. Its offer of $220 million slightly exceeded the $200 million earmarked by American from its bid and the $205 million from Jet Acquisitions Group's total bid.

TWA noted, however, that "the terms of the Worldspan partnership agreement require that an acquirer hold an airline operating certificate and not hold an interest in a competing GDS." TWA added that to the "best of its knowledge," Galileo holds no such certificate and is, of course, a GDS competitor.

Worldspan added that Galileo's proposal is "mischief" and "little more than a ploy to disrupt the travel distribution marketplace and infringe on Worldspan's growing share of the global travel agency market."

Galileo acknowledged its bid is contingent on several conditions, including amendments to TWA's partnership agreement with Worldspan. "We believe it makes good business sense to explore the opportunity through a partial ownership," Galileo vice president of corporate and consumer sales and marketing John Hach told BTN. "When we looked at today's environment, with consolidation and partnership opportunities that frequently occur, we felt we'd be remiss if we did not explore this one."

In a research note to investors, CIBC World Markets analyst Paul Keung said, "As a result of the bid, we now believe that Galileo's management is seeking financial partners to facilitate an eventual merger with Worldspan." Keung added that Galileo may have had "behind the scenes conversations with Delta and Northwest to discuss these issues." Delta Air Lines and Northwest Airlines also are Worldspan stakeholders.

Northwest, however, stated it would not consent to any requested amendments, adding that the Galileo offer is a "frivolous" attempt to confuse the market.

Details of the federal bankruptcy judge's decision, which was to be based not solely on price but also on the bidders' ability to maintain TWA's flight schedule and obligations, and TWA's own AMR recommendation, were not available at press time.

Because of bankruptcy proceedings, TWA canceled an embryonic codeshare agreement with America West Airlines and indefinitely delayed the launch of new international routes.

Meanwhile, United and US Airways agreed to extend DOJ's review period beyond April 2 in order to give regulators more time to analyze materials related to American Airlines' involvement (BTN, Jan. 15), which has raised antitrust concerns at DOJ. Both United and US Airways further agreed to give DOJ a 21-day notification prior to closing the $4.3 billion transaction. Last week's announcement marks the second time DOJ delayed a decision.

As the formal review proceeds, a spate of merger-related legislation has emerged from various congressional leaders. Earlier this month, Senators Byron Dorgan (D-N.D.), Charles Grassley (R-Iowa), Fritz Hollings (D-S.C.) and John McCain (R-Ariz.) introduced the Aviation Competition Restoration Act.

The legislation generally would prohibit acquisitions that result in a certain level of market dominance; force the divestiture of gates, facilities and assets by dominant hub carriers at their hub airports and make them available to new entrants; prohibit other anticompetitive actions; and give the U.S. Department of Transportation more authority in reviewing industry mergers and other threats to competition.

Though DOJ currently is charged with reviewing any potential industry consolidation, new DOT secretary Norm Mineta recently indicated that his agency may opt for "a more rigorous approach" to analyzing mergers and assisting DOJ with decisions.

Business Travel Coalition chairman Kevin Mitchell quickly threw his support behind the congressional bill. "Finally, one of the key premises of deregulation will once again be valid," he said, noting DOT's earlier failed attempt to implement competition guidelines. "Any airline willing, fit and able will be able to provide service to any U.S. airport."

Hearings on the Aviation Competition Restoration Act could begin as early as this week.

Meanwhile, Representatives Louise Slaughter (D-N.Y.) and Peter DeFazio (D-Ore.) introduced the Airline Merger Moratorium Act of 2001, which would delay any significant industry consolidation for at least a year. The act has been sent to the House Committee on the Judiciary for review.

Amid increasing federal scrutiny, United is firming up its integration strategy. The carrier continues to expand a transition team and recently reached an agreement with Atlantic Coast Airlines Holdings to sell off US Airways' three regional subsidiaries.

The three carriers--Allegheny Airlines based in Harrisburg, Pa., Piedmont Airlines in Salisbury, Md., and Vandalia, Ohio-based PSA Airlines--would become ACA subsidiaries following the closing of United's potential acquisition of US Airways.

United said it is "pleased" that Atlantic Coast will acquire the three US Airways subsidiaries, as its "business expertise at United is major airline operations." The three carriers would transition to United Express affiliates.

Atlantic Coast Airlines Holdings already operates Atlantic Coast Airlines--a United Express affiliate--and ACJet, a Delta Connection carrier, with a combined fleet of 106 aircraft and 650 daily departures to 51 destinations.

Despite unloading the trio of regional carriers and associated labor discontent, United still has plenty of in-house labor turmoil that could muddy the larger merger picture (see story, page 3).

Meanwhile, underscoring repeated assertions that it cannot survive as an independent carrier--and therefore must be acquired by United to survive--US Airways said it expects first-quarter earnings to be even lower than the expected consensus of a $1.12 loss per share, as recorded by First Call.