TIME: Almanac 1993/TIME Almanac 1993.iso/time/010791/0107201.000

Text File | 1992-08-28 | 5.9 KB | 126 lines

                                                                                BUSINESS, Page 71

Fallen Emperors of the Air


They once ruled the skies, but now they skirt bankruptcy. What
went wrong with the globe-girdling giants TWA and Pan Am?

By JOHN GREENWALD -- Reported by Jerry Hannifin/Washington and
Michael Quinn/New York


    In their heydays they were America's flag carriers in
foreign skies. Pan Am pioneered Pacific flights in 1935,
spanning the sea in Clipper ships that pampered their customers
like airborne grand hotels. And TWA, under flying mogul Howard
Hughes, became a premiere transatlantic carrier after World War
II. But now the once glorious airlines will be lucky to survive.
After a decade-long downward glide, they have finally come to
grief in the recession, buffeted by such forces as high fuel
prices and foreign competition. TWA and Pan Am serve as painful
lessons that even the strongest business empires will decline
and fall unless they constantly adapt to changes in the world
around them.

    For TWA and Pan Am, one last hope is to consolidate,
possibly with each other. But that proposal broke down last week
in squabbling over terms. Pan Am had tentatively accepted a $375
million buyout offer from TWA chairman Carl Icahn, but then
balked when Icahn demanded that the cash-starved carrier file
for bankruptcy before he would give it a $100 million loan. An
erstwhile raider, Icahn seemed spoiling for a fight to oust Pan
Am chairman Thomas Plaskett. Said Icahn: "He just doesn't want
to give up Pan Am. He's done a terrible job running the
airline." Retorted a Pan Am spokesman: "Mr. Icahn has not made
a credible offer."

    How did two carriers manage to soar so high, only to plunge
so deep into distress? Failure was foreign to Juan Trippe, the
adventuresome World War I flyer who built Pan Am's aerial
empire. Equipped with a global vision and deft lobbying skills
in Washington, Trippe won airmail contracts that ultimately
enabled Pan Am to link points from Buenos Aires to Bombay.
Trippe had help from Charles Lindbergh, who in 1929 surveyed a
2,000-mile Cuba-Panama route that put down at airfields hacked
out of jungle and malarial swamp.

    Yet the airline was eventually undone by Trippe's
single-minded pursuit of international business. After World War
II, intense competition sprouted along Pan Am's once exclusive
foreign routes. Many overseas rivals were subsidized by their
governments. Without domestic routes to funnel passengers to its
foreign flights, Pan Am saw its profits begin to plunge. In a
gamble to win back customers, Trippe ordered 25 Boeing 747s for
$600 million in 1966. But after they arrived, the 1973 Arab oil
embargo pushed up fuel prices and a severe recession set in.
"That was the start of a down-slide, and Pan Am never
recovered," said Will Player, a retired Pan Am executive.

    Pan Am has lost over $2 billion in the past decade and has
managed to survive only by selling off prized assets, notably
the Pacific routes that United Airlines took for $750 million in
1986. In what would be another major dismemberment, Pan Am is
reportedly considering the sale of its lucrative East Coast
shuttle to Northwest Airlines.

    Like Pan Am, TWA first soared to prominence by carrying
mail. Formed in the 1930 merger of Transcontinental Air
Transport and Western Air, it became America's first
coast-to-coast airline. TWA expanded rapidly under Hughes, who
acquired the airline in 1939. But Hughes was an erratic
businessman who delayed decisions and forced a string of TWA
presidents to resign. He dithered so long over a major aircraft
decision that his airline became the last large carrier to enter
the jet age. Bankers finally forced Hughes to step down in 1960.

    TWA also encountered stiff competition overseas. By the
time of the 1973 oil embargo and recession, TWA was leaking red
ink so freely that the Transportation Department urged the
carrier to merge with Pan Am. Instead, TWA went on a spending
spree, taking over such diverse firms as the Hardee's restaurant
chain and Century 21 realty, which it placed under a holding
company. When the diversification failed, the holding company
spun off TWA to shareowners in 1984.

    In the midst of takeover fever in 1986, Icahn acquired
control of TWA for $435 million. Thanks partly to Icahn's cost
cutting and his refusal to invest in new equipment for TWA's
aging fleet, the carrier reported a record $250 million profit
in 1988. But TWA lost $287 million the next year, after Icahn
took it private in a leveraged buyout and loaded it with more
than $2 billion of debt. The airline lost an additional $114
million in the first nine months of 1990. In December, Icahn
agreed to sell TWA's U.S.-to-London routes and its Chicago gates
to American Airlines for $515 million. (Icahn has already
recouped his original TWA investment -- plus a reported $33
million profit -- as a result of the buyout.)

    Can Pan Am and TWA survive, either together or apart? Icahn
says a merger would enable the new airline to raise more than $1
billion  in cash by selling overseas routes that overlap. "This
is just the first step in our growth," Icahn says. "But even
with the merger, I'm not telling you it's a sure thing."

    Some experts doubt that the two carriers can survive either
way. "The difficulty is that both companies are laden with
extreme levels of debt," says Paul Dempsey, director of the
Transportation Law Program at the University of Denver. Predicts
Robert Crandall, the tough-talking chief of American: "The
weaker carriers will be absorbed by the stronger ones. The
result will be a very competitive nationwide system of
relatively few carriers, virtually all of them competing on
every major origin and destination route." That could well leave
Pan Am and TWA as little more than nostalgic memories of glory
in the sky.