Carl Icahn - the shrewdest investor

I was reading about Microsoft reviving its race for Yahoo - now a takeover of Yahoo's search engine business and came across the news item on Carl Icahn and his proxy war. That lead me to read more about him and how he destroyed an another company, TWA. Below is the detailed history of TWA, once a famous Airlines, which explains how Carl Icahn made his money with TWA's gradual demise.

Such folks are called Corporate raiders. A corporate raid is a business term for buying a large interest in a corporation and then using voting rights to enact measures directed at realizing a profit. The measures might include replacing top executives, downsizing operations, or liquidating the company.

CNN's article cites him as the shrewdest investor and details further on the Icahn effect.

TWA - Death Of A Legend
by Elaine X. Grant

TWA was the Marilyn Monroe of the airlines: an American icon done in by powerful men who wanted a piece of its magic. Glamorous, tragic, gone before its time.

And even though TWA’s demise didn’t involve pills or rumors of mob involvement, it was every bit as controversial as Marilyn’s suicide.

Ask any ex-staffer what went wrong with the airline, and you’ll get one answer: Carl Icahn, the corporate raider who took over TWA in 1985 and systematically stripped it of its assets.

It’s easy to pin the blame on Icahn. But as glorious as TWA’s image was, its history was rife with missteps, misfortunes and miscreants.

TWA was born in 1930 when Transcontinental Air Transport merged with Western Air Express. In 1939, legendary Leonardo DiCaprio vessel Howard Hughes gained control of the airline. Already a famed aviator, tycoon and playboy, Hughes was asked to invest in TWA by its president, Jack Frye, a universally respected pilot who had run the airline since 1934.

Hughes would own TWA for the next 27 years—without ever holding an official position. At first, TWA was thrilled to have him at the helm. He brought to the table glittering celebrities, a true aviator’s love of flying, and money, money, money. But he also brought the eccentric behavior that foreshadowed his descent into an obsessive- compulsive prison years later.

Fiercely secretive and famously indecisive, Hughes was the millstone that kept TWA from staying at the front of the high-stakes jet race
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. He loved jets and wanted TWA to be one of the first airlines to have them—but, as with everything else, it had to be done on his terms. In the mid-1950s, when United, American and Pan Am placed large orders for the latest jets, Hughes wouldn’t allow TWA to follow suit. He eventually ordered eight short-range Boeing 707s through his Hughes Tool Co. but cagily told TWA that the airline would have no rights to them. (Indeed, he had been known to keep a TWA plane on hand for his personal use for months at a time despite his top executives’ entreaties for its return to service.) “Eight domestic Boeings, while better than none, were not sufficient to preserve TWA’s markets against the forthcoming onslaught by American and United,” wrote longtime TWA executive Robert Rummel in Howard Hughes and TWA.

Finally Hughes ordered 18 international Boeings and 30 Convair 880s, and it seemed that TWA might be back in the game. But with the Convair order Hughes found himself nearing the end of his financial resources.

He began playing games with the manufacturer—refusing delivery of planes, sending his own inspectors to place them under armed guard, preventing TWA inspectors and Convair workers from boarding, even blocking test flights—in a bid to delay payment.

TWA was in desperate need of money, but no bank would give the airline a cent as long as Hughes was still in the picture. “We were subject to very stiff interest penalties as a result of Hughes’ involvement,” says Jerry Cosley, who held several executive and staff positions with TWA from 1960 to 1985. “He was a genius in many aspects of aviation, but he maintained a very spotty record of financial achievement.”

In 1960, with TWA facing bankruptcy, Hughes finally gave up control of the airline. Six years later, he would sell his TWA stock. (TWA eventually filed two lawsuits against Hughes. After more than 25 years of litigation, the airline won one and lost the other, pocketing damages of almost $50 million.)

TWA began to gain ground, but more trouble was on the way. “TWA after Howard Hughes was really run by a group of people who never believed in the airline industry,” says Don Casey, who joined TWA’s marketing department in 1968. “What did they do with any money they got? They went out and bought Hilton International [in 1967] and Century 21 [in 1978]. They wanted TWA out of the airline business.”

“American and United survived because they had iron-willed CEOs dedicated to being the number-one carrier. Ours were distracted,” says John Gratz, who flew for TWA from 1955 to 1991. “We were always known for coming up with little gimmicks like inflight movies, coffee and [frozen] meals, but the big corporate decisions were lacking.”

Still, TWA’s future was brightening. “As the U.S. economy improved in the late 1960s, TWA’s fortunes started to improve along with the entire industry, even though we were still dragging the weight of a debt burden the other carriers didn’t have,” says Cosley. “The news stories always started with ‘Financially troubled airline TWA.’”

That financial trouble was only exacerbated in 1978, when President Jimmy Carter signed the Airline Deregulation Act, turning what had been an orderly system of cost and profit into a flurry of desperate competition.

“Deregulation set fire to the industry,” says Cosley. “Every carrier had the same problem then as now, and nobody in the industry has yet solved the riddle: How do you compete while effectively managing your costs? The fixed-cost burden—labor, leases, fuel, all variables that management cannot control—ate us alive.”

In 1984, TWA’s parent company, which owned Hilton and Century 21, cut the airline loose, a broken-winged bird helpless before the pounce of the ultimate corporate predator: Carl Icahn.

In retrospect, TWA should have known better. In 1985, Icahn launched a sneak attack, buying up more than 20 percent of the airline’s stock. TWA fought back, and another suitor entered the picture: Frank Lorenzo, president of Texas Air.

If anyone could make Icahn look good, it was Lorenzo. Infamous for breaking the unions at Continental, he was the last person on earth TWA’s union workers wanted for a boss.

“Most all of us thought Carl Icahn would be better,” says Gratz. “Everyone was so upset by the way Lorenzo handled the unions. He was more obviously ruthless than Icahn. You couldn’t see any redeeming quality about him.”

Icahn, though he already had a fairly dark reputation for buying and breaking up companies, told TWA what it wanted to hear: He wanted to make it profitable.

Profit was his goal, all right, but not TWA’s. “He told employees TWA needed to grow to be competitive,” says Jeff Darnall, who flew for the airline from 1989 until he was furloughed in 2003. “We took him at his word. It was an opportunity to be with an airline that was poised for growth.”

Icahn did help the airline grow, most notably by acquiring Ozark Airlines in 1986, an act that cemented TWA’s dominance at its St. Louis hub.

But soon enough, the party was over. “It became more and more apparent that Carl was not interested in growing the airline but in using TWA as a financial vehicle to acquire wealth for himself,” Darnall says.

In 1988, Icahn took what many consider the first step toward the airline’s demise: He took TWA private. Icahn received $469 million in the deal, and TWA got something a little less attractive: $540 million in debt.

That was just one manifestation of Icahn’s short-term–gain thinking. “Icahn wanted it to be a low-cost, low-fare airline,” says Casey. “He loved one ad that we ran—‘The World is a Bargain When You Know Where to Shop.’ I said, ‘You know, Carl, TWA can be a bargain if TWA stands for something, but if the only thing TWA stands for is a bargain, it’s not a bargain. He said, ‘I believe you, but when I run the ad, the phones ring.’”

In 1989, Icahn made another revealing move. According to Darnall, employees were anticipating an order for 100 or more airplanes to replenish TWA’s aging fleet. When the order was announced, it was for 12. “That was an indication to me that we had been hoodwinked,” Darnall says.

In 1991, Icahn did something that still causes twinges of pain for those who were there when it happened. He sold TWA’s prized London routes to American Airlines for $445 million.

“Selling the London routes was a killer,” says Gratz. “They were valuable as hell. The other things he did—trying to implement draconian procedures for everything, having people watch people—it’s all a hill of beans compared to losing those routes.”

In 1992, TWA filed for bankruptcy, emerging in 1993 with its creditors owning 55 percent of the company. One of those creditors, to the tune of $190 million, was Icahn. He resigned as chairman in 1993, and by 1995 he was growing impatient to be repaid. TWA executives, desperate to bring the tragic Icahn chapter to a close, gave away the farm, the cows and the farmer’s wife. They came up with a deal called the Karabu ticket agreement, an eight-year arrangement that allowed Icahn to buy any ticket that connected through St. Louis (but not those that originated or ended here, so St. Louisans never had access to the cheap tickets) for 55 cents on the dollar and resell them at a discount.

Karabu blocked Icahn from selling the tickets through travel agents, but it didn’t even mention the embryonic Internet, where he immediately set up Lowestfare.com and commenced to bleed TWA dry, one ticket at a time. “He put downward pressure on the amount TWA could sell tickets for because we were essentially competing with ourselves,” Gratz says.

American Airlines later estimated that Karabu cost TWA $100 million a year, but as bad as Karabu turned out to be for TWA, and as fervently as its constructors may have later wished they had closed the Internet loophole, TWA didn’t have many options at the time.

“There was no $190 million. There was nowhere to get $190 million. TWA had two choices: accept the agreement or shut down,” says Mark Abels, who was vice president of corporate communications from 1996 to 2001.

“They said, ‘OK, you mangy pirate, we’ll do the deal.’ If the airline didn’t do the Karabu deal, it would have gone out of existence in 1995 rather than 2001.”

TWA didn’t go out of business in 1995, but it did go into bankruptcy—again.

It emerged a couple months later, beaten down and limping behind the other major carriers but starting to perhaps not see but at least imagine clear skies ahead.

“We called it the 70-year-old startup,” says Dave Pelter, who was TWA’s director of revenue analysis at the time. “The carrier had just turned in a profitable quarter; things were looking up. There was an immense amount of potential.”

On July 17, 1996, a Paris-bound TWA plane exploded off Long Island, killing all 230 passengers.

TWA was shattered by the tragedy of Flight 800, but it picked itself up and tried, once again, to turn things around.

Long one of the worst performers in on-time arrivals, TWA surged to the front of the pack. It ordered hundreds of new planes, touting its renewed fleet with an ad campaign that boasted “a new plane every 10 days.”

“If we could outlast Carl Icahn, I really felt that we would have been in good shape from then on,” says Jeffrey Struyk, a pilot with TWA from 1998 until his furlough in 2002. “We’d done a lot to improve our operations. There was a real sense of optimism.”

Given that optimism, it’s not surprising that some of the unionized employees decided that it was time to recoup the money they had lost. A series of givebacks had started in the 1980s, all concessions the airline had insisted it must have to survive. TWA had survived; now it was time to pony up.

“TWA ended up with a contract for the pilots which was more than we had hoped for,” says Jack Stelzer, who was with the airline from the late ’60s to the mid-’70s and rejoined the carrier in 1997 as vice president of planning. “The mechanics, unfortunately, continued to live in a hypothetical universe where TWA was the largest airline in the world. They thought it was necessary for TWA to increase operations in JFK and to have large maintenance bases in Kansas City and JFK. Both of those things were very problematic.” Problematic or not, the mechanics, represented by the International Association of Machinists and Aerospace Workers, got what they wanted by threatening a work stoppage.

“We might have caved too quickly,” concedes Stelzer. “We were concerned that if we held out, the final settlement would have ended up raising our costs significantly more than we originally planned. We had the fear that every airline has: When you have a strike, you have no revenue, and TWA at the time was not in a position to be able to fly through that.”

“To threaten a strike, I thought that was pretty inappropriate,” says Struyk. “They seemed to be asking for a lot, and a strike would have shut us down. I wasn’t too happy that they were playing hardball at a time like that.”

The IAM contract would come back to haunt TWA. Those maintenance facil-ities in Kansas City and JFK, where the planes underwent “heavy checks” every five to six years, were siphoning money from TWA’s bottom line, and there was nothing the airline could do about it.

“The unions were insistent that they remain open,” says Abels. “Down the line, the Kansas City operation was more than big enough to serve the whole fleet. Even that might have been extraneous, because in order to be profitable, you farm out your heavy checks. Southwest, for example, has never done a heavy check. Maintenance at those facilities was pretty much stopped, but we couldn’t close them.”

Another problem was TWA’s international operations. Stripped of its lucrative London slots, TWA had become a weak presence in Europe, but it had a payroll of European workers that predated deregulation. Before the advent of computerized reservation systems, airlines required a lot of manpower to process each flight. “And once you hire somebody in Europe, they’re hired for life,” says Stelzer. “It’s a cradle-to-grave employment situation. We had more employees in Milan than in places where we had 10 to 12 flights a day. We had to either pay them forever or try to buy them out, which meant wages and salaries for the next 25 years. That made it extremely difficult to be competitive with the Continentals and Deltas and Americans that were coming in, outsourcing labor.”

All of this added up to a sorrowful reality: TWA was not going to make it.

“We had cleaned up a lot of the historical challenges and were on a path toward renewal,” says Pelter. “It just wasn’t enough.”

In January 2001, time ran out. CEO Bill Compton held a press conference to announce TWA’s third and final bankruptcy and a purchase offer from American Airlines.

Depending on whom you ask, the American purchase was either inevitable or borderline criminal. Compton, the pilot-turned-executive who orchestrated the sale and claimed it was TWA’s only option, is described variously as a good-hearted savior, a bumbling naïf and a turncoat who sold out the employees for personal profit.

“We were actually making progress, good progress,” says Darnall. “Our costs were among the lowest in the industry. The only thing that was keeping us from showing profit was Carl Icahn’s ticket agreement, and that was scheduled to expire in September 2003. We were very close to getting out from under that burden. We all knew that the winter of 2000 was going to be a difficult time. Winters were difficult times for all airlines. Our cash position was not flush, but we were convinced that TWA was going to make it without too much difficulty.”

“I was pretty surprised by the bankruptcy announcement,” says Struyk. “When the press release came out, it made it sound a lot more bleak than I thought it was.”

Given that reaction, it’s a pretty safe bet that Compton isn’t spending his days hanging out with his old TWA flying buddies, who sum up their feeling about his role in the sale with one word: betrayal.


One pilot speculates that Compton’s motives in setting up the sale were more personal than professional, “a defensive move so that he was not replaced as CEO.”

“I think nothing could be further from the truth,” Pelter says. “You don’t take a job like that because of a golden parachute. I think Bill, at the bottom of his heart, thought he was making the best decision he could to save jobs.”

“Bill Compton did every-thing he possibly could,” agrees airline analyst Michael Boyd. “Despite his union background, he was one of the most competent CEOs in the business. It had just gone too far.”

Or maybe he just didn’t know what he was doing. “If he did have TWA’s best interests at heart, he’d have to be naïve in the extreme to turn over a company like TWA to the likes of American Airlines, a company that has a reputation for being bloodthirsty when it comes to acquisitions,” says Darnall.

“As a guy who was on the scene,” counters Casey, “I can tell you that Bill Compton was not naïve. This was a guy who was used to doing a little horse trading as the head of the pilots’ union.”

The employees have their suspicions, but analysts and former executives say that Compton’s representation of the situation was sad but true. “TWA was dead meat,” says Ray Neidl, an analyst with Calyon Securities. “They didn’t have the market size, they didn’t have the fleet, they didn’t have the cost structure. Mainly they just didn’t have market mass. They were becoming a nonentity in a market that was dominated by low-cost carriers and giants. TWA was out of options.”

“By March of 2000, the tech stocks and dot-com market had started to implode,” says Stelzer. “Trillions of dollars were taken out of the stock market. Also, interest rates had started to go up, and fuel prices started to edge up a little bit. Demand was declining because the people who had been flying in the late ’90s weren’t flying anymore. It got worse and worse into 2001.”

“Painful as it was and is, the sale at least saved the core of the operation,” says Cosley. “It was the only option. The other airlines had their own problems; they didn’t want to buy into TWA’s.”

In fact, in February 2001 Compton testified before the Senate Commerce Committee, saying that he had approached every major airline in the United States. “No one was interested in TWA as a going concern,” he said. “Most recognized that they would benefit from TWA’s demise and decided they would sit back and let it happen.”

And it would have happened—soon. “The cash position was such that had American not stepped up to the deal on the day that they did, on the next day we would have shut down the airline,” says Abels.

As American was preparing to take over TWA, another potential buyer emerged: Carl Icahn. That was all it took. As had happened 16 years earlier, when the fear of Frank Lorenzo drove TWA’s employees into the arms of an arguably deadlier foe, the specter of Icahn, who made a $1.1-billion offer and said he would keep the airline independent while demanding labor concessions and making job cuts, made the American offer seem aglow with promise.

The bankruptcy judge dismissed Icahn’s offer as a joke, but even if it had been seriously considered, he had earned such a bitter reputation with TWA’s rank and file that they would have willingly marched off the American Airlines plank anyway.

Under American, everything sounded good—at first. The workforces were integrated in a way that put TWA employees at a disadvantage, but at least they were working. American promised to keep St. Louis as a hub and even expand its operations here.

“It looked like American had seen some value in the company,” says Struyk, “and it looked like we had something to contribute.”

Then came 9/11, and the promise of the American purchase lay in ruins along with the innocence of a nation.

“On 9/11, I knew it was over,” says Struyk.

In October 2001, American began making job cuts. Some employees were laid off; some were furloughed (removed from active status indefinitely).

The next casualty was the St. Louis hub. In November 2003, American resized the hub “to reflect size of St. Louis marketplace,” says American spokeswoman Mary Frances Fagan. American eliminated about 200 flights and restructured the remaining ones so that about 70 percent of travelers were originating in St. Louis, with 30 percent connecting, mostly from short- range destinations.

It wasn’t a popular decision, but it was a logical one. “Connecting flights don’t make you much money,” says Abels. “We had about a 70-30 mix of connecting to local traffic. You need 50-50 to make a hub operation work.”

In fact, the move made so much sense that it caused some to wonder whether a downsizing at St. Louis had been the plan all along.

“They blamed most of what they did on September 11. It was a convenient excuse for a lot of things that had nothing to with September 11,” says Gwendolyn Miller, a furloughed flight attendant who was with TWA for 25 years. (Paranoia? Perhaps, but American CEO Don Carty lent credence to the idea when he resigned in 2003, after approving bonuses for senior officials while simultaneously downsizing the St. Louis hub and urging employees to help the airline stave off bankruptcy with huge concessions.)

St. Louis had always been a problem for TWA. “In St. Louis we had a hub that was simply not viable from a profitability standpoint,” says Abels. “I say that as a native St. Louisan who loves St. Louis, who has chosen to live out my life and die in St. Louis. But St. Louis is not big enough to maintain a hub like Chicago or Dallas. It doesn’t have nearly enough traffic.”

“Under the original plan, it would have been a great secondary connecting point for American,” says Boyd. “American would have been the strongest carrier in the U.S. But I’ve read some of the old St. Louis materials saying, ‘You’ll always be a hub.’ No, you won’t. American is slowly eliminating it as a hub. It has maybe a couple years left.”

Given TWA’s strange history, the what-if game is too tempting to avoid, especially the biggest hypothetical of all: If TWA had not been purchased by American, would it have survived 9/11?

“If it weren’t for American, we would still be flying the TWA colors,” maintains Darnall.

“I don’t think there were three people in the world who would have given TWA a chance after Flight 800,” says Casey. “Four years later, we were a better airline in every way in terms of our aircraft, service and financial position. If we made it for those four years when no one gave us a chance, maybe we could have made it after 9/11.”

After all, says Abels, “TWA should have failed in the Hughes era; in the ’60s, when it became a conglomerate and spun off the airline into a cash-poor nothing; in the Icahn era ... It was the airline that wouldn’t die.”

But then there are the realists. “If TWA had managed to stay in business through the summer of 2001—it would have been difficult, but it could have—it would not have had enough cash to make it through September 11,” says Stelzer.

So what killed TWA? It wasn’t one thing but a collection of problems, some shared by the rest of the industry, some part of the outlandish panoply that was TWA: Hughes’ meddling, Icahn’s greed, the hellish actions of a cadre of terrorists. A militant union, the collapse of the economy, the price of fuel, tardy attention to the necessity of alliances.

Given the chance to go back and rectify the mistakes, each TWA loyalist has a different plan.

“American challenged the Karabu deal in court and won,” Pelter says. “TWA could have tried to get it invalidated. There were some penalties; to challenge it was really rolling the dice, but that’s what I would do.”

“Somebody suggested to me that, at the very beginning, the airline industry should have made the pilots part of management instead of organized labor that could stop the airline from flying,” says Casey. “It would have been a very different industry and a very different airline.”

Stelzer rattles off his own detailed plan: “We could have gone into bankruptcy, cut operations at St. Louis in half, shut down JFK transatlantic, let go of over half the workforce, taken the capacity that had been flying in St. Louis and moved it to other cities, created focus cities like San Juan throughout the U.S. and effectively had small hubs through which we could flow some percentage of our airplanes. If we had done all that, we would still be flying today.”

Gratz isn’t sure. “TWA was really handicapped and had to be creative in many, many ways,” he says. “I really didn’t think they’d last as long as they did.”