Let’s call this Carl Icahn week here at Cranky. This Thursday is the fourth annual Cranky Network Awards, and I’m already up in Oakland getting everything ready for the big night. I have two posts this week. Today, I’ll take a look at what happened at TWA when Carl Icahn got involved back in the 1980s. Then Thursday I’ll discuss what this could mean for JetBlue now that Icahn has taken a stake.
Carl Icahn is well known as an activist investor, and that’s about the nicest way you could describe the man. Others wouldn’t be so generous, calling him a corporate raider and greenmailer. No matter how you feel about him, we can agree that Icahn is someone who puts money into companies that he thinks are being undervalued and poorly run so he can change them and get rich. On occasion he takes them over, but more often he just uses his influence to effect change. His goal is to make money and get out, so he can go on to the next deal and get richer. Full stop.
This may not sound all that bad, and he is certainly transparent in that regard. But Icahn is more of a short-term thinker who isn’t overly concerned about long-term success of a business. Those who have been in the airline industry for awhile know this well. Carl Icahn is generally regarded as the man who killed TWA. You can’t pin all of TWA’s problems on Icahn, but there’s little question that he had an outsized negative influence on the surprisingly-slow demise of the airline because he was acting in his own self interest.
To be very clear, TWA was not in good shape in 1985. It was looking like Frank Lorenzo was going to win a fight to take over the airline and put it under the Texas Air Corp umbrella along with the two others he owned, Continental and New York Air. This wasn’t just speculation. He had an agreement to buy TWA.
Lorenzo had already gone through a bruising battle with labor when he acquired Continental and merged it with Texas International three years earlier. The unions at TWA saw Lorenzo as a bad man, and after a summer of negotiating with all comers, they chose Carl Icahn as their horse in the race to fend off Lorenzo.
Icahn had already acquired just over 20 percent of the company, because he thought it was undervalued. (Sound familiar, Jetblue?) He didn’t care about the unions one bit, but he saw them as a great hedge. If he could get a deal out of the unions to cut their pay, great. He’d go all in and take over the company. If he couldn’t get them to budge, well, that’s fine too. He’d be happy to let Lorenzo win while he sold his shares and counted the profits. He thought he couldn’t lose, but he was wrong.
The unions eventually did agree to concessions, and they worked to help Icahn beat out Lorenzo for control of TWA. He eventually acquired all outstanding stock and took the company private by saddling it with a ton of debt and of course, enriching himself (it was the age of the leveraged buyout).
Icahn would go on to squeeze everything he could from the airline in order to make money for himself. He moved the headquarters, sold the prized London routes, stripped other assets, and left the airline in an even weaker position than when he found it. In 1992, TWA went bankrupt and Icahn admitted this was a bad investment, but he didn’t walk away. He couldn’t.
During bankruptcy, it came out that Icahn’s TWA had underfunded the airline’s pensions by more than $1 billion. The Pension Benefit Guaranty Corp threatened to sue him, but instead, they settled. Icahn agreed to lend the airline $200 million and contribute millions to the pension fund. He also agreed to resign. Not long after, TWA was back in trouble again when it had to repay Icahn. It didn’t have the money, so it agreed to something terrible… the Karabu agreement.
The Karabu agreement allowed Icahn to purchase any published fare on TWA (except for St Louis origin/destination tickets) at a 45 percent discount. It also gave him access to some consolidator fares. When TWA agreed to this, the debt would be wiped out. Icahn would be able to access these fares until September 2003. Other crushing debt the airline still held would be converted to equity, all through a pre-packaged second bankruptcy in 1995 which was expected to put the airline on more solid footing.
It was envisioned that Icahn would come up with a scheme to make money on the Karabu deal, but the airline had made sure to prevent Icahn from selling these tickets through a third-party travel agent in the agreement. Unfortunately for TWA, this was the dawn of the internet e-commerce era, and Icahn came up with a plan. He created lowestfare.com to sell tickets directly to travelers. He would mark up the tickets to make his profit, but the end result for the customer was that it was still cheaper than buying from TWA or anywhere else. This venture was wildly successful for everyone except TWA.
It was later said that this cost the airline about $100 million in revenue per year, or more than 3 percent of total revenue. That may not sound like a lot, but in a world where margins were exceedingly thin, that could make or break an airline. And in this case, it did.
TWA had more problems down the line, like the explosion of TWA 800 after departing New York in 1996, but Icahn’s interest in his own near-term profits over long-term survival for the company undoubtedly made it nearly impossible for TWA to ever recover, though it made a valiant effort. In the end, as we all know, American bought TWA out of a pre-packaged bankruptcy and then proceeded to eliminate it entirely after 9/11.
Icahn, however, didn’t really lose out. He turned his bad investment into a money-maker with lowestfare.com for a few years, in addition to what he got out of TWA during his time at the helm. Since that time, he has eyed countless companies, primarily as an investor who wants to make things change. And now, he has JetBlue in his sights. We’ll talk more about that on Thursday.
