`Carl Has 9 Lives, But He's Getting Up To 8 1/2'

For years, Carl C. Icahn has been betting on the future of Trans World Airlines Inc. But in recent months, the wagers have turned rather ghoulish. Last summer, one of Icahn's closest advisers, TWA General Counsel Mark A. Buckstein, bet Icahn $1,000 that creditors would force the airline into involuntary bankruptcy by September. Icahn, TWA's owner and CEO, countered that he could arrive at some kind of arrangement with the airline's creditors before TWA sought Chapter 11 protection. On Jan. 31, TWA filed its so-called "preplanned" bankruptcy, which included agreements with most of its creditors and unions. "He lost $1,000 to me," gloats Icahn.

Icahn won the bet, but the airline is another story. The CEO argues that the bankruptcy reorganization will buy TWA the time it needs to turn around (table). Drastically lower debt service, a cash infusion from pending asset sales and Icahn's own pocket, and a bold plan to undercut the competition on price may even be enough to return the airline to profitability this year, he says. Icahn insists that with a 1% yield improvement in business travelers, TWA will post $50 million in operating income this year.

Icahn and his bondholders have to put the best face on things, but they're the only ones with such a rosy outlook. Financial analysts and TWA's rivals say the 66-year-old airline is no longer viable as an independent carrier and that it must seek a merger with another airline if it hopes to stave off liquidation. Says Standard & Poor's Inc. analyst Philip Baggaley: "Carl has nine lives, but he's getting up to eight and a half at this point."

`WINDOW OF OPPORTUNITY.' Even if Icahn avoids liquidation, he must still deal with TWA's pension liabilities. The Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures private pension plans, says TWA's plan is underfunded by $930 million. The agency is now negotiating with Icahn about ways to fund the plan, including tapping the assets of other Icahn-controlled companies. "Bankruptcy is a window of opportunity to address the pension issue," says Diane E. Burkley, deputy executive director of the PBGC. "The other businesses he owns and operates are liable."

Icahn is having a tough enough time just managing TWA. He has lost two dozen managers since taking over the airline. Some have been replaced, several from outside the industry. But Icahn has become deeply involved in many of the tasks other CEOs would leave to specially skilled managers. He has been delving into the logistics of hub-and-spoke systems and has taken a personal role in reordering certain TWA routes. And he often stays late into the night, dreaming up marketing schemes or fretting over ad copy. In an interview with BUSINESS WEEK at his Mount Kisco (N.Y.) offices, Icahn even trotted out his latest idea: He hopes to enlist 20,000 retirees to sell TWA travel packages in return for free passes. Says Icahn: "It will be sort of like the Avon lady or Tupperware."

It will take more than Tupperware parties to turn TWA around. The carrier's problems are massive. And even though the recent Chapter 11 filing may buy some time, it could make matters worse. Having seen Eastern and then Pan Am disappear, travel agents are becoming wary about booking customers on an airline that's in bankruptcy. And TWA's reputation for service is terrible. Its planes are the oldest in the industry--the fleet is five years older than the industry average of 11. To finance operations, Icahn has had to sell off $1.5 billion worth of valuable assets, including the airline's lucrative London routes. And TWA's domestic route system is too small to feed its existing European routes. "I don't see a long term furture for TWA," says Scott L. Hamilton, editor of Commercial Aviation Report in Dallas. "It's too small to be a significant player."

Travel agents are beginning to fear the same. They would prefer to see TWA remain a competitor, but many are afraid of lawsuits if TWA stops flying. So they are asking clients to sign release forms before they book a ticket. Such precautions will make many think twice. Even worse, some agents who are confidently booking TWA trips now say they are not willing to take bets on the longer term once Icahn gives up a majority stake. "You never know what TWA is going to do," says Richard Copland, owner of Hillside Travel in New York.

FARE CUTS. Icahn is hoping to allay such fears with lower prices. In January, TWA began offering frequent flyers 15% cash rebates on certain fares. And since October, it has been offering deep discounts on business travel fares. That strategy may fill some seats over the next few months, but Icahn has little else to offer in the way of long-term growth. He's beefing up TWA's hub at New York's John F. Kennedy Airport by adding flights from six cities beginning in March, but he plans to fight that battle on price as well. The Boston-to-New York hop will be $39 one way, compared with Trump Shuttle Inc.'s $142.

The best outcome Icahn can hope for is an alliance that could lead to a merger or joint venture. He has talked with several potential industry partners, but nothing has materialized. Last December, he said he had "talked" with Continental Airlines Inc. CEO Robert L. Ferguson. But industry experts note that as a bankrupt carrier, Continental is required to respond to any overtures. Icahn says he is also discussing "code sharing" with British Airways PLC. Such a marketing arrangement could "feed" TWA's domestic passengers at JFK into British Airways flights to London and vice versa. But that alone wouldn't change TWA's fortunes. "Icahn needs someone who will make a financial commitment," says Washington (D.C.) aviation attorney Morris R. Garfinkle.

Icahn isn't placing any bets--at least not publicly--on when and if that will happen. Although he calls TWA the "worst investment I ever made," the Princeton philosophy major is trying to become what he calls "an airline philosopher." He's dissecting TWA's operations so he can be better prepared to meet the challenges ahead. Icahn says it's like swimming in the ocean: "Once you get beyond those waves, it's easier." That may be true of swimming, but when it comes to running an airline, Icahn may already be in too deep.

RESTRUCTURING TWA
      DEBT Immediately chopped to
       $700 million from $1.7 billion
      ANNUAL INTEREST Reduced to
       $61 million from $211 million
      OWNERSHIP Icahn's 90% common stock holding wiped out, but his bond holdings let 
      him emerge with 20% to 40% of new equity, depending on warrants exercised; the 
      rest goes to other bondholders
      CASH ON HAND $500 million; $100
      million more from pending sales
      FRESH CASH Icahn to kick in $35 million more of his own funds
      NEW LOANS $200 million in debtor-in-possession financing to be supplied by 
      Icahn-controlled companies if needed
      DATA: COMPANY FILING