TWA to be acquired by American Airlines; files for Chapter 11 bankruptcy protection

Airline Industry Information, Jan 11, 2001

AIRLINE INDUSTRY INFORMATION-(C)1997-2001 M2 COMMUNICATIONS LTD

American Airlines has confirmed its intention to acquire most of the troubled Trans World Airlines (TWA) as well as taking stakes in US Airways and start-up carrier DC Air.

American Airlines will pay about USD500m for TWA, plus USD200m in emergency finance, and will invest about USD1.2bn in cash and USD300m in lease obligations for parts of US Airways as well as paying USD82m for a 49% stake in DC Air. The stake in US Airways will be bought from United Airlines, which is proposing to merge with US Airways, and this latter merger must be approved for American Airlines' transactions with United Airlines to proceed.

The deal with TWA was made more likely when the carrier filed for Chapter 11 bankruptcy protection yesterday (10 January). However, it is possible that American Airlines' plans could be challenged by creditors or another bidder. Further, the transaction has to be approved by regulators and unions at American Airlines could also make it hard to integrate the airline's workforces. TWA's unions have apparently responded favourably to the proposed acquisition.

Despite the difficulties it faces, American Airlines hopes to have the deals concluded in April, Reuters reported.

American Airlines' plans have not been welcomed by consumer groups, with a spokesperson for the Consumer Federation of America stating 'There's no more fiction about competition in the airline industry. Consumers will pay higher prices and lower services.'

Moody's Investors Service has also admitted concern about the deal, indicating that it would be reviewing American Airlines and United Airlines for possible downgrades due to the increased financial risk posed by their respective transactions.

Aviation industry observers have said that the deals place other carriers under increased pressure to consolidate, especially Delta Air Lines, which will be significantly smaller than its rivals if the deals are successful. Other carriers under scrutiny are Continental Airlines and Northwest Airlines.

Continental Airlines has indicated that it is not currently in the market for a merger.

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