News > Deals
TWA, AirTran said to talk
June 16, 2000: 2:43 p.m. ET

Deal would link struggling old-line carrier and debt-laden discount airline
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NEW YORK (CNNfn) - After weeks of talks about big air carriers joining together, two of the nation's smaller airlines, struggling Trans World Airlines Inc. and upstart AirTran Airways, reportedly are having their own merger discussions.

Neither airline would confirm reports in the Atlanta Journal-Constitution and the Wall Street Journal that the two are having discussions, but they wouldn't deny them either.

"There are a lot of rumors flying around right now," said Julia Bishop-Cross, spokeswoman for TWA, the nation's eighth-largest carrier in terms of traffic. "TWA is aware of what is happening in the industry. All airlines participate in discussions about various business transactions with other airlines from time to time."

graphicSome analysts believe this deal could make sense for the two carriers, and that it would stand a better chance of getting regulatory approval than some of the mega-mergers being discussed, such as the proposal by United Airlines parent UAL Corp. (UAL: Research, Estimates) to buy US Airways Group Inc. (U: Research, Estimates), or rumors of talks of other mergers between the nation's six largest carriers.

"It does give them more market mass, and gives AirTran a second hub," ING Barings analyst Ray Neidl said. "I think they'd probably want to use the TWA name.

But Neidl said there would be problems with a deal, including some high-interest rate debt that both have coming due within the next year that will be tough to refinance in the current market conditions. And merging work forces in aviation is never easy, he said.

"The unions would have to be on board, and they wouldn't be eager for more concessions," he said, adding that the combined airline probably would sell or otherwise dispose of TWA's overseas routes as part of a transaction.

"To succeed as an independent would be very difficult," he said. "They'd have to play the (discount carrier) niche that AirTran has been playing."

graphicDespite the fact that AirTran (AAIR: Research, Estimates) is the smaller of the two carriers, it is likely to be the acquirer in any transaction, according to Neidl. The holding company AirTran Holdings Inc., the nation's 14th largest airline in terms of traffic, was formed in 1997 when AirTran, then a start-up carrier in Orlando, Fla., bought the discount carrier ValuJet, which had been grounded after a Federal Aviation Administration investigation into a 1996 crash into the Florida Everglades.

The carrier has continued to grow rapidly since the merger. In 1999 it flew 3.5 billion revenue passenger miles, a commonly used aviation measure that accounts for both the number of passengers carried and the distance they travel. That was a 32 percent increase from 1998.

"AirTran Airways is committed to expansion through internal growth, but from time to time has held conversations with other airlines about various forms of cooperation," said a statement from Joe Leonard, the carrier's chairman and CEO. "Our policy is not to comment on any conversations we may be having."

Leslie Head, vice president-general counsel at Orlando-based AirTran Holdings Inc., confirmed the talks, according to the Atlanta Journal Constitution report. Head did not return calls seeking comment.

AirTran reported net income of $2.9 million, or 4 cents a share, in the first quarter, its fifth consecutive profitable quarter, something TWA hasn't been able to do. It earned $29.8 million, or 43 cents a diluted share, in 1999, after posting a loss of $13.2 million, or 20 cents a share, the year before.

graphicTWA (TWA: Research, Estimates) has been through bankruptcy reorganization twice in the last decade and lost $352.5 million, or $5.57 a share, last year, the worst loss of any carrier in what was generally a strong profit year in aviation. In the first quarter of 2000 rising fuel prices drove its losses to $76.1 million, or 98 cents a share. Analysts surveyed by earnings tracker First Call forecast it to lose another 29 cents a share this quarter.

AirTran's chief recently appeared before a Congressional committee saying that the proposed purchase of US Airways by UAL would not significantly hurt competition and actually could help it if low-cost carriers such as AirTran were granted the gates and landing slots at Washington's Reagan National Airport.

"The state of competition in the airline industry is at best poor. In terms of the type of competition that is most beneficial to consumers -- price competition -- it is limited to those relatively few markets where a low-fare carrier, like AirTran Airways and Southwest, provide competition. The big six carriers do not compete on price today. And the combination of United and US Airways will not change that fact," Leonard said.

In terms of market value, upstart AirTran has a market capitalization of $287.4 million, and long-term debt on its balance sheet of $362 million, while TWA has market capitalization of only $189.3 million, and long-term debt of $544.1 million.

Shares of AirTran edged up 1/16 to 4-3/8 in trading Friday, while TWA shares climbed 7/16 to 3. Back to top


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