News > Deals
AMR eyes TWA purchase
January 8, 2001: 5:58 p.m. ET

Proposed deal could lessen fears about pending United-US Airways merger
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NEW YORK (CNNfn) - AMR Corp., owner of American Airlines, is negotiating to acquire financially troubled Trans World Airlines Inc. as part of a complex, three-way deal that also would give AMR a significant stake in DC Air, according to AMR's top union official.

John Darrah, president of the Allied Pilots Association, the bargaining agent for American Airlines pilots, said he received a call Sunday evening from Gerard Arpey, American Airlines executive vice president of operations, detailing the TWA discussions. Darrah said Arpey also indicated AMR was negotiating to take a 49 percent stake in DC Air, a new airline being created by Black Entertainment founder Robert Johnson.

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Darrah said as part of the transaction, AMR (AMR: Research, Estimates) would purchase approximately 20 percent of U.S. Airways (U: Research, Estimates) assets to help ease regulatory concerns about that airline's pending $4.3 billion merger with UAL Corp. (UAL: Research, Estimates), the parent company of United Airlines.

  Is American Airlines prepared to take on Southwest in St. Louis? I hope not. That's one of the reasons I turned negative and downgraded AMR shares this morning.  
  Julius Maldutis
CIBC World Markets
"According to Arpey, the US Airways-United-American deal could conclude as early as today, but would not become final until approved by the Department of Justice," Darrah wrote on the union's Web site. "Meanwhile, discussions are ongoing with TWA management."

A spokesman for the APA confirmed Darrah was informed by American of negotiations with US Airways, United and TWA.

But a spokesman for No. 2 U.S. carrier American said Arpey called Darrah only to give him a "heads up" indicating news stories of the deal would appear, and the Web posting seems to be drawn from those reports.

APA Spokesman Gregg Overman said the union expects to hear the company's rationale for the deals on Wednesday and will determine their position on the matter at that point.

The Washington Post, which first reported the negotiations Sunday evening, said the deal would be announced Wednesday. The purchase price was not disclosed.

Both Darrah and the Post indicated that discussions between the parties are ongoing and could fall apart at any time. But Wall Street reacted coolly to the proposed transaction and raised questions about why AMR would pursue a financially troubled asset in TWA.

"I don't know what the likelihood of [the deal] being done is," ING Barings airline analyst Ray Neidl told CNNfn's Market Call. "I think it's serious, I think something is going on -- and many people were surprised, including myself, that American would even want to buy TWA, which is basically a real problem asset. And then you have the problems of integrating the work force."

"It's a failing carrier and government authorities would probably love to have a bigger airline come and buy it and rescue it," Neidl said.

CIBC World Markets analyst Julius Maldutis saw a number of difficulties with an American acquisition of TWA and downgraded AMR shares to "hold" from "buy" on the news.

Maldutis said the new administration's policy on consolidation is still unknown and also pointed out that of the 18 airline mergers in the 1980s, only one was financially successful Delta's acquisition of Western Airlines because Delta fired all but the operating personnel.

He called American's 1998 acquisition of Reno Air "a monstrous financial headache." The deal led to a 10-day "sickout" of American pilots and numerous flight cancellations. Maldutis also said American would face very strong competition from Southwest Airlines (LUV: Research, Estimates).

"Is American Airlines prepared to take on Southwest in St. Louis? I hope not," he said. "That's one of the reasons I turned negative and downgraded AMR shares this morning."

AMR shares lost $2.25, or about 5 percent, to $41.50 in Monday trading. UAL also fell, losing $1.94 to $43.06, while US Airways jumped $4.50 to $44.

Both AMR and TWA officials declined to comment on the news reports.

An AMR spokesman said in a recorded message the company does not comment on speculation about ongoing negotiations.

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graphicCNNfn's Jack Cafferty takes a look at reports that American Airlines is in talks to buy TWA.
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TWA officials also declined to comment on the deal, adding the company was not a source for a Wall Street Journal story about the negotiations.

"Like other airlines, TWA from time to time holds conversations with other airlines and other businesses with the intent of exploring possible business agreements," the company said in a statement on its Web site. "We do not confirm or comment on such discussion until they produce agreements. To do otherwise would be counterproductive and could jeopardize the successful conclusion of transactions beneficial to TWA."

The regular regulation issues

The Wall Street Journal, citing "people involved" with the deal, reported Monday that Justice Dept. officials have been briefed on the deals and have not raised "significant objections." But the Journal also cited "others close to the talks" who said regulators have not been given a detailed proposal and have yet to pass any judgment on the moves.

According to Darrah, the negotiations call for AMR to purchase US Airways aircraft, gates and landing slots, along with part of the Boston-New York-Washington shuttle.

Such an agreement would address federal antitrust concerns about United's proposed purchase of US Airways Group Inc. as well as improve American's competitive position in the United States, Neidl said.

The acquisition of TWA (TWA: Research, Estimates), the No. 8 U.S. carrier, would make American comparable in size to the combined United and US Airways after the planned merger. United already is the nation's largest airline.

As part of the TWA deal St. Louis-based TWA would file for Chapter 11 bankruptcy protection from its creditors Wednesday and American would buy all TWA assets and preserve the jobs of its 20,000 employees.

American does not plan to continue the TWA name, reports said.

"In bankruptcy you run the risk of losing control,' Maldutis said. "Obviously [financier Carl] Icahn or the three other carriers -- Continental, Delta, Northwest -- can come in and make a bid for TWA assets."

graphicThe acquisition of TWA's St. Louis operation would give American a much-needed third mid-continent hub along with Chicago O'Hare International Airport and Dallas-Fort Worth International Airport, where it has run out of room to expand, the story said. AMR Corp. has its headquarters in Fort Worth, Tex.

"The advantage to American is they could buy assets very cheaply, since TWA has very low equity value, and also it would prevent another airline from moving into St. Louis and competing with American if TWA were to fail," Neidl said.

"This now brings a very strong airline into another hub, that is really needed, in the middle of the country, in St. Louis, with a lot of power, a lot of aircraft, a lot of frequencies, a lot of destinations," said aviation analyst Ed Pinto.

The agreements are expected to head off the concerns of congressional critics who have indicated that the United-US Airways deal would touch off another major round of consolidation in the airline industry, the Post reported.

In early December, a report issued by the General Accounting Office said the proposed takeover of US Airways would hurt competition in more than four times as many markets as it would help, affecting more than five times as many passengers.

With American's planned purchase of TWA and the Justice Department already having signed off on an alliance agreement between Northwest Airlines Corp. and Continental Airlines Inc., Delta Air Lines Inc., the remaining major airline, would be left with no major carrier with which to merge, the Post said.

"Delta in the past has expressed a lot of interest in Continental Airlines, and I'm sure that interest would be revived," Neidl said. "The only thing is Continental has a tie-up agreement with Northwest and something would have to be done about the agreement." graphic


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