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                                                                                BUSINESS, Page 44

Icahn's Tar Baby


TWA has proved nothing but trouble for the investor and may
not be long for the skies

By THOMAS MCCARROLL


    To celebrate his victory in the hostile takeover battle
for Trans World Airlines in August 1985, corporate raider Carl
Icahn donned a pilot's cap and uniform jacket and paraded
triumphantly around his Manhattan office. The parade didn't last
long. Plagued by labor strife, mounting losses and bruising
competition, TWA became more of a financial straitjacket for the
erstwhile wizard than the trophy he had envisioned. In recent
years, as he struggled to keep the now bankrupt carrier aloft,
Icahn groped for a graceful way to bail out. Despite near
frantic efforts, he was unable to find a willing buyer or merger
partner, until now.

    In a deal that allows him to save some face and salvage
what's left of his investment, Icahn agreed last week to step
down and turn over the controls of TWA to the company's
union-led employees in return for major concessions that are
designed to keep the airline flying. Under the tentative
agreement, TWA's 28,000 flight attendants, baggage handlers,
mechanics and pilots would swap a 15% pay cut for a 45% equity
stake in the carrier. The airline's creditors would acquire the
remaining 55% in exchange for forgiving more than $1 billion in
debts. Icahn currently owns 90% of TWA's stock, but he would
gladly dispose of his holdings if it means freedom from the
financially troubled carrier. Says Robert Joedicke, an
investment analyst at Shearson Lehman: "Icahn will do just about
anything to extricate himself from this mess."

    The deal is probably as good as Icahn can get, given TWA's
bumpy flight path since he came aboard. Less than three months
after he officially gained control, the airline's 6,000 flight
attendants walked off the job for 10 weeks. In April 1986, a
month after the strike began, a terrorist bomb exploded in
mid-air on a flight bound for Athens, killing four passengers
and wounding nine others. TWA's overseas business never
recovered. Neither did its relationship with labor. Icahn's zeal
to cut costs has also led to confrontations with TWA's mechanics
and pilots.

    His abrasive style has touched off an exodus of top
managerial talent. In the past two years, TWA has lost its chief
operating officer, general counsel, senior vice presidents of
finance, marketing, flight operations and strategic planning,
plus its vice presidents of advertising, government affairs,
compensation, public affairs and maintenance operations. Perhaps
Icahn's biggest managerial blunder was engaging in a series of
unwinnable fare wars with the industry's big eagles: United,
American and Delta. Subsequent price cutting helped land TWA in
bankruptcy court last January.

    Despite the airline's dismal performance, many Icahn
watchers have assumed he would still come out ahead. Not so.
After leading a group to acquire the airline for about $400
million, he was able to recoup the investment in a complicated
leveraged buyout valued at $469 million in 1988. The LBO left
Icahn's group with 90% of the common stock, plus preferred stock
worth about $390 million. Icahn also held junk bonds with a face
value of $190 million. As TWA's financial condition nose-dived,
the bonds plunged 87%, while the preferred stock lost 83% of its
value. Outside investors who helped Icahn finance the buyouts
have also taken a beating. Although Icahn is mum about his
total outlay in the carrier, he claims to have personally lost
at least $100 million in what he describes as "the worst"
investment he ever made.

    If the new deal is done, Icahn has agreed to give up his
common stock, now practically worthless, and invest yet another
$150 million to help the airline operate until a reorganization
is completed. The federal Pension Benefit Guaranty Corp.
maintains that as majority owner, Icahn must make up a $1.1
billion shortfall in TWA's pensions. Even if Icahn managed to
parachute out of TWA, the pension agency says it would enforce
a new law sponsored by Senator John Danforth that would make
Icahn's non-airline businesses liable for the underfunding. That
would place the pension burden mainly on ACF Industries, the
Missouri-based railcar leasing company that Icahn uses as his
cash cow to fund outside investment activities. Although he
expects to resolve the pension dispute, Icahn argues that the
Danforth legislation is unconstitutional.

    Turning TWA over to its employees is no guarantee of a
happy landing. The airline is losing about $1 million a day.
Wage concessions alone, say analysts, won't be enough to
reverse the company's fortunes. While the carrier has enough
cash on hand to continue flying for at least another year,
analysts say it will be forced to unload more assets. With a
fleet averaging 17 years in age, the oldest in the business, TWA
is in need of a massive capital infusion for a complete
overhaul. And even that assumes travelers will still want to fly
with TWA. After years of leading the industry in customer
complaints, for instance, the once proud carrier has all but
lost what was once a sterling image among customers. Says Kevin
Murphy, an airline analyst at Morgan Stanley: "TWA's problem
isn't just ownership. It hasn't made money; it's not making
money; it will never make money. Changing owners is not going
to change that."

    So while Icahn may finally have wriggled out of his
tattered uniform, he may well still lose his shirt. As for the
employees left behind wearing the real TWA uniforms, they too
seem scheduled for a ride that will certainly continue to be
bumpy.