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High Spirits, Heavy Weather


The Corporation

HIGH SPIRITS, HEAVY WEATHER

When it comes to morale, few airlines can match the enthusiasm of TWA's employee owners. After trading 45% of the once-bankrupt airline's stock for wage concessions last November, Trans World Airlines Inc.'s employees collected $14,800 among themselves to pay for two billboards in Kansas City proclaiming: "We are TWA and we are back."

But if this experiment in employee ownership has done wonders for morale, it hasn't done much for TWA. The St. Louis-based carrier is stuck with $1.8 billion in long-term debt. Its cash reserves are down to $134 million. Management has waffled on a key marketing strategy. Adding to the confusion is the recent exit of three senior executives.

Now TWA's vice-chairman, Robin H.H. Wilson, is hinting at layoffs. In a recorded message to employees in May, he said TWA is falling short of its financial goals for the critical summer period and will announce a new wave of cost-cutting measures. Only last month, Wilson said he believed TWA could avoid layoffs.

In fact, when competitors were slashing headcounts in 1993, TWA added 1,000 employees, boosting payroll to 26,000. "There is a reluctance to furlough at an employee-owned airline," says Glenn R. Zander, who resigned as vice-chairman in January. "People think they bought their jobs, and they don't want to find out differently."

Small wonder that rivals and analysts say TWA still faces heavy weather. For the first quarter of 1994, it lost $80 million on revenues of $761 million. Since TWA emerged from Chapter 11 on Nov. 4, employee owners have seen their shares plummet 37%, to 35/8. "Basically, they have rearranged the deck chairs on the Titanic," says analyst Kevin C. Murphy of Morgan Stanley & Co. Wilson, who oversees daily operations, counters: "This company has a resilience that people don't give it credit for."

ROCKY ROAD. TWA's woes have broad implications for the airline industry, which looks increasingly to employee ownership as a way of reducing costs. UAL Corp., parent of United Airlines Inc., has agreed with its unions to exchange 55% of the company's shares for wage and benefit concessions. And most analysts believe Delta Air Lines Inc. and USAir Inc. will make similar deals. But some airline executives, citing TWA's experience, say that giving unions a greater voice weakens management's decision-making role. "I really feel what we're doing at TWA is historic," counters William F. Compton, head of the pilots' union and a board member. "We don't have anyone coming in and drawing a road map for us."

TWA's employee shareholders have traveled a rocky road since Carl C.

Icahn, who bought it in 1986, left. As part of the agreement to bring TWA out of Chapter 11, Icahn relinquished ownership and employees gave up $660 million in wage concessions for 45% of the airline's equity and 4 of its 15 board seats. Creditors got most of the remaining seats and the rest of the equity.

But the board has had trouble filling the corporate cockpit. William R. Howard, the compromise CEO candidate among union leaders and creditors, lasted only seven months before the board asked him to step aside. The 71-year-old former chairman of Piedmont Airlines raised TWA's fares in September; three hours later, Northwest Airlines Inc. announced a fare cut.

Howard was followed out the door the same day by Zander. Sources close to the board say the unions blocked his appointment as CEO because of his reputation as a cost-cutter. In turn, creditors opposed Wilson as CEO, thinking he wasn't tough enough. The board settled on another compromise candidate: Donald F. Craib Jr., a TWA director and former head of Allstate Insurance Co. with no direct experience running an airline.

TWA has also vacillated on its marketing. Its U.S. market share has slid to 4.8% from 11% in 1988. For a time, the airline seemed to have a strategy. Renaming its coach section Comfort Class in January, 1993, TWA removed seats to give passengers 30% more legroom and launched an ad blitz, calling itself "The Most Comfortable Way to Fly."

Business travelers cheered. But last month, TWA reversed itself, reinstalling 34 seats on its 747 jumbo jets to take advantage of heavy transatlantic traffic expected this summer. While the rest of the fleet still has the extra legroom, TWA had to junk its Comfort Class ad campaign overseas. Robert B. Cozzi, the TWA senior vice-president who devised the Comfort Class strategy, resigned three weeks ago in opposition.

ICAHN'S LEGACY? TWA's high cost structure hasn't helped. It spends 3.3 cents a mile in labor costs for each available seat. Only badly listing USAir exceeds that, with almost 5 cents. Even the 15% wage concessions have done little to help. Junk-bond analyst Paul Davner, who tracks TWA's debt, believes the workforce needs drastic trimming--in the range of 20%.

In his message to employees, Wilson warned: "We are going over our 1994 budget again and looking for ways to reduce employee expenses by a meaningful amount between now and the end of the year." But even if he wants to reduce the payroll, he's likely to meet stiff union opposition. "The problem isn't that you have too many people doing the work, you don't have enough work for people to do," says Compton. He says TWA's unions are prepared to give up some contract provisions to cut costs.

But are such savings enough? TWA failed to meet revenue projections in January and February. It can't borrow money because virtually all of its assets are pledged, and analysts call chances of finding a large equity investor or merger partner slim.

Some analysts say it's unfair to judge employee ownership by TWA's example. Its problems are "the legacy of Carl

Icahn," says Michael Boyd, president of Aviation Systems Research, a Golden (Colo.) consulting firm. Maybe so. But there's plenty of blame to go around.

TURBULENCE AT TWA

Since emerging from Chapter 11 last November, the airline hasn't been meeting financial projections. Among its problems:

MANAGEMENT TURNOVER Three top executives have resigned since January, including Chairman William R. Howard, Vice-Chairman Glenn R. Zander, and Senior Vice-President Robert B. Cozzi.

OVERSTAFFING While other airlines' workforces shrank last year, TWA added 1,000 new employees. Despite wage concessions, its labor costs remain high.

CONFUSED STRATEGY After removing seats to increase legroom and promoting its Comfort Class seating, TWA has added seats back on Boeing 747s to take advantage of heavy summer traffic.

DATA: BUSINESS WEEKSusan Chandler in St. Louis


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