American Airlines' parent AMR has upped the ante in the latest round of consolidation in the US airline industry with a $1.8 billion attempt to acquire most of TWA's assets, a substantial share of US Airways and start-up DC Air's operations. The related, but separate deals, if approved, would leave American controlling a quarter of the country's domestic air traffic.

American, the USA's second largest carrier, is seeking court approval to acquire most of TWA's assets for $500 million after the country's oldest surviving airline filed for Chapter 11 bankruptcy protection for the third time in nine years. American has committed $200 million in Debtor in Possession financing to TWA and deterred competing offers with a $75 million fee break-up provision if it is outbid for ownership. TWA debts and leases total $3.6 billion.

TWA and American have sought to portray the deal as a lifeline for the St Louis-based carrier, without which it would have folded within weeks after depleting its cash reserves hedging against rising fuel prices. "I can't imagine too many deals better than this one," says TWA chief executive Bill Compton, adding that it guarantees jobs for the company's 18,000 unionised workers.

The airline has not made a profit in more than 10 years and lost $353 million in 1999. By putting the airline into Chapter 11, the major losers would be TWA's shareholders who, says Compton, "won't get much of anything", and its airframe and engine suppliers. The airline has outstanding orders for 35 Boeing 717-200s, 25 Airbus A318s and 20 A319s, plus a substantial number of options.

The Airbus order in particular appears vulnerable, as none of the aircraft ordered has been delivered and because of the preponderance of Boeing equipment in the American fleet. Compton notes that with the bankruptcy filing there is an "opportunity to use the process to rectify non-beneficial contracts".

This includes the lease rates TWA pays on many of its 190 aircraft, which are widely recognised to be over the odds on account of the airline's poor credit rating, which Standard and Poors has lowered to 'D' in the wake of its Chapter 11 filing. American, in addition to aircraft, gains a dominant position at the 15th busiest US airport, St Louis Lambert, which unlike its own main hubs at Chicago and Dallas Fort Worth (DFW), is not slot constrained.

"Over the next few months we'll look at the frequency and hubs and see how its works with DFW and Chicago," says American vice chairman Bob Baker. TWA's St Louis hub mainly serves cities to the east and west and as such is complementary rather than competitive with American's two hubs to the north and south, he notes.

Separately, American has tabled a $1.2 billion deal to buy 20% of US Airways' operations and struck another agreement to acquire a 49% holding in DC Air. The deal is designed to make United's proposed $4.3 billion purchase of US Airways more palatable to the US Department of Justice (DoJ), which has anti-trust concerns over the acquisition and has delayed a final review until April.

US Airways' prospective new owner United would in turn give American 14 gates, 36 slots, 86 aircraft and a half share of its shuttle service along the Washington DC-New York-Boston corridor. American would support DC Air's planned Washington National Airport operation by supplying 11 Fokker 100s on a wet lease basis.

"We believe that today's agreements with American, United, TWA and DC Air assure job security for US Airways' 45,000 employees and thousands of others, guaranteeing vital air service and enhanced competition," says US Airways chairman Stephen Wolf.

While the planned TWA buy has met with general approval, the US Airways and DC Air deals, which depend on the DoJ approving United's acquisition, are less certain. An enlarged American and United would end up controlling over half of US air traffic and the country's other major carriers Continental, Delta Air Lines and Northwest scrambling to respond.

"Once this process starts, it is likely to reduce the industry to three major airlines that would be unlikely to compete vigorously. We would lose the low fares and other consumer benefits gained from airline deregulation," warns Rep James Oberstar of the House Transportation Committee.

Source: Flight International