American Airlines' Takeover of TWA and Its Corporate Restructuring by rku10038



     American Airlines’ Takeover of TWA
     and Its Corporate Restructuring after
     the Tragedy of September 11th , 2001
Rumor of an American Airlines takeover of Trans World Airlines (TWA) first surfaced in the Wall Street
Journal on January 8, 2001. The official announcement of a takeover came two days later when
American filed legal documents at the Securities Exchange Commission (SEC). Then American Airlines
CEO, Don Carty, hailed the strategic move as something that would enhance the value of the newly
merged company. We examine the news of American’s operations and its financial performance during
three separate periods: the TWA takeover, the aftermath of September 11th and the corporate
restructuring of 2003.

By Steve Swidler, Ph.D.* and Triant Flouris, Ph.D.

This article chronicles American’s           encouraging eco-
takeover of TWA, its struggles subse-        nomic news and
quent to the tragedy of September 11th,      U. S. government
2001 and ultimately the restructuring        guarantees of
that occurred as the airlines hovered        airline company
near bankruptcy.                             loans, American’s
It may always be debated whether             stock price
American’s takeover of TWA realized          quickly began to
the strategic benefits envisioned by         rebound. How-
Carty and other company officers.            ever, bleak corpo-
However, one simple way to assess the        rate news in 2002
economic value of a takeover or any          along with mount- American Airlines Boeing 767-300ER at Aruba
corporate event is to look at the stock      ing losses led         Photo by Hubert Croes
market’s reaction around the time of its     American to the brink of bankruptcy.         2003. As Figure 1 illustrates, Ameri-
announcement. The stock market               By the end of March 2003, the initial        can’s economic value was tied to the
measures investors’ beliefs about the        investment in AMR stock was worth            general economy, but company spe-
future profitability of a firm. Thus, if a   only $.04. After management upheaval         cific news clearly caused the airline’s
consensus of individuals believe a           and major corporate restructuring,           fortunes to diverge from that of the
corporate change will lead to increased      American’s fortune began to take a           market. In the remainder of this article,
profitability, we would expect to see        turn for the better, and by the end of       we examine the news of American’s
the stock price rise upon disclosure of      2003, it appeared the company was            operations and its financial perform-
the event.                                   well on its way to financial recovery.       ance during three separate periods: the
To get an idea of American’s stock           Over the same period of time, the U. S.      TWA takeover, the aftermath of Sep-
performance beginning with the TWA           stock market as measured by the Stan-        tember 11th and the corporate restruc-
takeover, Figure 1 graphs the value of       dard and Poor 500 index (S&P 500)            turing of 2003.
an initial $1 investment over time.          also suffered be-
Starting on January 5, 2001, the $1          cause of the events
investment in American (stock ticker         of September 11th.
symbol, AMR) immediately dropped             However, positive
in value with the announcement of the        economic news
takeover. After leveling off for a pe-       throughout the last
riod, the tragedy of the terrorist attacks   half of 2003 meant
on September 11th, 2001 caused airline       that a $1 investment
stocks to fall precipitously. A week         in the market at the
after the tragedy, the beginning of the      beginning of 2001
year investment in American Airlines         was worth $1.18 on
was worth only $.41. Following some          December 31st of

Aerlines Magazine e-zine edition, Issue 26                                                                                        1
The Takeover of TWA
 At the beginning of 2001, TWA an-
nounced that it would file for Chapter
11 bankruptcy and accept a buyout
offer by AMR, the parent company of
American Airlines. The terms of the
acquisition included a $500 million
payout to TWA and the assumption of
$3 billion of debt. Not long after the
announcement, rivals Continental and
Northwest Airlines objected to the
takeover, and TWA declared that it
was willing to look at better offers.
After pressure by the TWA pilots to
accept American’s offer, the company
agreed to AMR’s terms over a com-
peting bid by Jet Acquisitions Group,
In mid-March, the U. S. Bankruptcy            A former Trans World Airlines McDonnell-Douglas MD83 departing Aruba
court and Department of Justice ap-           Photo: Hubert Croes
proved the sale of TWA’s assets to
AMR, and the airlines completed the             investors’ beliefs about the economic       adjusted returns had fallen more than
acquisition on April 9, 2001. In                value of the takeover. As we have           36%, but when the acquisition was
AMR’s 2000 Annual Report, then                  seen earlier, however, it is important      complete, the total effect was a fall of
CEO Don Carty hailed the takeover as            to disentangle the effects of company       15.55%. The end result is that the
a strategic move that was part of the           specific news from information about        market did not believe the American-
company’s network building efforts.             the market in general. Thus, Table 1        TWA merger was a value enhancing
Airline industry experts, however,              subtracts the returns of the S&P 500        move. Investors thought that future
suggested that network building was             from daily AMR returns to yield mar-        profitability would decline after the
only part of the reason for the take-           ket adjusted returns. These adjusted        merger, with a reasonable estimate of
over; in fact, another important reason         returns may then be added up over           lost value being somewhere between
was to derail UAL’s (United Airlines)           time to produce cumulative adjusted         15% and 35%. However, this estimate
proposed purchase of US Air. While              returns (CARs) which measure the            was predicated on the economics of
the takeover of TWA allowed Ameri-              total effect of all takeover news on the    the airlines industry in the spring of
can to help craft the restructuring of          value of AMR stock.                         2001. No one could foresee the tragic
the airline industry, it is not clear that      The results in Table 1 clearly illustrate   events that would happen on Septem-
this merger was in the best interest of         that the initial reaction of the market     ber 11th and the lasting effects it
AMR shareholders.                               to American’s proposed takeover of          would have on airline travel.
                                                TWA was negative. Rumor of the
Table 1 reports daily AMR stock                 takeover on January 8th, 2001 caused        American Airlines Following
returns from January 8, 2001, the date          AMR stock to fall 9.85% on a market         September 11th
of the rumor of a TWA takeover, to              adjusted basis. By January 10th, the        On September 11th, 2001, four ter-
April 9, 2001, the date that the acqui-         announcement day (t=0), American’s          rorist plane crashes brought commer-
sition was completed. Returns during            stock had fallen a total of 21.13%          cial air traffic to a halt. Despite new
this time period give the notion of             after adjusting for market returns. As      security measures, customer demand
                                                                the takeover terms fil-     for air travel fell significantly, and
Table 1
Market Adjusted Returns for American Airlines                   tered through the news,     accordingly, airlines reduced their
Around Time of TWA Takeover                                     American’s market           flight schedules. Despite some cost
     Date        Day, t     Market Adjusted          CAR**      adjusted returns contin-    savings from smaller operations and
                                Returns*                        ued to fall; ten days       government guarantees of loans,
      8-Jan-01        -2         -0.0985           -0.0985
      9-Jan-01        -1         -0.0329           -0.1314      after the initial           losses mounted in the airlines indus-
     10-Jan-01         0         -0.0799           -0.2113      announcement, the total     try. The terrorist tragedy and resulting
     11-Jan-01         1         -0.0214           -0.2328      effect of the news was a    losses eventually led United Airlines
     12-Jan-01         2         -0.0554           -0.2882
     16-Jan-01         3          0.0138           -0.2744      decline of 29.12% in        and US Airways to declare bank-
     17-Jan-01         4         -0.0294           -0.3038      shareholder value.          ruptcy.The response of AMR’s stock
     18-Jan-01         5          0.0204           -0.2833
     19-Jan-01         6         -0.0260           -0.3093      Over February and           price to September 11th was severe
     22-Jan-01         7         -0.0214           -0.3308      March news about the        and immediate.
     23-Jan-01         8          0.0480           -0.2828
     24-Jan-01         9         -0.0257           -0.3085      takeover and whether it
     25-Jan-01        10          0.0173           -0.2912      would be approved by        Figure 2 illustrates a loss of 40% to
      1-Feb-01        15          0.0051           -0.1152      the federal authorities     American’s stock price in the first
      1-Mar-01        34         -0.1127           -0.3603
       2-Apr-01       56         -0.0108           -0.1315      caused American’s           week following the attacks. This fall
       9-Apr-01       61         -0.0020           -0.1555      price to fluctuate. On      in shareholder value was similar to the
* Market Adjusted Returns = AMR returns –S&P 500 returns
**CAR = cumulative adjusted returns from day –2 to day t
                                                                March 1, cumulative         decline in stock price of Southwest

Aerlines Magazine e-zine edition, Issue 26                                                                                         2
                                                                 the new labor            fourth quarter earnings statement
                                                                 pacts, promise of        noted that as part of its cost saving
                                                                 a secret bonus           measures, the airlines closed its St.
                                                                 for management           Louis reservation center, reduced the
                                                                 surfaced, and            size of its St. Louis hub and acceler-
                                                                 shortly thereaf-         ated the retirement of TWA aircraft.
                                                                 ter, Don Carty           In less than three years after the take-
                                                                 resigned as com-         over, American had sold or closed a
                                                                 pany CEO. In             number of TWA assets and opera-
                                                                 turn, the AMR            tions.
                                                                 Board of Direc-          Given that American Airlines of to-
                                                                 tors appointed           day, in many respects, resembles the
                                                                 Gerald Arpey the         company prior to its takeover of
                                                                 airline’s new            TWA, the question arises why did the
Airlines, a company that had been          chief executive officer, thus beginning        airlines acquire TWA?
doing well prior to September 11th.        a new chapter in corporate history.            While the stock market reaction sug-
While the market value of both com-                                                       gests that the takeover was not a value
panies (and the airline industry as a      American Airlines after Corpo-                 enhancing move, we’ll never really
whole) recovered in the spring of          rate Restructuring in 2003                     know whether the company would
2002, subsequent news from Ameri-          The takeover of TWA         Table 2
can caused its stock price to diverge      initially increased the     Size of American Airlines Operations 2000 – 2003*
from Southwest’s for the remainder of      fleet size of American                                2000       20011     2002       2003
the year.                                  more than 20%. Table 2 Number of AMR                   978        1229     1179        972
Losses at American continued to pile       illustrates the change in Revenue Passenger
up in 2002 and at the beginning of the     the size of American’s      Miles                    116594     120606    121747     120328
                                                                       (in millions)
third quarter, the airlines announced      operation from before       * All figures include American Eagle data.
that it would reduce capacity, retire      the takeover through the 1 Includes acquisition of TWA assets completed on April 9, 2001.
some of its fleet including nine of its    end of 2003. While it is
TWA 767-300 aircraft and eliminate         clear that cost saving measures and             have realized the anticipated strategic
7,000 jobs. Around the same time,          downsizing of American operations               benefits of the merger. The tragic
American restated its book value and       began subsequent to the September               events of September 11th caused a
confirmed a charge-off of $1.4 billion     11th tragedy, significant restructuring         dramatic change in the economic
to reflect matters related to its acqui-   came after the selection of Arpey as            landscape of the travel industry and
sition of TWA and Reno Air. As             company CEO. Under his leadership,              affected the operations of all airline
American entered 2003, CEO Carty           American announced a turnaround                 companies. What is known with more
announced that continuing losses were      plan to facilitate the company’s return         certainty is that after standing on the
unsustainable and the airlines would       to profitability.                               brink of bankruptcy, the company’s
seek labor saving concessions from its     At the end of 2003, the number of               stock price has rebounded nicely (as
unions. In March of 2003, American         owned and leased aircraft fell to virtu-        seen in Figure 2). Corporate restruc-
teetered on the brink of bankruptcy,       ally the same number as the company             turing in 2003 has led to improved
and the dire financial situation led       had prior to its takeover of TWA.               conditions at American Airlines with
unions to agree to a $1.8 billion labor    Revenue passenger miles also re-                the prospect of future profitable years.
savings one month later.                   flected a corporate downsizing; while
With new labor agreements in place,        larger than the pre-takeover figure,
American seemed ready to emerge            revenue passenger miles in 2003 de-
from its string of earnings losses.        clined from its 2002 level. AMR’s
However, one week after announcing

Aerlines Magazine e-zine edition, Issue 26                                                                                          3

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