MORE TROUBLE FOR RESURGENT TWA

By John Greenwald

Until last week's disaster, TWA could point proudly--as CEO Jeffery Erickson did publicly--to an admirable safety record. Its financial history, on the other hand, has been absolutely dismal. TWA has flown in and out of bankruptcy twice this decade, losing more than $2 billion in the process. It has managed to survive largely on the willingness of its workers, who own 30% of the company, to grant whopping concessions to keep it from following fellow pioneers Pan Am and Eastern into aviation history.

Not only has TWA survived, but the carrier once piloted by mogul Howard Hughes and later by corporate raider Carl Icahn has been enjoying a financial turnaround. Just hours before Flight 800 went down, TWA reported a $25.3 million profit for the second quarter, a fivefold gain over the same period a year ago. And with passenger traffic growing, and its $300 million cash stockpile rising, TWA has been planning to add as many as 40 Boeing 757s and 15 McDonnell Douglas MD80s to modernize the U.S. industry's oldest fleet (average age: nearly 20 years). The airline canceled a party scheduled for last weekend to celebrate the arrival of the first 757.

Under Erickson, who was recruited in 1994 from discounter Reno Airlines, TWA has labored to become an up-to-date carrier. The company struck deals with workers and creditors that slashed $500 million from its $1.8 billion debt, including $130 million in reduced wages and benefits. TWA also cut its annual interest payments by $50 million. Incredibly, the airline only recently converted to computers to set fares and manage its inventory of seats to boost revenues for each flight. Notes Brian Harris, airline industry analyst for Lehman Bros.: "TWA had been operating in a 1970s time warp." This backwardness apparently did not apply to safety and aircraft maintenance. Unlike some airlines, TWA didn't outsource its maintenance to cut costs.

But last week's disaster could endanger both the turnaround and TWA's future. Comparisons were being made to Pan Am, a troubled company that ultimately couldn't survive the bombing of its Flight 103 over Lockerbie, Scotland, in 1988. The disaster cost Pan Am hundreds of millions in canceled bookings, which helped put it out of business in 1991. Even before last week, some observers were questioning TWA's long-term outlook. Scott Hamilton, editor of the trade publication Commercial Aviation Report, told Bloomberg Business News earlier this month, "If anything goes wrong of significant consequence, like another Iraq invading Kuwait or another round of terrorist bombings, I don't think TWA has built the kind of foundation that would enable them to survive."

TWA today is much stronger financially than Pan Am was post-Lockerbie. Pan Am quit the skies during an industry-wide recession. By contrast, U.S. airlines are in the second year of a recovery, and Erickson said last week that TWA was in "the best financial condition in a decade." He contended that TWA's summer bookings had not been affected by the tragedy. One fiscal casualty: the airline was forced to postpone an 8 million-share offering last week. Before the disaster, Erickson noted that "we like to think of ourselves as a 72-year-old start-up. The trick is to get the market to remember our glory years but forget our most recent history." It still is.

--By John Greenwald. Reported by Thomas McCarroll/New York

With reporting by Thomas McCarroll/New York