What Happened to TWA? Three Bankruptcies, the Karabu Agreement, and More

Trans World Airlines (TWA) was formed in 1930 through a forced merger of a few smaller airlines.

Less than a decade after its founding, the legendary Howard Hughes took control of the company. Over the decades that followed, TWA has grown – together with Pan Am – into one of the most recognized airlines in the world.

The U.S. airline industry’s deregulation in 1978 has, however, started what would become the demise of the airline.

Prior to launching international flights, TWA was named Transcontinental & Western Air (T&WA).

Carl Icahn’s Takeover and TWA’s First Bankruptcy

The Airline Deregulation Act passed in 1978 made it harder for TWA to compete. Because of that, in 1984, TWA’s parent company – Trans World Corporation spun what was by then an unprofitable airline off.

That made the airline a target of corporate raiders including Carl Icahn. He started by taking hold of more than 20% of the stock in 1985 before gaining control of the airline later.

Initially, he contributed to the airline’s growth.

In 1986, TWA acquired Ozark Airlines which strengthened its position in St. Louis, one of its two main hubs, considerably. In 1988, the airline transported – with the help of its feeder network in both the US as well as Europe – more than half of all the passenger traveling across the Atlantic.

Not long after that, things went south for TWA, though.

In the fall of 1988, Icahn decided to take TWA private. While the deal reportedly pocketed the businessman more than $450 million, it also left the airline with more than $500 million in debt. This additional liability put the airline’s growth on halt.

Strapped for cash, Icahn decided to sell TWA’s lucrative London Heathrow routes to American Airlines. This move is considered by many to be the beginning of the airline’s end.

While initially, American Airlines agreed to pay $445 million for a total of six routes, the regulators only approved the sale of three routes. In spite of that, to stay competitive with United Airlines which acquired Pan Am’s London routes around the same time, American agreed to pay the full amount to TWA for just half of the routes.

That didn’t TWA’s finances much, though, and so, it had to file for bankruptcy at the beginning of 1992.

What Happened to TWA?
Among other types, TWA used the 747-100 on its flights to London Heathrow. (Credit: Eduard Marmet, CC BY-SA 3.0)

The Karabu Agreement and the Second Bankruptcy

The company managed to restructure itself and emerged from bankruptcy protection at the end of 1993. It also managed to oust Icahn.

There was a catch to that, though.

Icahn left only after arranging what has become known as the Karabu agreement. It gave Karabu, a company he controlled, the right to buy TWA tickets at a 45% discount until September 2003. Later on, Karabu’s subsidiary Lowestfare.com was added to the agreement as well.

With access to heavily discounted TWA tickets, Lowestfare.com has grown to be one of the largest online travel agents at the time.

While the agreement was highly lucrative for Karabu and Icahn, it caused issues for TWA. Having to make a considerable portion of its seat available to Karabu, the airline was essentially competing against itself. It had to keep its prices competitive with whatever prices Karabu set.

The deal was reportedly costing the already troubled TWA more than $100 million a year and contributed to the airline filing for bankruptcy for the second time in 1995.

TWA Lockheed L-1011
The L-1011 Tristar used to be one of the most important aircraft types in TWA’s fleet.(Credit: Eduard Marmet, CC BY-SA 3.0)

The Third Bankruptcy and the End of TWA

After its second bankruptcy, the airline shifted focus from its international to domestic operations.

By this time, it had an aging fleet, and so, ordered more than a hundred aircraft to replace its 727s, 747s, L-1011s, and DC-9s. With its new 757s, 767s, and MD-80s, it continued operations mainly out of its St. Louis and New York hubs.

However, neither the focus on domestic routes nor the fleet renewal were enough to significantly improve its financial situation. In early 2001, TWA filed for bankruptcy for the third and the last time.

Seeing value in acquiring TWA’s assets, American Airlines decided to submit a bid to acquire the troubled airline. On March 12, 2001, its take over by American Airlines received initial approval before being finalized later that month.

To Icahn’s disappointment, the judge didn’t agree to keeping the Karabu agreement – which contributed to TWA’s demise and which was meant to last until September 2003 – in place.

That decision marked the beginning of the end of Lowestfare.com. After all, at its height, more than 80% of its revenue came from TWA ticket sales which it was selling significantly below published fares.

TWA operated flights for the last time on December 1, 2001, before being fully integrated into American Airlines.

The Heritage of Trans World Airlines

TWA has been gone for almost two decades now, however, it was possible to fly on ex-TWA aircraft on American Airlines flights until earlier this year. The last ex-TWA aircraft in American’s fleet were retired in September when the airline phased its remaining MD-80s out of service.

That said, the TWA name still lives on as one of the airline’s Boeing 737s is painted in a “retro” TWA livery.

Besides that, TWA fans can get their fix at the TWA Hotel at New York JFK airport which opened on May 15, 2019. At the hotel, everything is TWA-themed, and visitors can not only see the airline’s uniform and other memorabilia but also an ex-TWA Lockheed Constellation.

TWA Hotel
TWA Hotel.

Summary: What Happened to TWA?

At one point, Trans World Airlines was one of the largest airlines in the United States. It operated a feeder network in both the United States as well as Europe and transported millions of passengers across the Atlantic.

After the deregulation of the airline industry in the United States, however, it found it harder and harder to compete. That – and its spin-off from its parent company – made it a target of corporate raiders.

Under Icahn’s control, some of the airline’s most valuable assets including routes to London were sold off, further contributing to the airline’s troubles. While he was ousted from the airline, that didn’t help save the airline in the end. In fact, the Karabu agreement he left with was a further contributing factor to the airline’s demise.

Even though the airline managed to restructure itself after two bankruptcies, in the end – after declaring its third and final bankruptcy – it was acquired by American Airlines.

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