World Airways Struggles -- Asia Just Part of the Problem

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I have received a number of emails lately regarding

World Airways

(WLDA)

. Most of your inquiries have dealt with two questions: One, is World a possible turnaround play? And two, how is the situation in Asia affecting the company? To these I would add a third, and maybe more important, question: What the heck is going on with

WorldCorp

(WOA)

, the parent holding company for World?

So, let's take them one at a time -- but not necessarily in that order.

First, has the situation in Asia affected World since we

wrote about them last fall? You betcha.

World Airways operates as an ACMI carrier, hauling freight and/or people around the globe on a contract basis. This means that the airline provides the planes, the crew, the insurance and the maintenance on the planes. The contractor is responsible for fuel and anything else involved in the transaction. (This is the same concept that

Atlas Air

(CGO) - Get Report

utilizes, for example.)

Now, let's take a look at World Airways' client list for the first three months of 1998.

Maylasian Airlines

,

Philippine Airlines

,

Garuda Indonesia

, and the

U.S. Air Force

. Now, if that list doesn't get your antennae up, I don't know what will -- especially if you read my piece on

Wednesday, when we looked at the situation in Asia with some of these same airlines. (I might also mention that

MHS Berhad

, the Maylasian aviation company, owns approximately 17% of World Airways.)

The percentage of block hours and revenue from these Asian clients is already down for the first three months of 1998 from their levels in 1997.

The current status of the contracts? World expects Maylasian to meet contractual obligations, it expects to operate passenger services to Garuda as scheduled, but the contract with Philippine Airlines expired in February and it doesn't appear there is any additional work there.

In addition, the U.S. Air Force contract, which contributed 37% of the company's revenues for the first quarter, is up in September. And World has no assurances that the contract will be renewed.

The airline minced no words in its 10-Q filed on May 15, in which it said that the company has "substantial uncontracted capacity in the third and fourth quarters of 1998 and beyond."

World reported pretty bleak numbers this past quarter. It suffered 25% drop in the total number of block hours flown, and its total operating revenues decreased $9.5 million, or 12%, to $69.2 million.

Now one thing we do need to keep in mind and that is this: If the Asian carriers cut back and cut back, and then cut back some more, there may be opportunities for carriers such as World to step in and provide added capacity -- but I don't see this happening in the very short term.

Okay, so we know what the Asian situation looks like. Let's now take a look at what's going on with World's parent holding company, as that could be even more of a problem.

Want to see one abysmal chart? Take a look at WorldCorp's, which owns approximately 51% of World Airways. The company is nothing but a sieve that money pours through.

And unfortunately for World Airways, a lot of that money of late has come from the airline. Here is a brief rundown of the financial sleight of hand that began last year.

Just as World Airways seemed to be on the road to financial recovery last year, WOA used the airline's rejuvenated balance sheet to float a $50 million private debt offering. Now, guess what it did with a big chunk of that money?

WOA had World buy some $25 million worth of shares back from WOA. Net effect? WOA gets $25 million and World Airways is now $50 million more in debt.

In addition, MHS Berhad, which at that time owned about 24% of World Airways, then had the right to dispose of some of its World Airways shares. It did so, selling approximately $5.9 million to World in January. Net effect? $6 million or so to MHS Berhad, $6 million out of World Airways' coffers.

Earlier this year, WorldCorp again raided the bank at World Airways, borrowing $2 million as part of a proposed acquisition of a paper company.

I won't bore you with further details of proposed acquisitions of paper companies and other sordid details from the WOA book of financial tricks, but I will tell you that yesterday the company sent a letter to holders of it 7% convertible debentures. Interest payments on these were due May 15. The company is now in default of these payments. The gist of the letter? It pleaded with holders of the debt not to try to force the company into bankruptcy.

So, in answer to the last and final question: Is World Airways possibly a turnaround play?

I don't think so. Personally, I'm staying away as far as possible from this one.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site, at

www.planebusiness.com.