Strategy and Change Management - Mergers in Airline Industry - Essay Example

Strategy and change management Table of Contents Executive Summary 3 Introduction 4 Facts about Mergers in Airline Industry 5 Motive behind Merger and acquisition of Airlines 6 Merger of Delta Airlines and Northwest airlines 7 Merger of Delta Airlines and Northwest airlines SWOT Analysis 8 Probable benefits 9 Probable Threats 10 Outcomes 11 Recommendations 12 Conclusion 13 References 15 Executive Summary Every leading organization in global market is trying to capitalize on the opportunities that are being created due to globalization. Organizations now-a-days are trying to reduce operational costs in order to maximize profits. There are several ways to cut down the cost and enjoy maximum revenue. Merger and acquisitions are the typical process that is implemented in business practices in order to reduce cost. Airline industry is potential industry throughout the past, but several issues such as hike in fuel price, global recession, economic slowdown of several countries and terrorist attacks have affected the industry in terms of global market. Therefore, several leading airlines have decided to merge with each other in order to reduce several business threats. Delta Airlines, Inc. and Northwest Airline Corp. in 2008 have proclaimed that they are going to merge with each other in order to create world’s largest airline named Delta. . Due to merger, the flexibility to acclimatize to the economic challenges of Delta has increased. After the merger, Northwest Airline is the completely owned subsidiary of Delta. According to the market characteristic theory of low-cost airlines, it is feasible that low-cost airlines usually compete in such a market where the traveller density is high enough to develop the competitive advantages by offering rapid-return and time to time services. Lower fares usually results from the economies of traffic density. This type of economies of scale is one of the key features in the airline network model. Such strategic actions also bring certain non-price benefits also. Current trends towards the product differentiation seem to be one of the elements of competition. Due to such strategic actions the airline companies have increased incentive to correspond and improve customer service quality. Due to the economic down turn the company along with the whole airlines companies in Europe and America went through a tough phase. The competition has been intense regarding fares, services and routes. Also the company indulged in to a legal battle with the union airlines. A problem faced by the company has been the over dependence on the North-American market Introduction Merger and acquisition in airline industry is one of the interesting topics within the industry. The airline industry has experienced high disorder due to high operational cost and increasing price of petrol (Hackbarth and Miao, 2007, p.33). The study will reveal the effect of merger on the business performance of two leading airlines Such as Delta airlines and Northwest airlines. The research is based on the several theoretical frameworks, lectures and the practical experience about the subject. Delta Airlines, Inc. and Northwest Airline Corp. in 2008 have announced that they are going to merge with each other in order to create world’s largest airline named Delta. Today the merged airline headquartered in Atlanta has become one of the leading global airlines. The airline serves nearly all of the major travel market in world wide. It started its operation by giving service to 66 countries. Employee strength of this organization is more than 75,000 globally. US domestic airline industry is consisting of legacy airlines and Low-cost airlines. Low-cost airlines operate under the low-cost structure in order to maximize the business profit by offering direct flight to several routes with limited services at a low price. The global airline industry is facing several difficult economical environments. Due to merger, the flexibility to adapt to the economic challenges of Delta has increased. After the merger, Northwest Airline is the completely owned subsidiary of Delta. Increase in fuel price and operational cost have generally changed the economic environment of airline industry. Since last five years the price of fuel has doubled. The remarkable run-up in the oil price makes the transaction more difficult. Therefore, the two leading airlines have effectively taken the decision to merge with each other. Facts about Mergers in Airline Industry Several studies have been dedicated in order to analyze the impact of mergers. Performance of merged airlines can be analyzed by flight duration, load factor and other input prices. As it has identified that US domestic airline industry is consisting of legacy airlines and Low-cost airlines, since 1980 demand for low-cost airlines has increased significantly after the introduction of deregulation act. Travellers now-a-days put more stress on direct and low-fare flights than hub airports. It has been evidenced the legacy airline has faced constant losses over the last few decades. Generally, several extensive analyses have been implemented to support the fare increasing after the merger. According to the market characteristic theory of low-cost airlines, it is feasible that low-cost airlines usually compete in such a market where the traveller density is high enough to develop the competitive advantages by offering rapid-return and time to time services. In summary two different evidences has been identified. Firstly, mergers in airline industry have increased the air fare. Secondly presence of low-cost airlines has forced the legacy airlines to reduce the prices of air tickets. If these factors exist in the industry then a question may arise that how the legacy airline’s merger will affect the business performance of low-cost airline? Moreover, will legacy airlines have to change their pricing strategy in order to face the competition of low-cost airlines? According to a report by the transportation department of US, the newly merged airlines got most consumer complaints of any airlines in the US in the year 2010. The company also increased fare due to the fluctuation in the prices of jet fuel. Motive behind Merger and acquisition of Airlines The basic purpose of merger and acquisition in airline industry is to abolish the duplicative operating cost by reducing the cost of services, operation and cost on labour. Moreover, by this the merging forms integrate their facility, financial assets and technology. Airlines tend to reduce cost and maximize profit by Merger and acquisition. For an example, if two airlines with high market overlap merged to other firm, several operating cost can be saved significantly. Particularly when the market demand is low, demand for merger and acquisition tends to increase. Motivation behind the industry merger and acquisition is significantly based on need for pooled market share at the incorporating airlines’ most important hubs as it maximizes revenue. The impact of low-cost airline may reduce the airfares in the competitive market place; an ascendancy of merging organizations through assimilation may lock in profit against competition of cost. Moreover, the airlines tend to merge with one another in order to expend the business network. Low-cost airlines now-a-days trying to expand in global market through code sharing, strategic alliance or a merger with other low-cost airline in order to compete with legacy airlines in broad market place globally. After deregulation in the US domestic airline industry in 1978, excessive competition and price dispersions caused financial failure of five leading legacy airlines. From the year 2001 to 2005, the legacy airlines lost near about 33 billion UD dollar. On the other hand, the low-cost airlines remained profitable during that era. Hike of fuel price was the only concern of the low-cost airlines. In agreement with changes in the market construction followed by financial restructuring and exit, since 1980 the practice of merger and acquisition has increased significantly. Merger of Delta Airlines and Northwest airlines April 14, 2008, Northwest airlines and Delta airlines announced a merger of 17.6 billion US dollar. The both organization dreamed to become the leading commercial airline in global market through merger. Both of the airlines were legacy airlines, prior to the deregulation act, 1978. Moreover, both of the airlines operated according to the hub-and-spoke system. In this system the passengers had to bear a hub airport in order to take a connecting flight. In the year 2006 Delta Airline was the third largest and Northwest Airline was the fourth largest airline according to the market survey. Finally, in order to reduce economical threat, operational cost and maximize the profit Northwest Airline has decided to operate under Delta’s flagship. The hubs of Northwest Airline had been fully merged with Delta’s brand. Merger of Delta Airlines and Northwest airlines SWOT Analysis Strengths Supreme employee loyalty is the spirit of Delta. Code sharing with other Airlines in global market has increased the core competency of Delta. Implementation of advanced technology has made the aircraft operation more effective. Supreme luxury and high-class in flight service has increased the reputation of this airlines. Major hub location and serving over 300 countries, has made them one of the leading global airlines. Weaknesses Delta airlines have lost some valuable money and time in search of low-cost competitor. Over dependency on North-American market may affect the business performance. Reduction in total current asset and inadequate flight turn-around timing strategy... High debt obligations. Opportunities A successful strategic merger results huge growth. Providing global services for aircraft repair, maintenance. Potential global market place. US airline industry is recovering strongly from the effect of recession. Increasing brand awareness of Delta airline in global market. Threats Pollution and several environmental laws and regulations. Global economic distress. Fare hike of Delta matches with American Airlines. Increasing competition within the industry for services, roots and fares. Probable benefits Airline alliances or mergers create extensive opportunities for initiating benefits. These benefits could be viewed from both demand as well as the supply side. The benefits related to the demand side could be the delivery of seamless services through the expanded networks. From the supply side it can be referred to as the ability to provide better services at a lower cost taking advantages of the higher traffic densities, lower transaction, improved utilization, better technology and resources leading to the economies of scale. The probable benefits of the merger between the Delta Airlines and the Northwest Airlines are discussed in this section (De, 2011, p. 136). Delta-Northwest gained a huge global reach (Moylan, 2008, p.1). The merged airlines had a reach from Europe to Asia and even all over the USA. This made the companies a global airline of gigantic proportions. United, which has been treated as one of the best global service network was severely affected due to the merger. One of the major customer benefits due to the merger happened to the cost cut down. Lower fares usually results from the economies of traffic density. This type of economies of scale is one of the key features in the airline network model. Such strategic actions also bring certain non-price benefits also. Current trends towards the product differentiation seem to be one of the elements of competition. Due to such strategic actions the airline companies have increased incentive to correspond and improve customer service quality. The airlines may be able to provide wide range of schedules to the customers. This helps the companies provide clustered services during peak demand times. Consistent and simplified services provided consumer benefits without anti-competitive results. Of course for the point to point customers the close operations of the airlines along with the services could lead to effects that could be anti competitive in nature. Therefore the merged airlines restricted the supply of ticket stock to the non-stop passengers though high fares. (Henry, 2008, p. 205) Probable Threats According to a report by the transportation department of US, the newly merged airlines got most consumer complaints of any airlines in the US in the year 2010 (Koenig, 2013, p.1). The company also increased fare due to the fluctuation in the prices of jet fuel. Also environmental factors such as high degree of carbon emission have haunted the company. Due to the economic down turn the company along with the whole airlines companies in Europe and America went through a tough phase. The competition has been intense regarding fares, services and routes. Also the company indulged in to a legal battle with the union airlines. A problem faced by the company has been the over dependence on the North-American market (Bhattacharya, 2009, p. 209). Outcomes As a result of the merger, the employees shared in the success of the new company through the expansion in the ownership of shares in the newly formed company. Delta distributed equity stake to all the US based workers with the international employees showing participation through cash payments. Delta also ensured that other steps related to the employee benefits from merger are completed. Both the companies also completed a contract with the Air Line Pilots Association. This contract helped the company to bond both pilot groups under a single working agreement. The pilots also agreed to the process. The company also implemented a protection policy to makes sure that the employees are provided financial protection via a fair- process. The merger between the Delta and North West merger have brought together two financially secure airline companies with the best cost structures. The deal generated over $2 billion annual revenue. This resulted in a diversified air traffic route system and cost synergy. The synergy resulted from decreased over head cost. According of both the companies’ the stock holders received more than one percent of delta shares. In the volatile economic climate the merger seemed really helpful, because the company helped over $2 billion. This laid much required the foundation for profitable growth. It was a unique merger for the airlines industry because of the balancing nature of the both the airlines Delta airlines completed the merger as the company received a letter from the United States department of Justice or DOJ that stated that DOJ would not challenge the merger. Earlier that year, the merger also received permission from the European Union. Delta airlines had also announced the new board of directors. The chairman of the boards Mr. Daniel Carp stayed as the chairman. On the other hand Roy Bostock became the vice chairman. Recommendations It has proven that the expansion is likely to be more profitable than adding more domestic flights. Therefore the company should focus on the international market. This will help the company to avoid low cost competition. Moreover, expansion in global market will increase the brand awareness of the airline. Several tourists and visitors may choose the airline wherever they go. The customer satisfaction has always been the prime focus of the company. But off late delta has been under fire from the customers. Therefore the company should again focus on making flying a unique experience for the customers. This strategy may not require affecting the process of the tickets. The company starts new business class coaches as a short term promotional measures. As the company looks to focus on the sheer class of flying experience, the company may want to position the luxury of the aspects of the services. This would require training focused on business etiquette to make sure that the brand image is in alignment with the services provided. Monitoring of several in-flight safety parameters is required. If the airline start to alternate their pricing strategy, they should carefully handle the safety issues of passengers. Last but not the least Delta Airline should improve the turn-around timing of their flights. In order to improve this they need to implement more advanced technology, need to hire skilled and talented ground staffs for quick ground service (Pprune, 2013, p.1). Conclusion Delta Airlines, Inc. and Northwest Airline Corp. in 2008 have announced that they are going to merge with each other in order to create world’s largest airline named Delta. US domestic airline industry is consisting of legacy airlines and Low-cost airlines. Low-cost airlines operate under the low-cost structure in order to maximize the business profit by offering direct flight to several routes with limited services at a low price. The global airline industry is facing several difficult economical environments. Due to merger, the flexibility to adapt to the economic challenges of Delta has increased. After the merger, Northwest Airline is the completely owned subsidiary of Delta. Delta-Northwest gained a huge global reach. The merged airlines had a reach from Europe to Asia and even all over the USA. This made the companies a global airline of gigantic proportions. United, which has been treated as one of the best global service network was severely affected due to the merger. Increase in fuel price and operational cost have generally changed the economic environment of airline industry. Motivation behind the industry merger and acquisition is significantly based on need for pooled market share at the incorporating airlines’ most important hubs as it maximizes revenue. The impact of low-cost airline may reduce the airfares in the competitive market place; an ascendancy of merging organizations through assimilation may lock in profit against competition of cost. According to a report by the transportation department of US, the newly merged airlines got most consumer complaints of any airlines in the US in the year 2010. The company also increased fare due to the fluctuation in the prices of jet fuel. Also environmental factors such as high degree of carbon emission have haunted the company. It was a unique merger for the airlines industry because of the balancing nature of the both the airlines Delta airlines completed the merger as the company received a letter from the United States department of Justice or DOJ that stated that DOJ would not challenge the merger. Though there are several probable benefits and threats of this merger that can affect the business performance of Delta, but still it is evidenced that it is one of the successful merger in global airline industry. References Bhattacharya, S.2009. Macro Economic Theory. Matrix Educare Pvt. Ltd: India. De, B. 2011. Strategic Management. Matrix Educare: India. Hackbarth, D., and Miao, J., 2007. The Dynamics of Mergers and Acquisitions in Oligopolistic Industry. [pdf]. Available at: < http://www.carlsonschool.umn.edu/assets/147141.pdf>. [Accessed on March 16, 2013]. Henry, A. 2008. Understanding Strategic Management. Oxford University Press: UK. Koenig, D., 2013. American Airlines, US Airways to merge. [online]. Available at: . [Accessed on March 16, 2013]. Moylan, M., 2008. NWA-Delta Merger Goes Forward; Deal Draws Mixed Reactions. [online]. Available at: < http://minnesota.publicradio.org/display/web/2008/02/14/_nwa_delta_merger>. [Accessed on March 16, 2013]. Pprune, 2013. How Safe Are 30 Minute Turn-Around Times. [online]. Available at: < http://www.pprune.org/archive/index.php/t-488175.html>. [Accessed on March 16, 2013]. Read More