The Merger of Two Airlines - Essay Example

MERGER The airline industry is notoriously and fiercely competitive, with airlines competing for limited space, high capital outlay, strict regulations, and other major obstacles. Rumored mergers and acquisitions are often one way that airlines take towards reducing risk in this dynamic industry. The current investigation considers the merger of two airlines, American Airlines (AA) and Continental, looking at the motivations behind the merger, the problems facing the new entity, and the company’s progress toward achieving its objectives. For the new merger, being the first mover in a market represents enormous strengths for an expanding company in terms of providing needed goods and services before anyone else is able to do so. A risk of this situation, however, is that the first mover is also coming from the perspective of the internal environment of a merged airline (AA culture competing with Continental culture internally). In cases in which this setting is going through a transition between deregulation and state control, the first mover could be subject to more scrutiny than another company that would come onto the scene later. But learning to adapt to the dynamic first mover situation may be a situation in which even failure is a strength, in terms of lessons learned for the dynamic manager. "The final analytical task is to zero in on the strategic issues that management needs to address in forming an effective strategic action plan. Here, managers need to draw upon all prior analysis, put the companys overall situation into perspective, and get a lock on exactly where they need to focus their strategic attention" (Porter, 1995, p. 203). Although Continental has committed itself to being an industry leader in terms of innovation in commercial marketing capacities, this same attitude has not filtered through to all parts of the company, including the R&D division, where the old culture of internal teams competing with one another and working on individual projects is still a factor to be considered. This is something in the merger which AA operations could help with Overall, however, Continental can be said to have many of the core mission values that AA has, in terms of an evolving sense of renewed customer importance. Former competitors which merge in this industry also hope to provide an innovative platform of integrated and sophisticated products as well as services (this is a more recent development in the case of Continental) to clients in an organic and inclusive way. Perhaps the most important facet of this change in mission is a more customer-inclusive platform of service that is more aligned with the needs and wishes of the client. Still, a frequent weakness is that airlines like the proposed merged AA-Continental order airplanes from the manufacturer some time before they would receive the final project, which would not be tailored to meet their specific needs. Threats are inherent in a high entry barrier industry like air travel. The insurance costs are prohibitive, first of all, and to make matters more difficult, the fear of losing the entire company on one bad decision keeps many companies from even marketing aggressively at all, or supplying the service to the reach of customers possible. The high profit margin of the industry is also considered to contribute to the general sense of business risk, along with other prominent factors. Over the last few decades, the aircraft industry has changed and matured in ways that affect all aspects of business, from customer attenuation to systems integration to technological innovation. Therefore, the industry trends are also affected by mergers and integration. Continental is an airline that has been mentioned in terms of mergers in the past, including with United, and there is a tention between times when the airline has stated it will welcome a merger, for example with AA, and times when the airline said that it was not interested in a merger, like with United, but till left room for talks to continue to the companies can reach a beneficial agreement. The external political environment of the airline industry today is generally caught between two categories. The first category is the large, government-supported or subsidized airline, which is designed for tourism and business but doesn’t bring a lot of profits in as a company. These companies are often in the headlines for going bankrupt and being bailed out by the government, or merging to form even larger airlines in an effort to streamline operations (this often does not work). In this model, not much profit goes back to the investor, and it is problematic bringing value to the consumer. Continental and AA are both examples of this, as would be the merger between them. In a competitive industry like the airline industry, the main stakeholders in any case can be classified into three categories: investors in the business, regulatory bodies, and governments. The involvement of governments, especially that of the U.S. and Europe, complicates the system of business risks that are associated with the airline industry drastically. If the only stakeholders were companies and regulatory bodies, the airline would arguably be much less risky as a business venture. But because of the involvement of private stakeholder concerns, which are in the external environment that is difficult for businesses to control, the issues of business risk become more predominant. It perhaps does not help that even initially, without political involvement, the airline industry has traditionally been considered an industry that is high-risk, along with the aircraft manufacturing industry. Another economic threat faced by Continental is rising fuel costs. “Oil prices again edged near $90 a barrel, helped by stronger-than-expected U.S. factory order data. Light, sweet crude for March delivery rose 94 cents to $89.90 a barrel, on the New York Mercantile Exchange. Airline shares often move opposite crude prices because fuel represents one of the industrys biggest costs” (Gutierrez, 2008). Of course, even since this recent date, the price of oil has gone up even more. This results in airlines facing a situation in which they have to improve cost effectiveness or fall by the wayside of competition. This has also resulted in a lot more integration and teamwork. Technological factors in Continental and AA’s industry along the lines of capital outlay and production have seen scant or little change in recent years. One thing that has perhaps changed in recent years is that the industry has gone from being fueled primarily by technological innovation to being fueled by current trends in a more economic manner. Commercial technology is becoming increasingly important in this new paradigm, and government interaction with the industry has also changed along the lines of research and development. Buyers are not competing directly with only suppliers in this relationship, however: the industry itself is often affected. Overall, a merger between AA and Continental represents opportunities for both companies. For one thing, they are similar in size and operations, which means that they will also have some aspects of internal culture that are similar. Secondly, they are both trusted names and established players in the market, so start up costs and economies of scale will not be a problem in the merger. As long as communication between different branches can continue, the merger should run smoothly. REFERENCE Gutierrez, T (2008). Airlines descend. Forbes. LaMotta, L (2008). Continental juggles other airlines. Forbes. Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press Read More