The Shape of the Aviation Industry - Term Paper Example

Flying the flags Table of Contents Introduction 3 Review of the EU Airline industry 4 BA Iberia merger 7 Implications of the merger (Benefits and Costs for the Airline industrys main stakeholders) 8 Conclusion 11 Reference 13 Introduction Airline industry constitutes one of the most significant industry segments of the world. The airline industry in Europe was badly hit by the recent financial meltdown. The importance of air travel became much more evident following the needs of organizations to ensure faster travelling of executives from one place to another. The importance of airlines industry can also be analyzed from the fact that it has a significant contribution towards the economic growth of the region. The airline industry is significant considering that it is one of the largest capital intensive industry segments and in addition to its contribution to the GDP it also provides employment options to a large number of individuals. The airline industry is prone to various external aspects like oil price, government regulations and market distortions. However the airline industry has shown signs of revival with all the major economies in Europe being put back on the path of economic growth. A report by Mott McDonald pegs the present value of the airline market in Europe would increase by approximately 2.3 percent by the year 2025 (Mott McDonald, 2011). Another significant aspect that has changed the shape of the aviation industry is the advent of Low Cost Carriers (LCC) following the de regulation of the aviation industry by the European and US governments. These players have grabbed a significant market share owning to their aspect of low cost which has provided them with a competitive advantage (European Commission & United States Department of Transportation, 2010, p.3). Mergers and acquisitions have become one of the most vital strategies that have been adopted by market players across the world including Europe to increase their market share as a means to improve the product mix (Siebert, 1989, p.10-11). Review of the EU Airline industry Europe constitutes one of the most important markets for the participants of the airline industry. The mammoth size of the European aviation market can be analysed from the fact that there are approximately 450airpots in the region which ferried approximately 751 million passengers in 2009 alone. The market has about 150 scheduled airline companies including full service and low cost carriers. In addition to this fact the aviation industry provided direct employment to about 500000 individuals and had an approximate turnover amounting 100 billion Euros as of the year 2009. The aviation industry apart from being a significant contributor towards the economy and growth of the region also serves as a means to bring together people from different regions and provides integration or all the member states of Europe as well as with the rest of the world (European Commission, 2011, p.5). Figure 1: 20 Year forecast for the Airline Industry (Source: Mott McDonald, 2011) The figure above shows the forecasted growth rates in both cargo as well as passenger segments of the European aviation market. It is clear from the figure that the airlines industry in Europe is expected to show growth rates of 5 percent and 6.1 percent in the passenger and cargo sections respectively by the year 2026 on a year on year basis. This is even more significant considering the fact that the European airline market was severely impacted by the terrorist attacks in US in 2001 as well as the financial meltdown in the recent years. The recovery of nations in the European Union has again created hopes for the resurgence of the European airline industry. Figure 2: Major Market Players in Europe and their levels of consolidations (Source: Buttner & Burger, 2008, p.8) The major market players in the European Union are shown in the figure above. The major airlines of the EU are trying to aggressively expand their business by undertaking consolidations by using strategies like mergers and acquisitions. Some of the worthwhile mergers and acquisitions include the merger of British airways and Iberia (Williams, 2008). In terms of market size the French market is the largest market for the aviation industry in Europe followed by Germany, UK, Spain and Italian aviation markets (GlobalSecurity.org, 2011). The major challenge for the European aviation industry includes the volatile macroeconomic scenario as well as the large scale competition within the market. This has accentuated the need to ensure greater organizational efficiency apart from aspects like consolidations so as to ensure competitive market advantage and to promote sustainability. BA Iberia merger One of the biggest news events in the aviation industry in Europe was the merger between British Airways and Iberia on the 12th November 2009. On this historic date a Memorandum of Understanding (MoU) was signed between the management boards of British Airways and the Spanish airlines Iberia to create a new airline conglomerate named International Consolidated Airlines Group. The merger of the two airlines was carried out through a twin staged process in which the ordinary shareholders of British Airways would receive one share of IAG and the Iberian shareholders would receive 1.0205 IAG shares for a single share of Iberia. The treasury shares held by Iberia would stand cancelled and the cross shareholdings would be reformatted between the two organizations. The main reason behind the strategy of the merger was due to the changing landscape of the aviation market in Europe which has seen dramatic changes following the emergence of the low cost carriers. The merger also assumes significance considering the fact that both British airways as well as Iberia have a large number of competitors in their markets which are offering air travel at lower costs. The merger would also help in consolidating the passengers that were lost due to the competition between British Airways and Iberia when they existed as individual entities. The advent of high sped rails also offers significant competition to the two airlines and a merger between these two organizations would largely help in consolidating the volume of passengers. The other advantages of entering into a strategic agreement would also include enhancing the synergies and potential of the organization, the total value of the synergy resulting from the merger between the two organizations is stated at 400 million Euros. The merger would also help in improving the strategic positioning of the two organizations which would help in future growth as well as capacity addition. The merger between the two organizations would help inculcate better hedging strategies so as to take care of the cyclical fluctuations and turbulence in the market. Finally the combined knowledge base and he organizational abilities of the two organizations can help in generating long term strategic and sustainable advantage by formulation of better strategies and implementation of changes in the business models of the organization (Spanish National Securities Market Commission, 2010, p.34-37, 71-72). Implications of the merger (Benefits and Costs for the Airline industrys main stakeholders) The British Airways provides cargo transport and air passengers and numerous other related services like maintenance and ground handling, overhaul and repair (MRO) services. It has been serving 150 numbers of cities across 75 nations along with an additional 215 numbers of cities served under different code sharing relationships. The organisation also has a number of subsidiaries like CityFlyer and OpenSkies and franchisees like Sunair and Comair. The company is headquartered in London and also operates bases at London and Gatwick (Europa, 2010). Iberia on the other hand serves around 106 numbers of destinations across 43 nations and has 110 cities served under the code sharing relationships. Both the airways have memberships in the oneworld alliance. The merger between the two may be considered to be a perfect case of horizontal merger which leads to economies of scale and obtains a national market (Hill & Jones, 2009, p.180). The European Commission examined the impact of the merger between the British Airways and Iberia. First of all the impacts of the transaction on short haul routes London-Madrid and London-Barcelona was examined. As per the investigation conducted by the Committee the merged entity would continue to confront with excessive competition from the other carriers which were active on the same route. From the perspective of a member of the merger panel, it can be said that this would be in the interest of the public. This is because the passengers would have a wide range of alternative flights to choose from and fly through these routes after the merger (Europa, 2010). In addition to this the Commission also examined the effects of this merger on the long and short haul routes on which one of the parties have been offering nonstop connection while the other party have been offering one stop connection, or on which both parties have been offering one stop connection. Based on the investigation it was revealed that the merged route would continue confronting with sufficient competition which would give customers enough alternatives to avail their flights (Europa, 2010). Further the investigation also revealed that the merged entity would continue facing competition from competitors like air cargo transport, ground handling services. Moreover it would also impact the market for MRO services (Europa, 2010). Thus what follows from the investigation of the commission is that the merger will not have any significant effect on the existing competition on any markets which is related to the merger. It is said that the merger would be effective in creating a strong airline which would be competitive enough to survive in the 21st century. However both would retain their respective heritage and brands after achieving the synergies. The single airline that would be created would save both organisations cost of 400m Euros each year (BBC News, 2009). The merger however was not accepted well in the Virgin Atlantic. It was said that the merger would result in British Airway’s dominance at Heathrow with regards to take-offs and landing slots and this would make it impossible for the other airlines to replicate the scale (BBC News, 2009). Among the major stakeholders are the employees of the two organisations. After the formalisation of the agreement, it was found that British Airways would implement active job cuts and would cut down jobs by about 1200. Initially BA was confronted with a growing problem with two pension schemes. “In the past six months, the surplus in one scheme fell from £860m to £27m, while the deficit in the other scheme ballooned from £1.2bn to £2.7bn” (BBC News, 2009). There was tremendous resistance from the staff of the two companies as they were resorting to strikes. The cost cutting measures adopted by both Iberia and BA had significant impact over the staffs that were actively resorting to strikes over pay. Initially it was expected that the merger would result in the formation of one large struggling airline from two small ones. There were apprehensions that the merger would not increase the shareholders value. Moreover the rate of failure of the cross border mergers also remains high. However, it was ensured that the shareholders would be compensated for the risk they were taking. Under the “deficit recovery plan for the pension schemes” seems to be acting as a barrier for the people. Thus it can be considered that the scheme would remain in the interest of the people and would not allow them to suffer any loss due to the merger (Punter Southall, 2010). Certain rules were implemented with regards to cross shareholding between the two companies. Both parties intended to recreate or maintain the present cross shareholdings following the merger. Major steps were taken in favour of the shareholders. The shareholding of Iberia in BA would be converted to A2 shares. The shareholdings would be transferred to the Iberia Operadora and would remain an asset of the same (Thomson Reuters, 2010, p.10). It is also expected that there would not be any cultural problems from the merger. This is because both companies would remain operationally different but work under the single banner of International Airline Group (IAG). IMG would provide them with the flexibility for consolidating their operations further. It was also ensured that the processes would be made easy and transparent. This would be effective in maintaining confidence of the shareholders and earn goodwill (IATA, 2011). Most importantly one of the main aspects of the merger is its objective to attain and contribute towards global economic prosperity. The aim is to avoid all kinds of contradictory regulations across the world. From the perspective of a common man the measure would result in enhanced economic prosperity. Conclusion While doing the project it was found that since the two organisations were in the very same business activity their merging would effectively result in economies of scale mutual benefits (Weston, 2003, p.36). The main benefit that would be incurred would be in the interest of the customers. The merger would result in the increase in competition in the area which would consequently provide greater numbers of flight alternatives for the customers. Also, the merger was aimed at enhancing the shareholders value and maintaining their interest. It would also serve the purpose of the requirement of efficient air traffic management. The attainment of burden free and contradictory environment was one of the key factors behind the merger. The resultant effect was to attain more consolidation in the industry and provide the dimension which would make the combined business more rational and purposeful. Most importantly, both companies would be able to save much of their costs because of the attainment of scale economies and the eventual reduction in price. The overall picture resulting from the merger looks favourable for the common interest of both parties, including the shareholders and the customers. Reference BBC News. (2009). BA and Iberia agree merger deal. [Online]. Available at: http://news.bbc.co.uk/2/hi/8356780.stm. [Accessed on April 12, 2011]. Buttner, M & Burger, C. (2008). Consolidation Index for the European Airline Industry. [Pdf]. Available at: http://www.esmt.org/fm/479/BB-108-007.pdf [Accessed on April 12, 2011]. European Commission. (2011). Flightpath 2050 Europe’s Vision for Aviation. [Pdf]. Available at: http://ec.europa.eu/transport/air/doc/flightpath2050.pdf [Accessed on April 12, 2011]. European Commission & United States Department of Transportation. (2010). TRANSATLANTIC AIRLINE ALLIANCES: COMPETITIVE ISSUES AND REGULATORY APPROACHES. [Pdf]. Available at: http://ec.europa.eu/competition/sectors/transport/reports/joint_alliance_report.pdf [Accessed on April 12, 2011]. Europa. (2010). Mergers: Commission approves merger between British Airways and Iberia. [Online]. Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/938&format=HTML&aged=1&language=EN&guiLanguage=en. [Accessed on April 12, 2011]. GlobalSecurity.org. (2011). European Aviation Industry. [Online]. Available at: http://www.globalsecurity.org/military/world/europe/industry-aviation.htm [Accessed on April 12, 2011]. Hill, C. & Jones, G. 2009. Strategic Management Theory: An Integrated Approach. Cengage Learning. IATA. (2011). Airline International. [Online]. Available at: http://www.iata.org/pressroom/airlines-international/december-2010/pages/ceo-iberia.aspx. [Accessed on April 12, 2011]. Mott McDonald. (2011). State of the Aviation Industry. [Pdf]. Available at: http://www.airports.org/aci/aci/file/2009%20Events/ACI_Econ_Fin_Conf/Mott_MacDonald_presentation_Laurie_Price.pdf [Accessed on April 12, 2011]. Punter Southall. (2010). British Airways-Iberia merger: Punter Southall comments on the implications for the pension scheme. [Online]. Available at: http://www.puntersouthall.com/news-archive?n=235&searchmonth=0&searchyear=0. [Accessed on April 12, 2011]. Siebert, H. (1989). The Single European Market A Schumpeterian Event? [Pdf]. Available at: https://econstor.eu/dspace/bitstream/10419/397/1/025225014.PDF [Accessed on April 12, 2011]. Spanish National Securities Market Commission. (2010). Registration document of international consolidated airlines group, s.a. [Pdf]. Available at: http://grupo.iberia.com/content/GrupoIberia/Documentos/Registration%20Document.pdf [Accessed on April 12, 2011]. Thomson Reuters. (2010). Merger project between international consolidated airlines group, S. A. [Pdf]. Available at: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTIxMjd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1. [Accessed on April 12, 2011]. Weston, J. F. (2003). Takeovers, Restructuring, and Corporate Governance. Pearson Education India. Williams, G. (2008). Key Trends in the Airline Industry. [Pdf]. Available at: http://www.euromedtransport.org/fileadmin/download/Aviation/Workshops/Airline_Seminar/Presentations/1_Key_Trends.pdf [Accessed on April 12, 2011]. Read More