Economic Business Environment - Example

Economic business environment Name Instructor Course Date Industry analysis- The airline industry Introduction Air travel is a big and growing industrial business and involves the movement between places by use of aero planes or aircrafts. It enhances economic growth, international trade, international ventures and tourism and is therefore essential to the globalization processes taking place in many other businesses. The airline industry is integrated in such a manner that all countries have their airline. Benefits of this form of transport include speed, reliability and security. The European Union airline business went through remarkable chaos in the early 2000’s. This had been caused by four main bankruptcies and two chief mergers, with all former legacy shareholders reporting a large profit decrease. Development of scientific knowledge has changed the way people live and understand the world they are living in, and airplane is one of them. The oldest airline corporation is KLM, a subordinate company of air France, which started to operate from 1920. Today the airline business has arrived at a position where it would be difficult to think of life with no air travel (Doganis, R. 2004).               Presently, there are over 1600 Companies in the world and only a quarter of these are quoted. This industry remained the largest despite the various financial difficulties faced in the year 1997 to 1998. In the past decade, airlines business has grown 6.6% every year. The main grounds behind the rapid growth of the airline industry are global investments and fast rise of international supply, manufacturing chains and consumers, and swift expansion of lovely tourist destinations (Bamberg, G.2009). This evaluation is aimed at presenting a structural representation of the industry, and estimation the effects of change in demand and supply on profitability. The current figures indicate that a comparison of the airline industry in late 1990s and 2011; a) Price sensitivity of demand was 8% more, portraying an increase in customers. b) Customers liked direct flight c) marginal cost changes favored the direct flights Financial Analysis of the EU Airline Industry Previously, air travel has mostly been supported and operated through state support, either in form of equity or subsidies. The business experienced an increasing loss during its 100-year history. Economic profile of the Air line industry:  The airline business has always shown cyclicality because travelers' demand is quick to respond to the presentation of the macro economy, yet airlines must forecast this demand precisely because of the lead time necessary to obtain aircraft. When airlines over-calculate demand, due to a number of reasons, they suffer losses. The main apparatus of demand for airline services are business travelers, freight transport, tourism, and mail transfer (Bamberg, G.2009). Competition in Airline industry:  It is significant to inspect the substantive result that mergers and coalitions may have on competition in general and on consumers in specific. International associations may have a different form than local mergers, but may have the same substantive consequence on competition and thus emerge to merit similar review and oversight. Pricing is highly competitive. Deregulation:  Currently, approximately all US citizens use this form of transport and this was made possible by the introduction of a free market in this industry. In general US airline deregulation was a very important and flourishing step to the growth of business airlines. This shows that airlines can build up their own strategies and principles; they have the right to add or remove routes depending on their profitability and carry out many business decisions independently. Airlines deregulation can also be attributed to new competitors some of whom were bankrupt, some merged and some thrived (Ashkenazi, R. and Lawrence, J. 2008). Market shares In the past one decade, air travel business has developed by 7% every year. Movement for business and leisure reasons has grown strongly in the world. Planned airlines conceded 1.5 billion passengers last year. In the holiday field, the accessibility of huge aircraft such as the Boeing 747 made it suitable and reasonable for people to tour further to new and foreign destinations. Governments in developing nations have recognized the profit of tourism to their national economies and have encouraged the development of resorts and transportation to entice visitors from the wealthy countries in Western Europe and North America. As the economies of developing countries expand, their own people are by now fitting as the new worldwide tourists of the future. Below is a diagram showing the market propositions of different airline firms in the world with their respective performance in the year, 2010. Airline domestic share market: January-December 2010. Employee population The number of workforce at E.U-based airlines as of March, 2010, was the lowest ever since 1990 according to a report by Department of Transportation (DOT). Commercial airline rates of employment in March dropped by 3.8 percent compared to 2009 March (DOT statistics). As at March, 2010, there was a corresponding 377,261 full-time employees at E.U. commercial airlines, a decrease of 14,800 from the previous year. This was the lowest monthly total figure of airline staff since at least 1990. The number of employees declined at the five main airlines. On personalized basis, Delta has the highest number of employees followed by the American airlines and the US Airways (Bamberg, G.2009). On comparison basis, from 2006, United Airlines has reduced its workforce the most, with a decrease of 18 percent. American Airlines employees are 11 percent less compared to previous employment levels. Delta airlines have tried to maintain its employees by shedding of only 3% of the total employee population (Ashkenazi, R. and Lawrence, J. 2008). Merger between Iberia Airways and British Airways A merger is said to take place when two companies unite to form a single company. A merger is related to an acquisition or takeover, only that in the case of a merger, current stockholders of both businesses concerned maintain a common interest in the new business entity. In contrast, in an acquisition one corporation acquires a volume of a second firm's stock, generating an irregular balance of possession in the new shared corporation (Doganis, R. 2004). The whole merger development is usually reserved in secrecy from the common community, and often from the mass of the workers at the concerned corporations. Since the bulk of merger efforts do not make it, and since most are kept undisclosed, it is difficult to approximate how many possible mergers occur in a given year. It is possible that the figure is very elevated, however, given the sum of thriving mergers and the attractiveness of mergers for many corporations. Let us evaluate probable merge between British Airways and Iberia Airways. Why the firms merge Some of the reasons why the airline firms could merge include the attempt to gain marketplace authority and control, for reasons of tax advantages of gaining a loss making firm, efficiency, increasing market allocation and diversification. Efficiency: Ravenschaft and Scherer (2007), state that firms will merge since they believe that this will in effect increase efficiency in the new firm. Efficiency is anticipated to go up after the boost in capital, sharing of expertise, elimination of duplicate practices in manufacturing process and the comprehension of economies of scale. All these rewards linked with mergers pressure firms to merge, but according to Hughes (2009) mergers may not necessarily guide to the recognition of efficiency but may lead to even bigger inefficiencies in the new firm. Market power: Firms will merge so as to gain market share, which occurs when firms are in the same industry or business, in some cases they form a monopolistic firm which has the power to controls the prices. Mergers will also be formed in order to increase competitive advantage. However, this may not be the situation where policies restrict monopolistic forms. The merge between the two airlines could have been targeted at increasing the market power of the merger firm, in Spain and Europe. Increased market share: Firms have diverse stages of marketplace share in the market, when the businesses merge they form one big corporation whose market portion is equivalent to the sum of both firms market share. This in return acts as an inspiring factor for businesses to merge. The reason why a superior market share is preferred is because a business will realize economies of scale, increased sales level, and increased sales revenue and therefore increased profits will be earned. Tax advantages: Tax advantage is also a reason why firms will merge, firms pay tax to the government and the amount will depend on profit levels, firms that merge with loss making firms will relies this advantage reduction burdens of tax. In many countries however policies that govern such mergers are put in place to discourage firms. In cases where there is a common tax that is levied on all businesses, businesses may opt to avoid it through a merger in order to share that cost. Increasing geographical coverage: Mergers will also occur if firms want to increase their geographical exposure, this way firms are able to offer their products to superior populations. This happens because when mergers occur a large company is formed. The merger between BA and Iberia is a good example since the two businesses operate in different geographical locations and a merger will result in widespread coverage of each firm into new markets (Bamberg, G.2009). Sharing of expertise and technological integration: Firms will gain proficiency and gain from mergers, managers and other professionals who will share ideas and this helps in humanizing the competence and also the output of a firm, this sharing is made achievable when firms join but this would not have been possible when the firms operate independently. A merger between BA and Iberia is bound to result in transfer and sharing of expertise and experience among the combined workers and this will result in better products and services being produced. Therefore the sharing of technological concepts and ideas will guide to higher output and profitability of a firm (Doganis, R. 2004). Increased firm size: It is apparent that firms will merge for the reason of escalating their size, larger firms are known to contend better in the marketplace than smaller firms, and consequently firms are aggravated to merge due to the fact that development of a bigger firm will in effect translate into improved competitive situation. The union of these firms will generate a larger firm that is more noticeable to customers and investors; therefore the bigger firm will draw more customers and investors and therefore recover the firm's presentation and productivity. A good example will be the merger between the British Airlines and Iberia Airlines will result in increased firm size. Problems caused by these mergers: Mergers are known to have some negative influence on the market as well as the people it affects. Mergers result in problems to the investors and workers. The most common problems linked with mergers include loss of jobs, loss of the investor confidence, demoralization of employees and loss of some business property. Effect on employees Designed mergers negatively affect workers of the merging businesses in that the slow nature of the process influences workers of both firms since when announcements are made about the merge of corporations, the working environment in those corporations change, workers become confused and nervous about what will happen and this condenses productivity of these employees (Doganis, R. 2004). Job losses Mergers engage chief reorganization of the corporation’s arrangement of the new business to be formed. This is because merging firms will get rid of replica processes to cut down on production costs, and as a result of this workers will loose their jobs because of this restructuring. Effects on employees: Managers and other top level staff in both companies may be underprivileged of their power after the union. This is a tender process and may affect their presentation after the amalgamation. This process discourages such workers and presentation of the new business formed may be even worse. In the case of the merger between British Airlines and Iberia Airlines, the top management of the two companies may be involved in a push and pull on who should continue with their task and who should start or change their task (Bamberg, G.2009). Slow negotiation process Mergers entail a procedure that requires time to finish and much time and resources are used up in the process which may unfavorably influence the presentation of the business. This is because managers focus on the conciliation process rather than the company’s management and this will lead to poor performance of both corporations. Economic analysis of the merger A merger has both positive and negative effects on the party companies involved and the effects are usually felt both in the short run and in the long run. In economic terms, the merger will result in increased economies of scale for the union company due to larger market base. The new firm is also at a position of strengthening its capital base since none of the companies is bankrupt. This will be interpreted by more investments and hence higher revenues I the long run. Conclusion: In the above analysis it is apparent that mergers do not always increaser the competitive advantages anticipated, research idnciatge that such mergers may lead to a reduction in the performance of these companies after merging. The best way to avoid such scenarios starts from the humble topic of evaluating the economic business environment before deciding on what step to take. As in the case of EU airlines, the successful and most dominant airlines have well set up economic and business environment strategies that ensure they carry out their activities effectively. References Bamberg, G. (2009). "Up in the Air: How Airlines Can Improve Performance by Engaging their Employees". Cornell University Press. Ithaca, New York. Pp. 89-91. Demphilis, D. (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press. pp. 74-79. Doganis, R. (2004). Flying off Course; Airline Economics and Marketing. New York. HarperCollins Press. pp. 34-69. Rosenbaum, J. and Pearl, J. (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. Pp. 46-50. Ashkenazi, R. and Lawrence, J. (2008). Making the Deal Real; How GE Capital Integrates Acquisitions, England. Harvard Business Review, pp. 17-20. Read More