The Proposed the USA Airways-Delta Airlines Merger - Research Paper Example

? The impact of the Delta Airlines- US Airways Merger and Table of Contents Table of Contents2 1.Introduction 3 2.Background 3 2.1 US Airways 3 2.2 Delta airlines 4 2.3 The proposed US airways-Delta Airlines merger 6 3.Legal section 6 3.1 Statement of law 6 3.2 Legal analysis 7 4.Utilitarian ethics 7 3.1 Application 8 5.Kantian ethics 12 `5.1 Categorical imperative 12 5.2 Law of nature 13 5.3 Kingdom of ends test 13 5.4 The agent-receiver test 14 6.Aristotle’s “Doctrine of the Means” 14 6.1 Application 14 7.Social responsibility 15 7.1 Applications of the social responsibility 17 8.Conclusion 18 1. Introduction For the last one decade, the U.S. Airline industry has experienced a number of high-profile merges, the recent one being the US Airways- American Airline merger. According to the available literature the three motives of mergers are: monopoly motive, speculative motive and normal business motive. Mergers became prevalent with the enactment of the Airline Deregulation Act and the trend still persists up-to date. Through anti-trust laws, the U.S. government discourages mergers in the Airline industry with the purpose of protecting consumer interests. This paper examines the legal, social and ethical implications of a proposed merger between Delta Airlines and US Airways. 2. Background 2.1 US Airways The company was started in 1939 and is owned by the U.S. Airways group. It is headquartered in Arizona, and has an extensive fleet network all over the world. Ten years after its formation, the company changed its name to All American Airways and then in 1953, the airline again changed its name to Allegheny Airlines. The airline was later renamed, USAir and in 1979, it acquired Seth San-Diego based Pacific Southwest Airlines. By 1989, the company had become one of the largest carriers in the U.S. and to further extend its influence it announced an alliance with the British Airways in 19996. In 2000, US Airways started negotiations with the UAL, the parent company of United Airline, but the negotiations never went through. 5 years later, the U.S. Airways merged with the America West holdings, and thereafter entered into code sharing agreements with Qatar Airways, ANA and TACA. In the past one decade, the company has extended its influence in the American skies by signing bilateral agreements with popular airlines. In February 2013, the company started negotiations with the American Airlines, to create one global career. The proposed merger is expected to be complete by the end of 2013. The company competes effectively with other low-cost carriers such as the Southwest, Delta Airlines, JetBlue, and Spirit Airlines. To compete effectively in the stiff market, the company has a huge fleet of modern planes and offers low prices to draw customers and increase load capacity. However, the company has too many planes and so its costs of doing business are unrealistically high, leading to looses. At the same time, the company’s hubs are concentrated at the East Coast and as such are able to compete effectively with other competitors. To address this problem, it would be good for the company to expand, to the west and other locations within the U.S. In addition, the airline has been affected by low productivity due to poor employee morale and loss of customers following the September 11th incident and the 2008 global financial crisis. To improve its current poor financial standing, the company should consider abandoning the hub-and-spoke model for the point-to-point system which is likely to attract more customers beside helping the airline to save on costs. Alternatively, the airline should consider forming strategic partnerships with financial stable partners such as FedEx and providing customers with innovative and more personalized services. The biggest threat to the company is the low uptake of the air-related services due to the hard economic environment. In addition, the company is likely to be affected by the fare-reduction pricing strategies that are being employed by the competitors. 2.2 Delta airlines The company was initiated in 1924 and started operating its first passenger flights in 1929. The company was founded by four entrepreneurs and it origin can be attributed to the boll weevil menace. At the time, the South was ravaged by the boll weevils and Mr. Woolman and Bert Coad, discovered a strategy of dusting crops using planes leased from the army. The venture led to the formation of the ‘Huff Daland Dusters’ which began its operations in 1924, with George Post and Woolman being vice-presidents. The Delta Airlines first dealt provided mail services but later expanded to provide passenger-related services. In 1955, the airline pioneered the famous ‘hub and spoke’ model and in 1972, the company expanded its global presence through a merger with the North East Airlines. 1970s saw the company initiate innovative products and processes such as the computer reservations system, and the Frequent Flier Program. During the 1970s the Company also entered into strategic merger with the Western Airlines to become the fifth largest world carrier. In 2007 Delta Airways, entered into an almost near merger with the U.S. Airways, and emerged from bankruptcy. During the same year, the airline listed in the New York Stock Exchange and entered into partnerships with the Air France and the European Union. Following, a successful economic turn around, the company posted a new income of $1.6 billion in the year 2007. In the following year, Delta Airlines merged with Northwest Airlines but returns were not good enough as the company reported a $1.2 billion in losses. However, in the following year, the company bounced back to profitability to post a $1.4 billion annual profit and $1.2 billion in the year 2011. Delta offers customers excellent services and in 2011 it was ranked as the most admired airline by the Business Travel News. The company offers its wide clientele a convenient flight schedules and safe and reliable services all over the world. However, the airline has not yet expanded into the business fliers segment which is more lucrative compared to the average travelers. However, the American market has become very competitive and for this reason it is expected that the airline will face stiff competition from other established airlines such as the Northwest airlines, American airlines, united Airlines, and British Airlines. 2.3 The proposed US airways-Delta Airlines merger In the recent past, US Airways made a takeover bid to the Delta Airlines, but it was rejected. The proposed merger would have resulted to reduced competition in the Airlines industry and would have also forced the two companies to harmonize their frequent flyer program and other services. Another consequence of the merger would have been harmonization of some of the routes, which means some of the workers would have been affected through job losses. Although the merger never came to be, this next paper will access the possible ethical and ethical implications that would have resulted. 3. Legal section 3.1 Statement of law Mergers and acquisitions are controlled by the U.S. antitrust laws specifically the Hart-Scott Rodino Act which gives the Federal Trade Commission and the Department of Justice the right to determine the suitability of the proposed transactions (Areeda, Kaplow & Edlin, 2004). Prior to entering into the merger arrangements, parties are expected to inform the agencies about the proposed deal, after which a review is conducted. The Delta Airlines and US Airways are required to follow the procedures as set out the by the Hard-Scott Rodino Antitrust Improvements Act of 1996. The authority of Justice Department in the approval of the merger requests was evident in the case of United States v. U.S. Airways Group. In this case, the defendant claimed that a successful merger between U.S. Airways and the American Airlines would eliminate the existing market discipline mechanisms and increase the companies’ dominance at the Reagan Airport. The Justice Department and the FTC also share enforcement of the Clayton Act, and other Federal Antitrust regulation. Another key piece of the legislation is the Airline Deregulation Act which came into being on October24th, 1978. The Act seeks to remove government control over the fares, routes and market entry in the airline industry (Frum, 2000). 3.2 Legal analysis The merger of the Delta airlines and US Airways is subject to approval by the FTC and Justice Department. Under current state and federal anti-trust laws, the propose merger could be opposed by the relevant agencies, as it would result in anticompetitive consequences that far outweigh the likely benefit. Consequently, to proceed with the merger negotiations the regulatory bodies will first have to examine the companies’ competitive position in the market. 4. Utilitarian ethics The principle is associated with John Stuart Mill and Jeremy Bentham and suggests that an action is moral if produces more pleasure that suffering. In other words, an action is considered right if maximizes the good, where good is defined as pleasure without pain. However, implementation of this principle could be challenging as it is hard to quantify pleasure and pain. The principle has since been modified to include act utilitarianism and rule utilitarianism. Act utilitarianism calls for strict adherence to the utility principle while rule utilitarianism introduces some rules which are pre-determined to produce the greatest good. Just to illustrate, under the rule utilitarianism is justifiable to respect human rights and universal prohibitions of certain harms. An important aspect of the utilitarian ethics is the need to consider the overall affect of the on all the stakeholders. To conduct an ethical analysis, one is required to conduct the following procedures: i) State the act that needs to be evaluated ii) Identify all the stakeholders who are likely to be affected by the action iii) For each group identified, all forseeable consequences –both band and good- are identified. The good and the bad consequences are evaluated on numerical scale of -5 to +5 iv) For each stakeholder, the bad and good consequences are summed up. If the sum produces a positive result then the action is concluded to be moral, but if negative then is considered immoral under the utilitarian ethical theory 3.1 Application The action being evaluated is whether the merger between Delta Airlines and US Airways is ethical or not. A mathematical morality test will be conducted to determine the suitability of this action. The stakeholders who are likely to be affected by this action include the: i) The government of the United States ii) Shareholders iii) Society iv) Customers v) Competitors vi) workers In the next section, each group’s possible pleasures and pain experiences are quantified. good harm shareholders +3 -5 society +1 -3 customers +2 -4 competitors +2 -3 workers +2 -4 The government +1 -5 From this total pleasure gained is 11 while harm is 24, which means the proposed merger between Delta Airlines and US Airway is immoral. Government Foreseeable good By reducing competition and increasing air fares, means the government will able to get more tax revenue from the merged entity. Foreseeable bad Given the complexity of the merger, the U.S. government will spend more money to execute its oversight role. The merger is also likely to trigger other potential partnerships between low-cost carriers, hence the need to spend more resources to oversee their operations. Shareholders Foreseeable good The shareholders will draw more returns from their investments, as the merged entity will be able to charge high fares and negotiate more effectively with its partners. The shareholders will also gain numerous benefits from the enhanced gain in the market share, increased cost efficiency and increased value generation. Foreseeable harm The success rate of the mergers in the airline is considered low at 41% and so the shareholders’ wealth will be subjected to high risk. Customers Foreseeable good The merged entity will offer diverse services and the customers will enjoy better transportation services. Foreseeable harm The merger is likely to harm competition, raise airfare for passengers, increase airport delays and reduce customer service. In addition, the consumer choice will be limited by the merger. Society Foreseeable good The merged entity is likely to sell some of its assets as one way of improving efficiency and this measure will decrease the levels of the air pollution. Foreseeable harm For the past few years, Delta Airlines has been voted as one of the best airlines in the world. Currently, the company flies to 340 destinations and operates in 65 countries and it constantly manages its fleet in order to reduce greenhouse gas emissions. According to Norwood and Wegg (2012) since 2005, the airline has reduced its greenhouse gas emissions by 18.4%. The company has embraced other initiatives such as reduction of aircraft taxi times, and reducing ground delays. On the other hand, US Airways has launched some green initiatives to preserve the environment. It possible that the merged entity will negatively impact on these green initiatives and eventually the company will lose out in the form of high pollution rates. Competitors Foreseeable good The merger will facilitate the low cost-carriers to start charging higher air fares. Foreseeable harm The merged entity would dominate the American skies and competitors would be edge out of business. Workers Foreseeable good The merger will increase the total number of te employees, hence they have more bargaining power. Foreseeable harm Following the harmonization of the overlapping, it is possible some of the workers will be laid off. 5. Kantian ethics The Kantian ethics is attributed to the German philosopher Immanuel Kant and requires persons to act with reason and a sense of duty (Marks, 2003). Kant argued that if an action was unreasonable then it was immoral. Kant was heavily opposed to the concept of consequentialism as it based on the desire to pursue happiness, a principle that negates the freedom of choice. In addition, the principle of happiness may not work well in instances where people come from different backgrounds and have different experiences. Further more, it is hard for persons to control the consequences of their actions. `5.1 Categorical imperative This is one of the major principles of the Kantian ethics and it calls upon persons to act in a definitive way. Kant believes that morality cannot be compromised on the lines of hypothetical imperative and people’s actions should be contingent on sensible desires. Based on this principle, it follows that an action is either moral or immoral and morality cannot be based on the subjective acceptance or rejection of a consequence to an act. For an action to be considered moral it should be possible to make it consistently universal, respect other human beings and must respect the autonomy of other persons. 5.2 Law of nature In the common world, mergers have become common in the world, but they bring with them some negative consequences. For instance, mergers promote the dominance of some players in the airline industry. In this regard, if the merger between Delta Airline and US Airways was allowed, there would be less competition and hence the consumers’ choices would be minimized. It is also possible that due to market dominance, the customers would be forced to pay higher fares, and ancillary fees. It also worth noting that US airways is a dedicated member of the Star Alliance and if the merger with Delta Airlines was to happen, then some of the consumers would loose out as they would be unable o recover their rewards. A merger between the two carriers would lead to other negative consequence such as the disappearance of the free-flier programs, and reduction of the workforce. It other words, the merger would impact negatively on competition and market forces to the detriment of the local consumers. Based on these facts, the merger would lead to deleterious effects and should never become a universal law. 5.3 Kingdom of ends test According to this concept people should not be treated mere means to an end. While trying oneself as end, one can then be able to determine whether an action is ethical or not. In this context, the successful merger between the two airlines would have led to negative implications and that’s why such mergers are always opposed vehemently and other parties. Even the shareholders too would likely to loose as it would be difficult to control the operation sof the two companies leading to unwarranted inefficiencies. 5.4 The agent-receiver test According to this maxim, persons have the ability to recognize the moral law and live their lives by that law. If a rational being perceives an act to other equal human beings, then the act is immoral. In other words, this principle requires a person to determine the acceptability of action by being both the giver and the receiver of the action. In this context, the main purpose of the merger between Delta Airlines and US Airways is to increase the shareholder and gain market dominance. While the shareholders could gain from this venture, they need to ask themselves whether they would like to suffer the same fate as the employees who are likely to loose their jobs and the consumers who are likely to be charge high prices. Based on this principle, it apparent would not be beneficial to the losers and so it fails the agent-receive test. 6. Aristotle’s “Doctrine of the Means” According to this theory people have the ability to act rationally and determine what is good for them. Through reasoning capability and following virtuous path, human beings can derive gain happiness and Aristotle defined virtuous acts as a balance between virtuous extremes. To behave virtuously, human beings are required to act in moderation; that is, choose the middle path between excesses and deficiencies Cavico & Mujtaba, 2007) 6.1 Application In this context, Aristotle theory requires the merging parties, to choose the middle greediness and service for humanity. On one end, the proposed merger is likely to benefit the shareholders, while on the other end customers are likely to lose out through higher fares. A fair option would be for the two parties to form harmless alliances and ventures without consolidating their operations. 7. Social responsibility As suggested by Visser, Dirk Manfred and Nick (2007) social corporate responsibility refers to the act of giving back to the society and this strategy has become popular in the modern economy as a way of maintain close relationship with the local communities. According to Visser, Dirk Manfred and Nick (2007) the concept of corporate responsibility is widely seen as an effective tool for reducing risks and operational costs. The origin of the social responsibility can be traced to the 1960s and 1970s but later vanished until recently when it re-emerged to due mounting public concern about globalization. In the past the public has held demonstrations to voice their opposition to products and services that impact negatively on the conservation of the environment. Social responsibility can better be understood using the concept of the organizational legitimacy. It is assumed that every organization has a responsibility to the society Social corporate responsibility can be examined using the stakeholder management concept. According to this concept, a business entity is required to serve all the stakeholders including, the suppliers, employees and the communities. As suggested by Carroll and Buchholtz (2006) the term ‘stakeholder’ is very wide but basically it is defined as groups of persons that are affected by the achievement of an organization’ mission. However, some of the people have criticized this definition, because in essence a lot of people depend directly or directly on the organization’s business activities. The available literature has suggested external and internal stakeholder frameworks with a view of identifying the real beneficiaries of the social responsibility concept. From the available literature the stakeholder approach can be divided into two: instrumental approach and the normative approach. The instrumental approach entails conducting a social responsible behavior in order to achieve profitability while the normative approach is defined by the ethical legitimacy of the stakeholders’ claims on the organizational purposes (Matten, Crane & Chapple, 2003). While concept is wide appreciated, the available literature has examined its characteristics to distinguish it from other philanthropic activities. In this regard, social responsibility is characterized by long-term activities which sometimes go beyond giving financial help and are not sanctioned by law. In other words, social responsibility is defined by conscious efforts which are aligned with the ethical expectations, rather than legal or economic demands. The concept of social responsibility requires business entities to fulfill a number of obligations in the course of conducting business activities. Firstly, business entities are required to follow those actions which respect the objectives and the values of the society. Secondly, business organizations are mandated to consider the effect of their decisions to the whole social system and ensure their business activities encompass societal economic, legal, ethical and discretionary expectations. Thirdly, the role of a business entity goes beyond fulfilling the desires of the stakeholders and what is prescribed by law. At the same time, business entities and the stakeholders are considered as interwoven parties rather than distinct entities. Closely related to the stakeholder dialogue is the social contract concept, which stipulates that a business entity should be allowed to conduct its business activities as long it will do so fairly and show accountability for its actions. The social contract expects a business entity to act according to what the society expects. Firms draw their power from the society and the business entities that do not use their power as the society expects, will tend to lose it. Just to illustrate further, for failing to produce environmentally friendly products and services, firms may lose their market share to other competitors. The stakeholder approach goes against the widely acknowledged shareholder policy which argue that a business entity of has the duty of maximizing the shareholder value. As suggested by Carroll and Buchholtz (2006) the shareholder theory is defined by the following four elements. Firstly, a business entity has a relationship with outside groups otherwise known as stakeholders. Secondly, the processes and the outcomes of this relationship are very important. Thirdly, the interests’ i both parties are of value. Finally, the interests of the shareholders can best be addressed through prudent decision-making. While the social responsibility pertains to the rest of the stakeholders’ interests, business organizations are also required to utilize the available resources in a sustainable manner. Ina addition, business entities activities should not be profit-driven only, rather should be guided by the need to preserve the environment from which the organization draws the raw materials. The need for sustainable development was first coined by the Bruntland commission which found prove the link between poverty, environmental degradation and economic development. The commission observed that business entities have a mandate of meeting the needs of future generations by conserving the environment. 7.1 Applications of the social responsibility In the airline industry, it has become increasingly important to conduct business activities while minimizing air pollution. Some of the payers in the airline industry have their efficiency in terms of the emissions per flown passenger. However, the number of passenegers has been on the increase, which means that airlines must embrace more fuel-efficient technologies and invest in research-based activities for renewable energies. The proposed merger could be beneficial to the society as the merged entity is likely to reduce its fleet size. However, on the downside, the proposed merger between Delta Airlines and the U.S. Airways will negatively impact on the previous green initiatives. 8. Conclusion The proposed merger between U.S. Airways and Delta Airlines will be regulated by the anti-trust regulations and is likely to be challenged by the agency bodies such as the Justice Department and the Federal Trade Commission. Under the Kantian ethics, Aristotle’s doctrine of Means and utilitarian ethics, the proposed merger qualifies as immoral. The merged entity is likely to benefit the environment through reduced fleet size. References Areeda, P., Kaplow, L., & Edlin, A. S. (2004). Antitrust Analysis: Problems, Text, Cases (Sixth ed.). New York: Aspen Carroll, A., & Buchholtz, B. (2006). Business and Society: Ethics and Stakeholder Management, 6th ed. Mason, OH: Thomson/South-Western Cavico, F. & Mujtaba, B. (2009). Business Ethics, The Moral Foundation of Effective leadership, management and entrepreneurship. Ft, Lauderdale: Pearson Customer Publishing. Frum, D. (2000). How We Got Here: The '70s. New York, New York: Basic Book Marks, M. L. (2003). Charging Back up the Hill: Workplace Recovery after Mergers, Acquisitions, and Down-sizings. San Francisco: Jossey-Bass. Matten, D., Crane, A., & Chapple, W. (2003). Behind the mask: Revealing the true face of corporate citizenship. Journal Business Ethics, 45 (1), 109. Norwood, T. & Wegg, J. (2002). North American Airlines Handbook (3rd ed.). Sandpoint, Idaho: Airways International. Visser, W., Dirk, M., Manfred, P., & Nick, T. (2007). The A to Z of Corporate Social Responsibility. 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