British airways and Iberia airlines merger - Essay Example

British Airways and Iberia Airlines Merger Brief History of British Airways (BA) British Airways (BA), the flag carrier of the UK, is the largest airline in the United Kingdom on the basis of fleet magnitude flights and terminus. The airline was established in 1974 and has ruled the airline industry since its creation as regards passenger volume until the arrival of low-cost competitor, Easyjet in 2008. BA has been centered at London Heathrow Airport, which is the airline’s central hub. In its growth strategies, BA acquired Dan-Air, which increased its popularity at Gatwick Airport. BA also acquired 25 percent shares in Australian airline, Qantas in 1993. In 1998, the airline together with other leading airlines formed an alliance dubbed “Oneworld airline alliance.” The airline was privatized in 2006 (Belliotti 2008). BA experienced 84 percent drop in profits in 1999, its worst performance in seven years. Consequently, Rod Eddington succeeded Robert Ayling as the company’s CEO. Willie Walsh later replaced Rod Eddington and steered the merger process. The airline sold its Qantas stake in 2004. BA and lberia made public a merger plan in 2010. BA stopped trading in London Stock Exchange in 2011. The alliance between BA and lberia emerged third largest airline group globally. In Europe, it was second biggest airline group. Brief History of lberia From 1944 to 2001, lberia remained nationalized. After privatization on April, 2001, lberia joined stock markets and was integrated in the IBEX-35 stock index of the Madrid Stock Exchange. The privatization lasted up to 2009 after which the airline formed a merger with British Airways in 2010, which gave birth to International Airlines Group. Under the merger, each airline retained its original brand (Burghouwt, 2007). Reasons for the Merge and Synergies between BA and lberia Mergers and alliances are strategic approaches that corporations use to mitigate business risks, threats emerging from competition and to take up emerging opportunities. Mergers and acquisitions normally arise when it is perceived that existing synergies between merging corporations can allow them to operate with higher efficiencies. Mergers are beneficial when the merging companies gain competitive advantage from the union, which would otherwise not be possible when the firms are operating individually (Morrell 2010). As such, there are many motives that could drive the merger between BA and lberia. Some of the reasons that could influence the merger between the two companies include improved technology, enjoyment of economies of scale and integration of human resource. Mergers and acquisitions are also driven by the urge to gain popularity and acquire larger market share as well as control of the industry. Moreover, companies usually form mergers to further their strategic business goals such as spreading business risks, diversification and value optimization. BA-lberia merger is driven by many factors. The first motive behind the merger is to widen the operation network of the airlines. Before the merger, BA operated 245 aircrafts with 149 destinations and lberia before the merger has a fleet of 174 aircrafts flying to 106 destinations. The group merger will improve the situation as it will result into 419 aircrafts flying to over 200 locations and ferry 62 million passengers per annum. As BA CEO, Willie Walsh claims, "The merged company will provide customers with a larger combined network," (BBC 2010, Para 8). Both BA and lberia are facing intense competition in their routes from rivals like Ryan Air and low-cost Easyjet. They are also threatened by other carriers such as France-KLM and Lufthansa. According to Morrell (2010), EU airlines, Air France and Lufthansa left lberia as one of the potential options for BA to partner with. As such, the merger will most certainly help BA and lberia to counter the threat of competition effectively. Second, both BA and lberia were adversely affected by economic downturn and escalating oil prices. In 2009, BA experienced its greatest loss. On the other hand, lberia also reported poor financial outcomes. BA’s revenues dropped from 8753 million GBP to 7994 million GBP between 2008 and 2010. Similarly, the profits of the airline dropped in the same period. Lberia despite experiencing losses lower than BA’s was also in the verge of financial trouble. The merger will most likely allow the airlines to exploit substantial low cost and operational synergies. Under the merger, the companies will have to downsize and remain with reasonable workforce and unite their operations (BBC 2010). Because of the merger, the companies will be able to save significant amount in cost (approximately US$ 530 million) (Wald, 2011). Cost reduction seems to be essentially a big thrust behind the merger motives. The biggest challenge to mergers however, concerns leadership and strategic vision for the newly formed alliance. The union between Daimler and Chrysler collapsed because of managerial differences of the companies. Mergers demand strong cooperation between top managements of the merging companies. The extent to which the workforce of the merging organization can integrate and work smoothly determines the success or failure of mergers. Decisions in merged corporation are greatly influenced by ownership ratio. According to the BA-lberia merger, the ownership ratio is 55:45 favoring BA. Apparently, BA is likely to have greater influence in decision-making process. The BA CEO, Willie Walsh is the designated CEO of the merged company. The two airlines contribute equally to strategic plans for the merger. Causes of the Financial Crisis Financial crunch in 2007 to 2009 adversely affected almost all industries across the world. The BA and lberia airlines were no exception in the aviation industry. The companies lost substantial revenues, which pushed further the urge to merge. Irresponsible mortgage lending, housing bubble, global inequities, securitization as well as lack of transparency and accountability in mortgage market and inefficiencies of rating agencies were some of the suggested causes of 2007-2009 economic recession (Jickling 2010; Verick & Islam, 2010). Conclusion In the contemporary market, globalization and technological advancement have created several business opportunities as well as risks. As such, corporations are continuously seeking for strategies to mitigate risks and maximize from their operations. Mergers and alliances are some of the common approaches, which organizations use to enter new markets. Companies can attain competitive advantage, which is impossible if each company operates individually, through mergers. It enables organizations to pull resources and effectively counter competition in the market. BA and lberia formed a merger to enable them to operate with greater efficiency. The merger also enabled them to increase their market share besides mitigating the adverse impacts of the recent economic slump on both companies. Bibliography BBC 8 April 2010. British Airways and Iberia sign merger agreement. Viewed on January 20, 2013 from Belliotti, R 2008, “Common use facilities and equipment at airports,” Transportation Research Board, Washington, D.C. Burghouwt, G 2007, “Airline network development in Europe and its implications for airport planning,” Ashgate, Aldershot. Jickling, M 2010, “Causes of the Financial Crisis,” Congressional Research Service. Accessed on January 20, 2013 from Morrell, P 2010, “The planned British Airways/Iberia merger: a viewpoint.” Accessed on January 20, 2013 from Verick, S & Islam, I 2010, “The Great Recession of 2008-2009: Causes, Consequences and Policy Responses.” Accessed on January 20, 2013 from Wald, A 2011, “Introduction to aviation management,” Munster: LIT, Berlin. Read More