Airline Mergers - Case Study Example

Case KLM – Air France Merger: Air France merged with KLM in 2004. Indeed, this was a distinctive deal in Europe in a way that two full time airlines with different organisational cultures merged with each other to increase their reach, improve quality and gain internal efficiency. The merged airline was later called as KLM – Air France, hence the strategic planners and policy makers adopted the similar ‘brand name’. The air demand was continuously growing during 2004 – 2007 due to economic friendly policies and expected elimination of trade barriers across the world after imposition of WTO agreement. (Holtz and Grimme, 2009, p. 13) 1.1- PEST Analysis: 1.1.1- Political: An ‘Open Skies’ agreement was signed between USA and European in 2007 that enabled the merged firms to ‘change their ownership structure’ and to get maximum voting rights from Dutch Government authorities. Indeed, the Air France and KLM then became subsidiaries of newly formed KLM – Air France. This was quite helpful in building shareholders’ confidence over top management of new company. (Holtz and Grimme, 2009, p. 14) The governments were paying special attention to develop environmental security laws and regulations to grapple with increasingly large menace of global warming. 1.1.2- Economic: The demand of air travel was constantly growing since 2002 because of phenomenal economic growth and increase in real incomes in both developed West and emerging nations. This in turn created more opportunities for airlines that later resulted in higher monetary gains, however, the competition among firms increased substantially because of new entrants joined the arena. Indeed, the conditions were quite favorable because of skyrocketing demand for cargo services besides normal visitors. The merger would have easily increased business efficiency, market share and consumer reach. (Friesen, 2005) 1.1.3- Socio-cultural: The increase in employment opportunities and business scope improved the standard of living across the world. Consumers, therefore, were inclined to use air travel services in their leisure. Similarly, business personnel were also required travel services to reach their destinations abroad for negotiation with partners, dealers and parties. Hence, propensity to spend for air travel had increased. (Katarzyna, 2004) 1.1.4- Technological: The special attention was paid to develop modernised aircrafts with greater seat capacity, range and fuel-efficiency to minimise the threat of carbon emission and pollution. Indeed, the new aircrafts were produced to reduce consumption of fossil fuels. 1.2- Porter’s Five Forces model: 1.2.1- Bargaining Power of Buyers: The bargaining power of customers was medium due to the fact the aggregate demand of air travel was increasing at phenomenal rate across the world. Perhaps, the reason behind that was aggressive economic growth in many emerging nations coupled with expansion in advance economies. Many potential business and normal travellers, in fact, were heavily dependent on airlines to visit their destinations or sign business deals. The fares thus were on rise due to some constant increase in air travel demand. 1.2.2- Bargaining Power of Suppliers: The suppliers (raw material and inputs’ providers such as spare parts, Jet Fuel and others etc.) had high bargaining power due to skyrocketing demand of air travel services across the world. Quite unequivocally, they could easily increase their prices on intermediate products due to heavy demand. Airlines, on the other hand, were reliant on suppliers and partners to ensure smooth flight service operations. (Weitbrecht, 2006) 1.2.3- Potential New Entrants: Although, there had been many barriers to entry such as investment, environmental and legal documentation in Air travel Industry, yet the increase in aggregate demand created new opportunities for many investors that had an inclination to set up small airlines or low cost carriers. The increase in world trade also intensified the demand of cargo services from businesses. There was considerable threat of potential new entrants because of business friendly policies and expected end of Quota system through WTO. (Katarzyna, 2004) 1.2.4- Threats of Substitute Products: The threat of substitute products from new airlines was extremely higher because of interest of investors in opening new ventures. On the contrary, since each existing firm had been struggling to entice maximum customers towards its travel services, the threat of substitute low fare quality air travel packages was higher. Indeed, this was an attempt to ensure growth, sustainability and maximization of market share. Low cost carriers apparently had a competitive edge, since they offer lowest fares as compared to conventional airlines. (Katarzyna, 2004) 1.2.5- Rivalry Among Competitors: It should be pointed out that rivalry among existing airlines had increased in the form of new product offerings, differentiation and aggressive advertising in an opportunistic business environment. Recalling the above, the airlines with high overheads would opt to attract maximum customers to reap profits or at least ensure break-even point. The merger proved to be quite beneficial for KLM – Air France as it enabled them to offer services to more travellers and expand business across new countries. The profitability increased significantly by nearly 12% (joint) because of improvement in efficiency, control over costs and new destinations. (Weitbrecht, 2006) Case 2- Delta – Northwest Merger: Delta – Northwest merger took place in 2008 when top management and strategic management of two renowned airlines signed a deal of more than $3 billions to establish USA biggest airline. Indeed, this merger was a milestone in US airline industry. This merger greatly helped the management of both firms combating in an extremely tough business environment where consumer demand for air travel had been reducing due to decrease in households’ purchasing power (inflation and unemployment). The costs of doing business had increased substantially because of skyrocketing oil prices that even touched peak $147 mark. In addition, there was stiff competition in the marketplace because of increase in number of airlines and low cost carriers. (Bachman, 2008) 2.1- PEST Analysis: 2.1.1- Political: The merger took place after approval from US Congress and other concerned government authorities, so there was no real political threat. The employees were promised that airline would not dismiss ‘the large number of employees, not reduce its air service points and close its airport offices’ (Hall, Sheik and Schwartz, 2009, p. 13) as part of merger policy. In addition, organizational culture will not be amended. Hence, the resistance from employee groups and other pressure groups was minimised. 2.1.2- Economic: The economic downturn in USA and across the globe had reduced substantially the aggregate demand for air travel services. Many airlines either closed their businesses or preferred to merge with other airlines. Hence, the competitiveness and internal efficiency of Delta – Northwest has increased after merger that enabled the airline to save costs and compete in an extremely challenging business environment. In this way, the probability that financial losses would be incurred was minimised. The competition in the market also reduced after this merger. (Bachman, 2008) 2.1.3- Socio-cultural: The customers were inclined to tighten their belts and avoid any unnecessary purchases except spending money on basic needs. The rising unemployment and reducing real incomes compelled the customers to demand cheap but high quality air travel services. 2.1.4- Technological: The merger of two largest US airlines with latest technology and use of new aircrafts provided a technological edge over their rivals. 2.2- Porter’s Five Forces model: 2.2.1- Bargaining Power of Buyers: The bargaining power of customers had increased due to the fact the potential travellers had decreased their spending because of reduction in purchasing power and thus demanding more value and high quality traveling services at lowest possible prices. Indeed, that was the shift in socio-cultural factors when customers in general were reluctant to buy unnecessary products and became choosier in their preferences. (Associated Press, 2008) 2.2.2- Bargaining Power of Suppliers: The suppliers here actually are raw material and inputs’ providers such as spare parts, Jet Fuel and others etc. In fact, there bargaining power was relatively lower because of economic recession and subsequent reduction in aggregate worldwide demand for air travel services. Airlines had already reduced their demand for additional fuel and spare parts during worst economic scenario, so suppliers had no other option to make deals on Airlines’ terms and conditions. (Associated Press, 2008) 2.2.3- Potential New Entrants: There are numerous barriers to entry in Air travel Industry. In addition, the demand for air travel had already plummeted because of increase in fares (as a result of peak oil prices) and fall in aggregate demand. The fall in world trade in turn sharply reduced the demand of cargo services from businesses. The threat of potential new entrants was extremely low because even existing airlines were struggling to ensure their survival and retention of customers. Northwest – Delta could have easily competed after merger because of greater efficiency and control over operational and structural costs. (AAI report, 2008) 2.2.4- Threats of Substitute Products: The threat of substitute products from new airlines was extremely low because of reluctance of investors to open new ventures. On the contrary, since each existing firm had been struggling to entice maximum customers towards its travel services, the threat of substitute low fare air travel packages was higher. Indeed, this was an attempt to ensure one’s survival and maximize market share. Low cost carriers apparently had a competitive edge, since they offer lowest fares as compared to conventional airlines. (AAI report, 2008) 2.2.5- Rivalry among Competitors: It should be pointed out that rivalry among existing airlines would increase in the form of price-wars and new product offerings in worst business environment. Recalling the above, the airlines with high overheads would opt to attract maximum customers to ensure at least break even point or minimal losses. (AAI report, 2008) In conclusion, the merger enabled both top two US airlines to restore their competitiveness and avoid losses that would have been incurred if both firms had worked in isolation and competed with each other. The market share of Delta – northwest increased to over 15% after merger while the number of flights and operations increased. Profitability has not observed any increase because of economic slowdown in USA and worldwide. References / Bibliography: Friesen, Mark (2005) “Capital Market’s Assessment of European Airline Mergers and Acquisitions – The Case of Air France and KLM” Conference paper STRC [online] Available at http://www.strc.ch/conferences/2005/Friesen.pdf Accessed [June 7, 2010] Viaene, Stijn (2005) “CRM Excellence at KLM ROYAL DUTCH AIRLINES” Communications of the Association for Information Systems, Volume 16, pp. 539-558 [online] Available at http://www.nuigalway.ie/bis/mlang/readings/CRM/Viaene%20(2005)%20CRM%20Excellence%20at%20KLM%20Royal%20Dutch%20Airlines.pdf Accessed [June 7, 2010] Weitbrecht, Andreas (2006) “EU Merger Control in 2005—An Overview” E.C.L.R., ISSUE 2, SWEET & MAXWELL AND CONTRIBUTORS pp. 43-50 [online] Available at http://www.latham.com/upload/pubContent/_pdf/pub1518_1.pdf Accessed [June 7, 2010] Martin Holtz, Wolfgang Grimme, DLR Cologne and Hans (2007) “Airline Alliances and Mergers in Europe: An Analysis with special focus on the merger of Air France and KLM” German Aviation Research Society [online] Available at http://www.garsonline.de/Downloads/070616/Holtz_Alliances_GARS.pdf Accessed [June 7, 2010] Katarzyna Janik (2004) “Managing cross-cultural mergers – the role of management style Case Air France – KLM” European Tourism Management [online] Available at http://du.se/PageFiles/5051/Janik%20thesis.pdf Accessed [June 7, 2010] Adele Hall, Abdul Sheik and Daniel Schwartz (2008) “The Delta-Northwest Merger” [online] Available at http://nexus.umn.edu/Courses/Cases/CE5212/F2008/CS6/CS6-report.pdf Accessed [June 7, 2010] Dave Brown (2009) “Mergers Triggering Mergers: A Simulation Analysis of Merging Airline Codeshare Partners” Job Market Paper [online] Available at http://www.k-state.edu/economics/brown/files/DaveBrown_JobMarketPaper.pdf Accessed [June 7, 2010] Lanier Benkard, Aaron Bodoh-Creed and John Lazarev (2008) “The Long Run Effects of U.S. Airline Mergers” [online] Available at http://www.econ.yale.edu/seminars/apmicro/am08/benkard-081106.pdf Accessed [June 7, 2010] AAI report (2008) “The Merger of Delta Air Lines and Northwest Airlines” American Antitrust White Paper [online] Available at http://www.antitrustinstitute.org/archives/files/AAIWhite%20Paper_Delta_NW_071020081630.pdf Accessed [June 7, 2010] Murgoci Stefania, Stefan Alexandru and Ionescu Emilia (2009) “The Financial Crisis and its Impact on the Travel and Tourism Sector” pp. 170-172 [online] Available at http://steconomice.uoradea.ro/anale/volume/2009/v2-economy-and-business-administration.pdf#page=170 Accessed [June 7, 2010] Bachman, Justin (2008) “Delta and Northwest Agree to Merge” Business Week [online] Available at http://www.businessweek.com/bwdaily/dnflash/content/apr2008/db20080414_755545.htm Accessed [June 7, 2010] Bachman, Justin (2008) “Delta, Let’s See Those Merger Benefits” Business Week [online] Available at http://www.businessweek.com/lifestyle/travelers_check/archives/2008/10/delta_lets_see.html Accessed [June 7, 2010] Bailey, Jeff and Micheline Maynard (2008) “Delta and Northwest in $3 Billion Deal” New York Times [online] Available at http://www.nytimes.com/2008/04/15/business/15air.html?_r=1&pagewanted=1 Accessed [June 7, 2010] Sorkin, Andrew and Jeff Bailey (2008) “Northwest and Delta Talk Merger” New York Times [online] Available at http://www.nytimes.com/2008/02/07/business/07air.html Accessed [June 7, 2010] Associated Press (2008) “Delta completes acquisition of Northwest” Msnbc [online] Available at http://www.msnbc.msn.com/id/27440244/ Accessed [June 7, 2010] Read More