Merger/Acquisition deal of Aviation/Airline Industries
Introduction:
A merging and acquisitions deal between two
companies was not allowed because of rules and regulations of industries in the
past. But a merging and acquisition deal in aviation or airline industries is
relatively new strategic approach. Merging and acquisitions are two aspects which
are related to management strategy, corporate industry and gives information
about dealings, dividing, selling and buying will help to get mutually
benefitted between companies. One such example where two companies merged and
signed a deal is from aviation industry (Berry &
Panle, 2010). The U.S. Airways and American West Airlines. In the year 2005,
U.S. Airways came forward to merge with America West into
brand new U.S. Airways . Several
acquisitions were followed with reference to merging between U S Airways with American West Airlines by other domestic
airlines in U.S. market which are operating at that time which includes Delta
and American airlines. The acquisition deal made by U.S. Airways in
order to get benefitted and strengthen their own position in the U.S. market in
relation to other airlines like United, Delta and American etc., and cost
sensitive airlines like Jet-Blue and Southwest etc.After few years United
airlines which had few negotiations earlier were broken in relation with
Continental airlines. After broke off United airlines started discussions with
U.S.Airways . However based on
situations later turned back to negotiate with Continental Airways and
later in the year 2010 United Airlines announced to merge with Continental
airlines after several negotiations.
The changes in the airlines industry which
continuously led to grow and consolidate and there is a speculation about the
merging between U S Airways and American
airlines grew because American airlines had bankrupt issues which made
investors to think and had raised questions about merging between U S
Airways and America West airlines
earlier in the past lead to affect of growth, efficiency, capacity and pricing
in an operation to post merging options (Borenstein, 2005).
The merger between U S Airways and American West provides a suitable example
which is rich and can be used for the analysis because U.S. Airways is
cost effective airlines in terms of pricing and demand where it operates its airlines
in Eastern part of United States and American West airlines which is low cost
airline operated initially along with Western part of United States. The
merging between U S Airways and American
West will provide an example which is complex and action will show impact on
size of industry, pricing, efficiency, costs and the capability of combining
both the airlines industries.
The merger and
acquisitions deal between U S Airways and
American West airlines can be studied by applying strategic variance analysis
method which is used to analyze the
changes in the performance that are realized after both airlines merged. This
merger provides a complex and strategic example which impact on size of both
firms and their pricing costs and efficiency and combination of both airlines
industries (Borenstein & Rose, 2007). The
case study will include the theory of merger and acquisition discussing
marketing strategies where efficiency versus power which motivates for mergers
and will discuss the role of U.S. Commission about the merging of two airlines
industry and their impact on U.S. market. The merger and acquisition deal
happened between U S Airways and
American West Airways affected efficiency, pricing, growth and the
capacity of U S Airways in post merging operations.
Few questions which needs to be addressed related to merger between U S
Airways and American West Airways include-how merging between both airlines
industry affected operation management and performance? To what extent changes
in operations were observed which are driven by price changes, costs, growth
and capacity of managing and productivity? Does the changes mentioned above are
similar to the efficiency theories and market power or management of U.S.
Airways .
During 1990’s airlines
industry of United States were considered as good years. There was growth in
the number of passengers and profits were favorable. Later after 9/11 attacks
in 2001 the demand in airlines tickets are dropped in significant range.
Airlines increased costs and fixed which showed tremendous decrease in large
airline industries (Brueckner et.al, 2010).
The cost variance, expenses of fuel and costs of labour were all together kept
pressure which showed greater impact on airlines industry. Below the graph
depicts the trends of U.S. Airlines Industry from 1996 to 2012.
There were tremendous
changes in competition action and many airlines industries look forwarded for
restructure the airlines and tried to merging and acquisition deals with other
industries in order to return back to earn profits. This lead to create groups
within U.S. Airline industry and there was healthy competition. They include
Hub and spoke routes operating airlines industries in U.S.market, Airlines
operating from one point to other point at low cost prices from small airports
in metropolitan markets and servicing travelers on vocational basis and
regional airlines collaborated with large network airlines for operating small
flights to get connection with large airline hubs.
The profits earned
varied widely across the airlines industry across the U.S. market but commuter
airlines and low costs of airlines tend to have very strong performance
financially rather than the network airlines operated by major companies. The
pricing of airlines which is low and aggressive tactics helped regional
airlines to share market from the large network airlines. Below the graph
depicts market share trends in U.S. airline industry from 2000 to 2010 (Pels, 2008).
At the time of U S
Airways merger the airline industry was
recovering from loss occurred due to poor demand. The costs were favourable
which created a position to take advantage of situation for emerging growth of
airline industry. The large network operating airlines industries reduced
prices which are associated with salaries and wages paid to the employees,
amount paid to the agents as commission, purchased services, aircraft services,
and fees for landing operation of airline and other operations in relation to
the airlines based on per revenue basis. For example The United airlines
reduced prices in relation to operating airlines by nearly 25% revenues between
the years 2001 to 2005.But on other side the cost of fuel and maintenance of
aircraft prices were increased.
The total
traffic scheduled and average cost of fuel per gallon and average revenue per
RPM is depicted below in table during 2005 and 2006 for U.S. carriers.
Network airlines still
faced money loss besides this improvement and the operations will lead to
disadvantage in U.S. market when compared with airlines running at low cost
prices. Airlines industries still finding a plan to cope up with market
operated at high prices caused horizontal acquisitions which is a mechanism in
order to strengthen their ability to compete with other network airlines
industries besides there was weak position in the market. Later U S
Airways merger experienced a wave to
consolidate with other network airlines industries, Delta- North West and
Continental-United Airways . U S
Airways made a possible attempt to merge
with United Airlines but later United didn’t pay interest and shifted their
decision to merge with Continental. The airline industries continued
consolidating because of lack of profits between the competitors. The
competition is related to pricing, fixed prices and variable prices like fuels
seems to be fluctuating which lead to cause losses to the large network
airlines. Due to this reason alternatively horizontal acquisitions were
considered by the airlines industries in addressing the structural changes and
other challenges faced within the industry.
In 1939, U S
Airways came into existence named, All
American Aviation Company which gradually seen growth through acquisitions in
order to become largest airlines industry in the United States. Later it
acquired so many airlines which are regionally operated like Mohawk Airlines,
Commuter Airlines and Pacific Southwest Airlines located in the regions of New
York, Pennsylvania and California. This led to expand business at national
level. In 1989, U.S. Airways acquired largest deal when bought Piedmont
Airlines and its position in the market got strengthened in the East Coast
market. Later after several years in 2000,.U.S. Airways signed
and accepted a deal in order to take over United Airlines industry but due to
federal law regulations this deal was blocked by the justice department of
United States. Later in 2003 U.S. Airways
faced a drop in revenue nearly
around 25% and there was total loss approximately 175 million dollars. Later
the U.S. Airways filed for protection in relation to bankruptcy
and U.S. Airways planned to merge with America West in the year
2005.
America West airline
came into existence in the year 1981 and operated as regional airlines in
southwest region of United States. Until the time America West merged with U.S.
Airways , it operated an airlines hub in
Las Vegas and Phoenix for nearly 100 destinations in U.S. Based on terms per
revenue basis, America West is considered as second low cost airline industry
operated in United States. The America West airlines faced bankruptcy in 1990
regarding structural changes and emerged by support from Mesa airlines and
Continental airlines as partners. After experiencing from bankruptcy it emerged
later and later expanded its business in the Eastern part of United States by
launching successfully in a hub present in Columbus,Ohio.Later upgraded their
fleet and eliminated route to Hawaii by expanding its business in
infrastructure and ordered new Airbus 320 and Boeing 727.Once started gaining
profits launched a new logo and started online system for sale of tickets and
launched E-ticketing system and other online services related to Airlines
management.
Because of industry
rules and regulations merger and acquisitions were not allowed in the past. But
on May 19th,year 2015,U.S. Airways
and America west airlines both
announced merging and the announcement was made since U S Airways was restructuring after emerging from
bankruptcy. The America West management assumed leadership of newly combined
airlines industry and as predicted Douglas Parker, Chief Executive Officer of
America West Airlines was named as new CEO of airlines after got merged together.
This merger made a top management with team from both U S Airways and America West. Douglas parker focused on
make stronger network of both airlines industries and helped struggling U S
Airways which is strong network airlines
in the eastern part of United States and America West is mainly concentrated in
western coast of United States. After Southwest airlines, America west is
second largest airlines industry as low cost operating airlines industry. U.S. Airways lacked
national scale and it was regarded as hub and spoke network airline. The merger
of two airlines industry will create a network nationally as air carrier with
greater efficiency of carrying the travelers with low cost prices.
There are goals set by
the CEO, Douglas Parker after U S Airways
and America West merger. As CEO, parker suggested many different
synergies after the outcome of merger between two airlines industries. The
geographical markets were made complementary initially. This can be explained
by the following example.Pre merger travelers from the Eastern coast part of
United States who were travelling beyond the geographic market of U S
Airways were made to transfer to an
airline which is a competitor in order to complete their journey. An
alternative approach to this was also planned which is traveller can buy a
ticket for direct flight with large competitor which is cost effective and
fixed prices. The passenger boarded America West airlines faced a similar situation
who travelled beyond the geographical boundary is directed by America west.
After merger the operations of airlines between two airlines the higher
officials expected to see increase in the revenues because of implementation of
new routes and connections across geographic boundaries which caused raise in
market value. The volume of passenger after merger will also determine it
expansion as larger airline industry and also gives justification that it is
operated across various and expands its geographic market. Later CEO, Parker
made an announcement of company plans to re enter the market in Hawaii
particularly. As per company estimations there are new routes and connections
and there will be new revenues too and expansion of markets would reach between
$150 million to $200 million by the end of 2005.
In order to save the
prices the company eliminated the routes and connection which were not gaining
profits in the market and alternatively planned to save these costs for fuel
expenses, maintenance of airlines and for personal servicing purpose in routes
and for customer management. The company estimated there will be a loss in
revenues which is around $150 million to $200 million after eliminating routes;
all these costs were reduced by U S Airways
as post acquisition prices. Whereas on other side there are possible
routes where U S Airways and America
West airlines will service in the same routes are consolidated which resulted
in large single flight. This would allow utilizing the staff more efficiently
and conserving fuel and maintenance charges of flight operations. U S
Airways made plans for better efficiency
based on demand on route size of aircraft is either increased or decreased
which is calculated as load factor of passenger and other approach to
efficiency improvement is to run flights more than normal hours in a day. The
changes which are made to expect the improvement in efficiency and utilizing
the capacity by means of amount which is not disclosed.
Douglas Parker,CEO
later suggested that after merger from both airlines decided to close the
company that merged and immediately planned to integrate their pricing ,plans
related to frequent flyer operations, scheduling of flights, marketing and
management which delivers nearly synergies around 99.9% within a quick period
of time. The anticipation among the company management regarding total
synergies because of merger is estimated to a total of $600 million. Later CEO
of merger company, Parker didn’t alter any ticket prices of flight operations;
this would lead to result in market gains by merging and acquisition between
America West Airways and U.S.Airways . This merger further allows minimizing the
costs related to purchasing, costs related to labour, expense of fuel usage by
means of power bargaining from labour unions and power suppliers.
The review from
U.S.Commission and Department of Justice, U.S. is required for the merger
proposed since it is a horizontal merger in order to examine whether the merger
between America West and U S Airways would
lead harming consumers by minimizing the competition in pricing. Before the
review was made the companies which are involved in merging will file the
information related to the industry, business and operational synergies that
are in connection with the merger. The merging companies will argue that U S
Airways could be benefitted by means of
low pricing of ticket which allows passing efficiency to the customers by
reducing the prices and make U S Airways
more efficient (Flouris et.al,2005).
Apart from this review the rules and guidelines of federal department made a
proposal related to horizontal mergers or market acquisitions where
concentration in high level are reviewed for anti competitive impact. The
technique to measure the concentration levels is called as Herfindahl-Hirschman
Index (HHI) which is used to measure the distribution and relative size of the
competitors in an industry. In order to calculate Herfindahl-Hirschman Index,
the shares of market individually of every competitor in a industry are squared
and combined into a sum. Thus the competitor size is measured by share prices
in market which lead to increase and HHI of the industry increases. The time
when U.S. Airways merger occurred the HHI’s that exceeds 1800
indicating that industries are highly concentrated as per DOJ guidelines (Fageda & Perdiguero, 2011). The transactions
related to merger and acquisitions which increases HHI by more than 100 points
within an industry which is already concentrated face concerns like anti-trust
which is again based on guidelines of DOJ horizontal merger. In the year 2010,
DOJ guidelines were totally revised.HHI of industries which range between 1500
to 2500 points are considered as concentrated moderately. The Department of
Justice of United States also inspected transactions of merger and acquisitions
which indicated that concentration increase in industries by greater than 100
points based on occurrence either in highly or moderately concentrated
industries. The regulatory scrutiny is received in greater proportion by
mergers which increased HHI by greater than 200 points.
The department of
Justice of United States later closed the further investigation of competitive
effects of U S Airways and America West Airways merger
carrying competition by a negative approach by issuing a statement that further
investigation is closed. Antitrust division of United Stated that the merger
proposal of U S Airways and America West
will not minimize competition and it has decided to close further investigation
by not issuing any requests to gain addition information. The division
concluded saying that merger will improve efficiency and benefits consumers by
their network from end to end operations. This merger will be 5th
largest in America which offers better services with affordable prices to the
customers and services flights to different destinations throughout the United
States. The CEO of U S Airways was more
concerned about the alterations within industry concentration because of merger
of Delta-Northwest and United-Continental because HHI of industry is increased.
Later planned to merge with American airlines and wondered if threshold levels
reached 1500 HHI and it is considered the industry is concentrated moderately
and wondered if merging with American airlines will increase HHI by 200 points
which results in scrutiny in greater proportion as per guidelines of DOJ (Vowles, 2006).
It is important to
address the following question in relation to merger between America West and U
S Airways concerns as per DOJ in order
to verify the effects related to performance.
Does U.S. Airways will
grow its sales between periods of pre merger and post merger as predicted by
management, otherwise does sales decline after merger?
Discuss the changes in
costs and pricings affected post merger performance? This question raised
because horizontal acquisitions theory stated that company used its increased
power in marketing order to raise the costs or for volume discounts bargaining
with supplier.
Did U S Airways improved its efficiency as predicted by
organization and does a challenge affect negatively the operational
efficiencies?
The evidence showing
the information about customers benefitted from operational efficiencies will
help U S Airways to build an approval
case of a future acquisition (Hofer et.al,2008).
Better understanding of variances performance based on pre merger analysis need
to be considered for understanding the effectiveness of U S Airways merger team and its capability to deliver the
performance in a proposed acquisition. This further helps in estimation of
synergies for prospective acquisitions.
The Strategic Variance Analysis:
The literature related
to cost managing introduced recently the strategic variance analysis. The
method is based on strategic analysis of income operation which was formulated
by Foster, Datar and Horngren.This analysis extended by Sopariwala.The analysis
extended explains the operating income difference between 2 years in four
components (Ito et.al, 2003).
The first
component is called growth component
will measure alterations in operation of income which resulted in changes in
sales prices, units and input costs and output constant relationships. The
component is further broken down into size variance of market, which represents
change in company’s income operation and share market variance because of
company’s share market changes (Klein et al, 1999).
The second component is
called price recovery component which evaluates the alterations in operating
income procedures which are caused due to variations in sales prices and costs
regarding input keeping constant as sales units and output-input relationships.
This serves as revenue effect which measure the change in sales price and its
impact is eliminated against effect of costs which measures the alterations in
costs related to output (Morrison, 2000).
The third component is
called productivity component which foresee the alterations in income operation
procedures caused due to alterations in output-input relationships by holding
input costs, sale units and sale prices as constant variables (Douglas et.al, 1974b).
The fourth component is
called the capacity underutilization component. It is used to measure the
changes or alterations in operation of income procedures which results in
change either in cost which is not used or in cost amount for a period of 2
years.
The data related to
operation of airlines and their finances of merger between America West and U S
Airways are combined to determine the
performance during pre merger and used to compare with post- merger acquisition
i.e. from 2005 to year 2006. The
U.S. Department of Transportation’s Bureau of Transportation Statistics’ TranStats
Aviation Database helped to extract the necessary data or information which
provides information about U S Airways operating
procedures between 2005 and 2006 which resulted in nearly $900 million increase
in U S Airways industry which is higher
than 2005.
The fuel costs and its
usage is explained below in the table and reclassification of U S Airways in
2006 and 2005 the expenses operated over
a $11.5 billion and $ 11 billion classified into three groups which include
costs of fuel, costs related to flights that includes operation procedures
of flights,maintenance,traveller
services, administrative expenses,depreciation,passenger related price
information including traffic expenses, aircraft expenses and finally expenses
related to sales and promotion (Goetz,2002).
All the above mentioned
expenses are represented into four panels named Panel A, Panel B, Panel C and
panel D.The financial reports of several expenses related to airlines merger
and acquisition is represented in the table below.
The growth component is composed of variances
which are reflecting changes in sales volume .The variances include costs of
fuel, revenues, costs related to flight operations and costs related to
passenger. All these are determined based on changes in size of market and
share prices in market (Tan, 2010). The
technical analysis of these components is listed below in the table showing
each variance and their costs that reflected changes
The case study of
merger between U S Airways and America
West airlines industries explains the application of technical analysis using
strategic variance analysis method and the results exhibited helps to know
alterations in financial performance which resulted in strategic action which
is quite complex and it examines and evaluates the effective and efficiency of
merger and acquisitions deal between U S Airways and America West airlines industries (Carlton et.al, 1980). The measures relating to
concentration on industries and perspectives of merger and acquisitions
regulations and their outcomes were seen and examine effect of merger of
America West and U.S.Airways . The study
is provided a best example for analysis of merger and its impact before and
after merging between two airlines industries. Besides American West bankruptcy
issues the airlines consolidated, rebounded again back to profits and there was
increase in revenues. This experience after consolidation which foreseen
financial and logistical obstacles again later gained profits from
transactions. Post merger analysis explained the situation of surmounting from
difficulties experienced by the American airlines. The article focused on
critical analysis of events that lead to merging of U S Airways and American West airlines and their impact
on airlines industry. The calculation of various expenses are calculated and
depicted in the table gives information costs related to variances in relation
to the Airlines industry (Hofer,Windle & Dresner,2008).The
bankruptcy issues and their effect on filing information later examined by
department of justice of United States and federal law in order to block merger
and later closed investigation and declared it is suitable for merger and it is
beneficial to the customers and concluded saying merger will continue success
and improve efficiency after bankruptcy issues. However the critical analysis
of two airlines pre merger and post merger concluded that both the airlines
operated in specific regions, later after merger it helped to operate in a
single large airline in most desirable routes and increased connections in busy
routes with efficient usage of staff members and allocated resources which
facilitated the success of new U S Airways
merger. The literature helped to know the consequences faced initially
and later after post merger with two airlines industries and thus merging
options between two airlines industry will improve efficiency, can run airlines
at costs which are affordable to customers and connect to all parts in the
United States.
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