Do Airline Mergers Alone Produce Better Bottom Line Results?
The news today reports a pending merger between United Airlines and Continental to be completed with a 3 billion dollar stock swap
. The combined company will result in the worlds largest airline. The pending deal will surpass the recent Delta/ Northwest merger that I believe, then created the worlds largest airline.
The real question is do airline mergers add value and increase bottom line profits?
The intent is to merge routes, cut redundant flights and service providers, and reduce costs. The real world result is often different.
Cost reduction gained by reducing headcount is often eliminated by higher wages and benefits given to labor to support the merger the subsequent loss of jobs and changes in work rules. About a year ago I wrote an article for an investment banking newsletter about mergers and acquisitions. The article was entitled Can Acquisitions Work?
Research for that article cited a study done by KPMG in 1999 that showed that 83% of mergers were unsuccessful in producing any business benefits regarding shareholder value (Feldman & Pratt 1999).
The reasons given were loss of productivity of up to 50% for 4 to 8 months following a deal, as well as difficulty in merging systems, cultures, and work rules.
If we apply those findings to any airline merger the potential of adding value and providing better bottom line results is even more questionable.
Is any industry more tied up in regulations and work rules than the airline industry? Government regulations, union agreements, agreements with lenders all put pressure on airline profits. Not to mention fuel costs, inability to quickly reduce unprofitable flights, difficulty reducing workers, or the difficulty in merging reservations systems, call centers, and ticket outlets.
The hope of both companies behind a deal like this is to combine services, cut costs, and keep all of the revenue that both companies have today. The thinking is that passengers at a given city are captive since many cities are only served by one or two airlines.
I think what makes this strategy risky today is the willingness of the flying public to accept more service interruptions and inconveniences is greatly deteriorating. Looking at it from a passenger standpoint and not as an airline industry analyst flying just isnt a great experience.
Speaking for myself as a former frequent flyer with over 2 million miles on two major airlines, Id rather do nearly anything than take a commercial flight. Increased security and long lines at airports, poor customer service, flight consolidations and delays, tighter seating, smaller planes make what used to be a tolerable experience a dreaded chore.
I think until airlines realize that they are a customer service provider that provides transportation, not a freight carrier dealing in numbers the public will continue to look for ways to minimize air travel. The recent recession has caused companies to reduce travel due to cost concerns. New technology such as affordable teleconferencing has made some non-critical travel easier to eliminate.
There will always be a need to have face to face contact with customers, but companies are looking for ways to minimize the frequency.
Smaller more nimble carriers such as Jet Blue and Southwest are working hard to gain market share. That market share has to come from somewhere and that somewhere is the large carriers. Bigger is not automatically better, unless the combined entity can increase performance, develop a loyal customer base and maintain sales at current levels or better, this merger will join a long list of those losing value for the shareholders.
by: Martin Harshberger, President, Measurable Results LLC
Flight Help For Holidays Concessions Along With Grand Seating While Boarding Flights For Baltimore Paying International Airport Taxes Low cost Indigo Airlines tickets Magnificent The planet pandora necklaces Search For Backpacker's Hotel And Flight Deals And Search For Information Regarding Prominent Vacati CHEAP FLIGHT TO SAN FRANCISCO, ARE YOUR BAGS PACKED YET? Book Cheap Flights to Cairo to Witness the Awe and Mystic of Egypt Book Cheap Flights to Denver, the Mile High City! Top 7 Tips to Book Cheap Airline Tickets the Smart Way! Many high-priced luxurious Accommodation Bangalore on the planet Airports in India are Offering World Class Facilities Costliest high-class Accommodation Bangalore about the planet Experience the Asian Cuisines with cheap flights to Asia