Writer’s choice
Pros and Cons of the US Airways and American Airlines Merger
In the past two decades, nine major airlines consolidated into four mega-airlines: Delta, American Airlines, Southwest, and United Airlines. A later merger was the $11 billion union of American Airlines and US Airways that was finalized on October 17, 2015. Initially, the merger was challenged based on antitrust laws, but it was later allowed after an agreement was reached between the government and the airline.
Use the Library resources to research the US Airways–American Airlines merger, then write a paper addressing the following aspects of the topic:
Briefly address the company profiles of US Airways and American Airlines before the merger (e.g., company mission, number of employees, head office personnel, flights per day, number of countries served, as well as any other relevant information).
Describe factors that led to the proposal of the merger.
Briefly discuss pros and cons of the merger (effect on the industry, effect on consumers) based on the following:
market concentration,
competition,
economies of scale,
ticket price,
frequent flyer,
Department of Justice decision to allow the merger, and
your own viewpoint on the merger. (Was it a good decision to allow it, or not?) Support your response.
List and briefly explain different types of risk that might arise in a merger.
How will this merger impact market power for the airlines involved, as well as for the remaining airlines?
American Airline and the Us Airways Merger
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Introduction
In the last two decades, the United States airline industry experienced novel and long term changes driven by fluctuation in the price of fuel, limited organic growth, slowing demand of air travel as well as the pressure to expand globally. Consolidation of the airline has often been considered as a strategy to overcome these challenges and a remedy to the organizational demands in the airline sector (Moss & Mitchell, 2012). This is evidenced by the consolidation of nine major airlines in a bid to promote their business. A later case is a merger between the US airways and the American Airlines (AA), a consolidation which was completed on 17th October 2015. This paper explores the merger between the two companies.
The profile of the companies
American airline
The American Airline was founded in 1934 through a union of many small airlines. The company originated from two companies, Colonial Air Transport and Robertson aircraft. Consolidation of airlines started in 1929 when, an organization called the Aviation Corporation was formed in a bid to acquire smaller companies (Moss & Mitchell, 2012). American airline becomes the first airline company to fly the Douglas DC-3 and by 1940 it was the number one domestic carrier. Since then the company made various achievements and grew over time. For instance, in 1999, the company introduced Boeing 777 and the 737-800 and considered the first airline company to offer DVD in-flight video. The company acquired TWA assets in 2001. American airline continued to increase partnership in the early 2000s (Mudde & Sopariwala, 2014). By 2010, the company was operating in many countries in the world. In 2011, AA’s parent firm AMR Corporation suffered financial problems that led to the formulation of a strategy to cut down on cost. In 2013, American airline had achieved international coverage of over 190 destinations in more than 20 countries in the world. The company was originally headquartered in New York City, 633 Third Avenue in Murray Hill but in 1979, the head office was moved to Dallas/ Dallas/Fort Worth International Airport. The American Airline’s slogan was “Great is what we’re going for.” By the end of 2013, the American airline had 970 mainline aircraft in its fleet. Further, the organization had 76, 200 full-time employees before the merger.
The US airways
Conversely, the US airways was headquartered in Tempe, Arizona. The organization’s slogan before the merger was “The New American is arriving. The company offered hourly services between LaGuardia Airport located in New York City, Ronald Reagan Washington National Airport and the Logan International Airport in Boston through the company’s shuttles. By 2013, the company was operating about 3,028 flights with the total number of employees globally being approximately 32,100. Additionally, the company had 344 aircraft by the end of the third quarter of 2013 (Drocton, 2014). In 2015, the US airways stopped its independent operations when the Federal Aviation Administration approved a single permit for American Airlines as well as US Airways, a move that paved way for merging of the two companies.
Reasons behind the merger
To reduce the cost of operation
According to American Airline (AA) and US Airways, the merger was important since the two companies would be able to cut down on cost. The American Airline is said to have gone bankrupt in 2011 and the deal was regarded great move to revive the company and bring it back to bankruptcy.
Changes in dynamics in the airline industry
The merger was fueled by changes in airline industry dynamics. As suggested in the introductory part, many companies in the airline industry were considering merger and acquisition strategy as an alternative in promoting their business and increase their competitive advantage. For instance, Delta Airlines and Northwest, as well as Continental airlines and united airlines, consolidated their business (Thomas, 2013). Due to the merger, American Airlines suddenly found itself small in the industry. AA was pushed to the third position and for it to revive itself it had no option but to consider the same.
To increase capacity and geographical coverage
A merger and acquisition strategy was a natural course of action for America Airline to increase its ability to effectively carry out its operations, enhance its geographical coverage and expand globally (Moss & Mitchell, 2012). Following the merger between the two companies American Airline group increased the number of aircraft to 1,540 and the number of employees to about 120,000. With a combined entity the company would serve a total of 339 destinations by that time.
The merger promised fewer job losses rather than alternative strategies and facilitate the provision of better services to customers
AA’s labour unions and CEO backed the merger and viewed the move as a way of ensuring that individuals do not lose their jobs. According to them, it was a defensive strategy and not a proactive one, it was a plan that meant to improve operational efficiencies (Thomas, 2013). AA’s senior presidents stated that consolidation of the two companies would put the company in a better position to deal with problems experienced in the industry and deliver quality services to customers and stakeholders (Thomas, 2013). The Executive vice president of US Airways not that the move would offer clienteles with a wider network, better services and more choices.
Pros and cons of the merger
Pros
Market concentration
The consolidation of the two companies increased the market share the making it possible for them to cover a large section of the market. The two companies increased market concentration which is a critical determinant of market power. With a higher, the market share/market power American Airlines and US airways realized higher the returns from investment.
Competition
Consolidation of companies can reduce the level of competition between the two rival firms. Reduced competition is often considered as a move than harms consumers due to the potential increase in the prices of goods and services offered. However, in this case, the move allowed the companies to effectively compete with other firms in the airline sector. No monopoly was created after the merger.
Economies of sale
Following the merger, the two companies increased their economies of scale. The group managed to increase its networks and coverage globally through the move. Besides, the group increased funds for research and advantages related to the purchase of necessary equipment and aircraft (low cost).
More places to go for frequent flyers and nicer aircrafts
Frequent flyers had a variety of choices concerning places to go using nicer aircraft. The companies promised to make a higher number of flights in a day on more than 600 planes to over 300 destinations providing an opportunity for flyers to go to new places.
Cons
Ticket prices
Sometimes companies engage in merger and acquisition intending to reduce competition and create a monopoly. As a result, increase the price of goods and services. The United States Department of Justice (DOJ) tried to block the merger between AA and US Airways, claiming that the decision could lead to higher ticket prices and create a monopoly (News, 2020). However, the companies defended themselves by saying that higher ticket prices are caused by higher fuel cost and the decision to consolidate AA and US airways operation was made in a bid to benefit both customers and the organization (Drocton, 2014).
In my view the decision by DOJ to allow the consolidation of AA and US airways was good. Indeed, both the company and customers experienced the benefits. Through the move, AA was able to revive itself and provide better services to customers. Frequent flyers had a chance to go to new places and many employees did not lose their jobs
Risks associated with mergers
- Employee layoff: some employees are likely to lose their jobs after a merger.
- Cultural differences: Cultural clashes are likely to occur and hence inhibiting the consolidation process
- Legal risk: Potential suits if necessary procedures are not followed.
- Miscalculations in the evaluation of assets: One company can end up benefiting more than the other due to miscalculation
Conclusion
Indeed, merger and acquisition strategies allow companies to overcome the challenges experienced in various industries. Nevertheless, such moves have pros and cons and must be executed for betterment of all parties involved (stakeholders, organization and customers). The merger between AA and US airways increased market power for both companies and allowed them to compete with other organizations. The merger was beneficial to all.
References
Thomas, C. (2013). Why American Airlines and U.S. Airways Tied the Knot. Retrieved 16 April 2020, from https://www.usnews.com/opinion/blogs/economic- intelligence/2013/03/01/whats-behind-the-American-airlines-us-airways-merger
News, A. (2020). Pros and Cons of an American and US Airways Merger. Retrieved 16 April 2020, from https://abcnews.go.com/Business/pros-cons-american-us-airways- merger/story?id=18516230
Mudde, P. A., & Sopariwala, P. R. (2014). US Airways merger: A strategic variance analysis of changes in post-merger performance. Journal of Accounting Education, 32(3), 305-322.
Moss, D. L., & Mitchell, K. (2012). The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems.
Drocton, M. (2014). Searching for the sweet spot: an analysis of the American-US Airways merger. Case W. Res. L. Rev., 65, 487.
