Making : Large airline mergers loom on the horizon, yet past transactions have often not paid off. So what are the rules for making them work?(Brief Article)

Publication: Airline Business

Publication Date: 04-JUN-01

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COPYRIGHT 2001 Reed Business Information Ltd.

The track record for merger and acquisition deals in the airline sector is hardly encouraging. The evidence says that even those deals that have gone through have yielded little or no real value. Take just one classic statistic. There have been more than 50 airline transactions in the European and US industries over the past 15 years or so, yet the total value of those transactions is more than the current market value of the whole industry. While airlines are not alone in generating such shocking statistics, there are few industries where the picture looks quite so bad.

Despite this sobering history, the industry appears to be lining up for another round of consolidation. That raises the question of whether they can succeed this time where others have failed. The underlying logic behind consolidation is, on the face of it, rational and compelling. The value is clearly there, but capturing it remains elusive.

Evidence suggests that the potential upside for airline mergers is significant. Work by McKinsey & Company suggests that a merger of two mid-sized carriers could unlock synergies in excess of 7% (see graphic on page 113). Of course unlocking those synergies is easier said than done. The process starts with understanding the business logic behind merger benefits.

Some benefits are those that apply to any industry. For example, the increased scale of the newly created entity will bring enchanced bargaining power with key suppliers. Indeed, added benefits can accrue as the integration process itself uncovers opportunities that the pre-merger companies may have missed.

The new entity will also benefit from cost rationalisation. While grabbing fewer headlines than new routes and aircraft orders, areas such as parts inventories, back office functions, sales forces or management teams are all nicely scalable. The usual messages also apply about massaging balance sheets and sharing skills around the combined company.

In addition, there are some powerful merger benefits specific to the airline business:

n Network optimisation - Single control over a combined network increases connectivity, aircraft utilisation and route rationalisation.

n Increased market power - The power of combined schedules, frequent-flier programs (FFPs), agency agreements and corporate contracts should result in a substantial increase in fair-share revenues in focus cities.

n New market growth - Combined home market presence will often permit new routes that would not have otherwise been profitable, providing an often-overlooked opportunity for growth.

n Improved alliance position - Bargaining power with existing and potential partners should increase markedly.

Unfortunately, many airlines find these...

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