Table of Contents
- The Causes of a Global Airline Merger
- Forces behind the Formation of Mergers
- Bilateral Agreements and Constellation Mergers
- Benefits of a Global Airline Merger
- Strategic-Positioning and Re-Positioning Motivations
- Internationalization Motivations
- Resource-Based Motivations
- Learning Motivations
- Benefits-Strategy Framework
- Strategic Fit of Airlines Mergers for Unaligned Airlines
- Reflective Report
- Merger for Gulf Carriers
- Related Free Economics Essays
Many mergers in the airline sector have been established. Some of them have failed, while others have survived and the developments have been perplexing for participants. The environmental changes have been seen as a major catalyst pushing participants into strategic mergers. The mergers have become instrumental for the companies to create collaborations by combining their expertise and resources to share risks, reduce uncertainty, a lower competition to manageable magnitudes, and to attain some operational complementarities. Mergers may constitute an efficient mean of expanding strategic capacities, while lowering competition, through the assessment of market undercurrents (O'Connell 2011).
Therefore, firms increasingly embark on alliances to attain their expansion objectives and to develop a global capability. The strategic mergers, in most situations, may create an access to markets at a reduced cost. Being a part of a multilateral merger allows businesses to exploit density economies through geographical boundaries and to access resources that would not be achieved at standalone (Stevenson 2011). The diverse complimentary expertise and resources is a key for derived merger benefits, given that hard-to-replicate arrangements of assorted resources may be a cause of a competitive vantage.
In a globalized business environment, there is no company that has the monopoly of resources to sustain a competitive advantage on a long-term basis. Airline mergers are depicted as a strategic management option, intended to enhance competitive capacities in the business contention. The strategic mergers were traditionally seen as the ways through which international firms would penetrate markets limited in their entry potentials. Mergers are considered to be strategies for the companies’ internal development. They serve the planned purposes of organizations to build a global unlimited network that will allow members to maintain or gain the market presence. In addition to ensuring a market access, mergers convene coherence to the service offering and a consistent experience for service consumers. Global airline mergers have been a recovery point for the aching industry, constellations of relationships and building the structures that shape a competitive capacity of airlines. Competing teams work together to increase the performance by committing a common goal and sharing resources (Stevenson 2011).
Considering that airline industry is a bubbling trade in a continuous dynamics, in a static scenario development, the current work is an attempt to identify whether there would be new models available for businesses mergers.
The Causes of a Global Airline Merger
Global airline companies are fighting the increasing fuel prices, a low demand by services consumers due to the economic meltdown, a burden of the new taxation on air tickets and the massive competition from low cost airlines. The Appendix 1 illustrates the airline industry reducing profitability that drives airlines into mergers. Here, the formulation of a network of business partners intended to provide necessary amenities, to pool resources and increase the market power is appropriate (Berry 2008).
This part of the paper is meant to focus on the causes that justify mergers as strategic alternatives in the airline industry and the mechanism of mergers. The changes in the market are setting the frame.
Forces behind the Formation of Mergers
There are numerous airline companies in the world, massive brands, completely different from most international companies. The level of market fragmentation is provided in the Appendix 2, comparing with other industries. The natural trend is towards the deeper merging. Furthermore, the airline industry is a massive movement of supply and demand. In addition, in the context of the highly regulated industry, where airlines are regarded as the natural monopolies, protected by the state, alliances see a vague possibility. Again, putting into consideration that service consumers are looking for global services, which have been impossible for the individual airline to deliver, airlines have started looking into possibilities of merging under a union of global alliances. In the harsh economic times, belonging to a merger is of essence; as the alliance would help in maintaining the revenue and traffic even when carriers reduce fleets and cut the capacity (Truxal 2012).
Code-sharing may allow one merger member to sell tickets for a flight that is operated by a different member of merger. In this agreement, reducing the airline’s network does not imply giving up the market share. A destination still remains a part of the airline schedule. At the same time, the operator’s costs are reduced given that they do not need to have the flight to the given destination. When the economic climate improves, flights are easily resumed. Through such mechanisms, mergers confer the flexibility to business operations (O'Connell 2011). It is suggested that a number of possible causes for a merger formation includes market penetration and retention, cost saving, infrastructure limitations, financial injections, avoiding institutional limitations and market stabilities.
However, mergers are most importantly revenue-centred, intended to optimizing revenue streams through the massive code-sharing within a merger environment. The costs of saving intentions are secondary. A key reason for the development of mergers is to increase the parties’ revenues. If cost synergies are attained, they may be insignificantly sufficient to justify the formation of a merger.
In addition, there is a combination of dynamics that facilitate the creation of global airline mergers, ranging from the increased fixed costs and reduced marginal costs, joint services across the network, service perishability and the value of ubiquity. Though the industry has attained significant growth rates, it is still suffering from an inherently reduced profit margin. As a result, airlines have had to investigate various strategies to improve their performance. Collaborating with business partners through the establishment of strategic mergers has historically been a feature of the industry strategy, and, recently, they have been used by businesses to attain a wider set of purposes as a strategic plan in response to shifting business environments. Traditionally, businesses were growing through the acquisition, while today they are growing through mergers. This is yet to be understood by many people (Truxal 2012).
Bilateral Agreements and Constellation Mergers
A bilateral agreement implies that two airlines establish an agreement to link their network on the specific routes to pursue business opportunities that would be difficult to pursue on a standalone. For instance, on a Moscow-New York route, there is a code-sharing agreement established between the Aeroflot and the DL, enabling the DL to gain a significant access to the Aeroflot hub and to engage in the domestic airline network traffic operations by selling onward a route on a domestic flights’ map of the Aeroflot. By functioning this way, more businesses are generated, where the DL becomes more appealing because of a linking option, while the Aeroflot gains due to its additional flights. In this set-up, it may be regarded that airlines are virtually using the resources of their agreement partners. In the process, the utility for airline clients is to increase dramatically where airline makes better sales. The original basis for a merger was a massive bilateral partnership between the Air France and the DL, the British Airways and the American Airlines (Berry 2008).
Due to the success of their models, the logic was formulated to bring other airlines across the world into their agreements, since it would have been not economically viable if both the Air France and the DL. For instance, they would collaborate with a same business partner in China to abridge intermingling of partnerships that would abridge business operations. These airlines acted as a core of global airline mergers.
The global airline mergers are composed of a large set of bilateral agreements that are organized into grouping. As a result, they add a value and are appealing since it takes one relation making them more efficient. Such global merger standardizes the airlines under a single universal brand (Truxal 2012). The bilateral agreements may be seen as basic structures, which when brought together, form a greater structure with the improved functionality and that are better organized.
Benefits of a Global Airline Merger
Strategic-Positioning and Re-Positioning Motivations
The strategic positioning and re-positioning motivations are concerned with increasing the strength of the companies’ strategic competitiveness in the industry. Mergers are a dominant strategic component and a key offensive as well as defensive competition weapon. As a market becomes more complex, and service consumers demand for full solutions instead of individual services or products, the inter-company collaboration becomes a critical element in the pursuit of a company’s competitive advantage. The economic meltdown in Europe has caused a seismic change in the industry, and most airlines have resorted to rethinking their operation policies. Airline mergers have become significantly important as a way of absorbing the shock during such crisis. Strategic mergers have become a crucial feature in various sectors of the economy in the airline industry (Kleymann 2004).
Since the beginning of the 21st century, the general consensus is that in case an airline does not form a merger, it will be forced to operate under a severe handicap. The mergers are often transitional devices. They multiply in industries undergoing some structural transformations or mounting competitions, where the firms’ managers are afraid of issues getting out of hand. The airlines that do not enter into a merger will eventually find themselves in a competitive disadvantage. They will be unable to generate a sustainable traffic from their merged competitors. The failure to enlist in a global merger will leave a standalone airline isolated. The general perspective is that firms that do not participate in the merger will be seriously disadvantaged. Such firm would find it crucial to become a function player. Thus, enlisting in a merger may be considered as a defensive plan. Remaining a standalone is not the best option, since once mergers have been established they tend to suck the existing traffic into their massive network (Kleymann 2004). To mount any sustainable competition with an established merger, you have to form a parallel network to ensure that you retain your traffic as an airline (Kleymann 2004).
The airline traffic polarization being generated by the formation of a merger may be significantly detrimental for standalone airlines whose interlining capabilities are limited, since mergers would provide connections with the priority to their members. Thus, being out of a merger may clip the strength of standalone airlines, making it impossible for them to form a parallel network. The merger partnership with other airlines may significantly boost the access to the feeder traffic of merger partners, which is important when it comes to the long-haul operations. In addition, with the increasing membership of mergers in respect to the network coverage, it becomes difficult for standalone airlines to obtain feeder traffic at some air terminus. This may, therefore, encourage the individual airlines to enlist in a merger to benefit from attractive environments for the feeder traffic from merger partners (Staniland 2008).
Once an individual airline enlists in a merger, its territorial competitors are faced with the increased pressure to enlist in mergers as well. Otherwise, they would be disadvantaged in competition for a market share. Because all business class travellers will start to gravitate around the airline that has the capacity to offer them a broad network of destinations while managing to allure them with the optimal incentives. The other territorial airlines would, nevertheless, represent the targets for other mergers that are yet to penetrate the market of interest. In the natural competition, the emerging mergers lagging behind in the market would attempt to compensate for the delay of having not been the first ones in enlisting for a merger by antagonistically recruiting probable partners. Nevertheless, the policies may differ significantly across the mergers. Airline mergers are, therefore, progressively and explicitly represented as inevitable strategic alternatives. They are seen to be self-legitimating and self-constructive where alliances reproduce the apparently new structures in this industry. The mergers of specific airlines mount the pressure on their allies, leading to a domino effect (Kleymann 2004).
The globalization process increases the competition between airlines’ firms forcing them to extend their penetration into the market to seek the new profit generating opportunities and to implement their growth ambitions. The expansion of unrestricted service networks creates an authentic incentive that drives airlines mergers and creates the internationalization motivation (Kleymann 2004). The other feature is that mergers may be regarded as the vehicles for overcoming inter-territorial restrictions to the global expansion. In the absence of mergers, network airlines would be confined to their domestic markets, lacking their global appeal.
The objectives of airlines enlisting into global mergers are to increase the market penetration internationally, exploiting multiple vertical markets and spreading the technical standards. Most airlines are interested in extending their operational networks beyond their current market at the least cost. Strategic mergers may lead to a fast domestic access to the social network connection in the way that is not possible at a standalone. The preferred entry mode follows an extensive paradigm of taking incremental phases, by building on the existing relationships. As the competition of the market penetration increases, airlines prefer the international expansion strategies that call for intensive commitments. Thus, the most natural way of a new airline being driven in the merger is to build on the existing code-sharing business relationships (Staniland 2008).
Mergers are meant to supplement the already available resources, by exploring the complementary capabilities and resources and through securing some missing resources. The global airline mergers emerge due to the need of the industry to supplement their existing resources and capacities. The purpose of alliances is to leverage capabilities and to seek synergies. Every airline serves a given purpose where it adds an incremental value to the industry. This is a fundamental basis for forming mergers. Mergers may activate the certain strength of the airline by placing it in an optimal context. It motivates the individual company in a merger to find a niche and to specialize in it by developing the competence. The motivations that drive the complex airlines network organizations tend to be the interdependent needs between the interconnected companies, engaged in the constellations of partnerships (Staniland 2008).
The objectives of taking moving towards global airline mergers, while departing from the assortment of the code sharing, is to develop the constellation of potentials under the multiplier influence of all links combinations. Code shares are meant to take care of some specific articulated customers’ needs, based on the route-to-route, while the mergers are developing an environment for their cooperation.
Mergers entail the tacit and formal learning as a main motivation. The strategic relationships may be understood as the learning arenas that give the airlines’ access to the knowledge that may not be available in an open market. The potential of learning from partners and to obtain knowledge that is confined within other companies amplifying the facts that mergers are access partnerships. Merging may be likened to plugging into a pool of knowledge. The discussions of experts are held on a regular basis, at different levels of implementation of a merger and reviewing the performance. The frequent meetings that are organized per a functional area for the airlines experts to discuss some ideas with regards to alliances, this is an optimal opportunity to acquire the critical information. Such a follow-up discussion ensures that the merger is functional at different levels of implementation (Staniland 2008).
Mergers may be regarded as a useful medium of enhancing knowledge in the critical areas of operation where the essential level of knowledge cannot be established within a suitable timeframe and cost. They provide some explanations for the firms to streamline their processes, to fine-tune the systems’ capacities and adhere to some standard compliancy rules that are meant to expedite the effectual delivery of highly quality services. However, to support mergers, airlines are required to establish an internal system to take care of its merger capability and to safeguard its interests. Under mergers, the financially challenged airlines are able to access financial resources and technological capability, as well as managerial services upgrading the company’s performance (Truxal 2012).
However, the learning motivations for the firms to join a merger depend significantly on the merger partners’ objectives and their level of development prior to merging. Within the merger, it is possible for a firm to earn the market spill-over knowledge playing a pivotal part in the establishment of the company’s specific knowledge. The airlines within the merger are absorbing the technical and managerial knowledge that is relevant and which has the potential to boost its performance in the industry. For emerging airlines, the products’ standards and processes may potentially pull forward the entire management’s regulation system of the company. However, where even smaller firms are interested in learning, they have a chance of destabilizing the merger’s environment (Truxal 2012).
The merger benefits are obtained from the value proposition of mergers. The mergers may be established without putting customers into consideration. However, there can be spin-off gains to service consumers. The consumers could just be benefiting from the externalities. The mergers offer some possibilities of extending the redemption possibilities for service consumers and offering them a wider destination to select from s global basis. Customers look for the air travel informed by prices and the depth as well as a scope of network. Ultimately, global airlines are established from the demand for the wider airline connectivity. If to consider that airline travellers earn miles each time they fly, one of the airlines of the merger, it become easier for such customers to attain the elite status. As a result, they are being prioritised when booking and boarding and during a baggage transfer. This tends to reduce the waiting time at the terminus (Staniland 2008). Furthermore, owning to the facts that within the mergers, forms struggle to adjust a timetable for better account operations, the connectivity may be enhanced. In mergers, where there are some overlapping flights, it may be argued that the frequency of the flight on a given route is improved, leading to the improvement of the connectivity.
In terms of the terminus experience, the mergers lead to some significant improvements due to the efforts by the airlines to enhance the quality and service experience. The airport experiences will eventually translate into the reduced waiting time as well as the efficient and quicker crisis resolution management. This may be achieved due to the round-the-clock help desks offered by mergers and the accessibility of quality lounges for frequent customers. Given that mergers are composed of airlines whose main competencies are territory bound, the resources and experts are the complementarities (Stevenson 2011).
The airline sector is characterised by substantial benefits of incorporation and exploitation potential of firms being non-location-bound and the establishment of the newly global available benefits, Mergers would allow an individual airline firm to specialize on their main competence, while giving such firm a global market penetration at the same time. The membership of firms in a merger provides the translations of the merger’s benefits to their customers, thus, formulating the value proposition to service consumers. It also generates the enhanced customer satisfaction owning to the value addition. Individual airlines consider obtaining the merger membership putting into account the positive effects that it may transmit to customers. The benefit to customers from the merger is, therefore, either operational or marketing (Kleymann 2004).
In conclusion, apart from the expansion of the operational territory and the benefits from the broad economies of market, airlines have a chance to invest into other airlines, attaining the economies of scale, as a mean of lowering competition while generating cost saving by operational synergies. There is also a diversification of the service portfolio by the airlines enlisted under a merger. The purpose is to be better equipped for the eventuality of a financial crisis. The business mergers do not only enhance the reach for the network spans, but they also provide the access to the global service provision. Thus, the merger increases the value proposition and customer base (Truxal 2012).
Strategic Fit of Airlines Mergers for Unaligned Airlines
Mergers are designed to provide the support and to strengthen the firms’ core business providing the attainment of strategic objectives. To establish beneficial mergers, the airline must have a complete understanding of when a merger has a strategic sense and how to manage mergers for business ends. The misfit, which is defined as the strategic differences in the motivational intent, may create some tension among the merger partners (Truxal 2012).
Merger for Gulf Carriers
The mushrooming success of the Gulf Airlines may be attributed to the intensive strength of global networks, increasing the demand to destinations in the developing world, reduced ticket prices as compared to the European Airlines providing the direct services, and their massive competition role in the consolidation of the aviation market. For instance, the fundamental formula for the success of Fly Emirate may largely be attributed to the hub-spoke operation, strong leverage of the EK’s brand, and their viable cost structure. In addition, the EK reaps its profits of a challenging geostrategic position in their oil-endowed region, which allows them to access the destination globally within a span of 10 hours. These advantages have allowed the Gulf Airlines to link the world end-to-end. Abu-Dhabi, Doha and Dubai are regarded as a ground-zero-the optimal spot for aviation, since every destination is within the reach from those cities. Thus, the Gulf region seems as a perfect bridge for East and West (O'Connell 2011).
Their future network strategic hub is established around the huge opportunities in regional India, provincial China and other regions being under-served. The Arabian Gulf plays a consequential role in the paradigm of new Asia. The Gulf is at geographic crossroads, the position between the developed and emerging market. The wealth from rich oil field fuels the urbanization of the South Asian subcontinent and China (Truxal 2012).
The airlines are within three hours of flight to the market of two billion people in China, India and Africa. With such pedigree, the growth of the Gulf aviation has a sphere of certainty about it. The other aspect substantial to mention is a fact that the governments in the Gulf region having ownership of airlines, an aspect that have constrained the management of airlines. As a result, there is a lack of independence to negotiate mergers due to the government involvement in control and management of these airlines. The lack of independence to make business decisions is a major reason why the Gulf Airlines have remained in a standalone (Truxal 2012).
Therefore, the key questions that need to be answered are: What are the value statements that the Gulf Airlines need to formulate to establish mergers? Are the potential benefits forming the merger worth formulating and implementing the strategic risks? Considering the above questions, there is an uneven distribution of paybacks, structural imbalances that would cause the instability in the merger. Therefore, the Gulf Airlines mergers may not be economically viable, a reason being not incompatibilities of business models, but a business strategic rationale. Consequently, the merger regulators would certainly raise the objection since it would lead into the reduction of competition. A merger of the Gulf Airlines will absolutely be a game changer leading to the enormous transformation in how airline business is being done globally (Stevenson 2011).
In the current work, it has been established that the benefits and costs are distributed depending of the airline’s command to the market share and its level of involvement into a merger. The smaller airlines tend to benefit most from the alliances, as it is opposite for the larger, and established carriers. Applying the wealth of theoretical resources and inputs from experts it has been established that airline mergers tend to be harsh. Notwithstanding the benefit of the market command, knowledge exchange, established network coverage, the mergers involve some internal alignment planning and decision making deadlocks that question their efficiency.
As illustrated in the last part of the paper, there are various reasons as to why a merger has not been possible for some airlines. It is evident that mergers for the Gulf Airlines would not represent an optimal fit due conflicting interests with the incumbent merger members. Although a two dimension approach has been explored significantly for airline mergers, the further studies should be carried out to develop a new model for airline mergers.