Mergers and Acquisitions: American Airlines Merges With Rival US Airways
Mergers and Acquisitions: American Airlines Merges With Rival US Airways
Successful corporations in business are always seeking different ways to improve their position in their respective areas of operation. Mergers and acquisitions have been proven to be a way to do just that. A merger is simply defined as two companies joining to make a new company, whereas an acquisition occurs when one company outright purchases another company. Mergers and Acquisitions are considered as the important growth strategy for companies to satisfy the increasing demands of various stakeholders (Krishnamurti and Vishwanath, 2010).
AMR Corporation, the parent company of American Airlines, announced plans to merge with US Airways Group in February, 2013. This came after the corporation had previously filed for Chapter 11 bankruptcy protection in November 2011. (Isidore, Chris) The resulting merger created the largest airliner in the world. The companies officially formed the new American Airlines Group Inc. on December 9, 2013. (Air Transport World, Jan 2014) Doug Parker, previously the CEO of US Airways, and now CEO of the new American, stated: “We are taking the best of both US Airways and American Airlines to create a formidable competitor, better positioned to deliver for all of our stake holders. We look forward to integrating our companies quickly and efficiently so the significant benefits of the merger can be realized.” (Air Transport World, Jan 2014)
That statement proves that the merger was formed for two reasons: money, and power. Both companies were losing in the passenger air transportation field to other companies that had recently merged. Merging would allow both companies to expand their resources and add routes and terminals together that were previously reserved to each individually prior to the combination. US Airways brings access to smaller US cities, whereas American Airlines has a large presence internationally, particularly London and Latin America (What the American Airlines/US Airways Merger Will Mean for You, 2013). American Airlines showed the want and need for money after it almost collapsed in bankruptcy. The merger of the two corporations was an example of a horizontal integration. This is defined by Investopedia.com as a merger or acquisition of additional business activities on the same level of the value chain in similar or different industries, and can be achieved by internal or external expansion.
The airline industry has changed drastically over the past decade with mergers of almost every major airline: Delta & Northwest; United & Continental; and Southwest & AirTran. These mergers created a new landscape in which the tables were tilted against both US Airways and American Airlines. It was a necessity that the two join forces in order to stay be competitive and stay afloat against the other recently formed mega-airlines. Those mergers also created an opportunity for revenue growth in the ticket pricing arena. The price of a domestic round-trip ticket prices has climbed nearly 15% since 2009 due to inflation. The merger will give American and US Airways the ability to increase fares with the addition of both companies pre-existing routes and terminals.
What were the significant effects of the merger?
In order to be a success, a merger must provide all parties involved some significant increase in benefit. This merger is not exempt from that statement. Dailyfinance.com (2013) states that a key reason for the merger between American and US Airways is to link both airlines’ networks, creating a system on par with Delta Air Lines and United. The combination of the two results in more than 6,700 daily flights to 336 destinations in 56 countries. This network will allow passengers to fly around the world without the need to make the often exhausting connections that they were subjected to pre-merger. The merger also created an instant increase in stock prices. Shares of the combined company rose 2.7%. This in itself is a good start for a company in the post-bankruptcy period. The restructuring and merging will repay AMR’s creditors with interest and give its unions and common holders a large share of equity in the new company. (Susan Carey & Jack Nicas, 2013)
Resulting Organizational Structure of the Post-Merger Company By combining two previously fully operational companies, the organizational structure will be more complex, at the least, than it was before. As a result of the merger, American Airlines Group, Inc. now has combined workforce of 110,000 people along-side a fleet of 1,511 aircraft (Bohemer, 2013). Organizing such a large workforce creates a challenge that requires a leader capable of handling that task. The company is now lead by Chief Executive Officer W. Douglas Parker, the former CEO and chairman of US Airways. Parker has proven leadership ability, presiding over the merger of US Airways and America West Airlines in 2005. He also oversaw the company during a time of record revenue growth and increased profit margins. Outgoing CEO Tom Horton was in that position from 2011 through 2013, leading the company through the merger before handing the reins over to Parker.
Parker appears to have an edge on leading and team building, having going through an airline merger previously. His ability to increase profit and company wealth makes him the obvious choice to lead the new corporation. Although the merger has become final, the two companies will still operate as separate entities for the foreseeable future. This will allow the companies more time to put together the large structure and make proper decisions to ensure for smooth operations in the future. They benefit from not being the first airlines of their sizes to make this transition, as the mergers of Delta and Northwest and United and Continental have sort of created a path of what needs to be done in order to be a successful merger. The structure combined employees from both airlines, which builds unity and shows that the company is committed to moving forward together, not just to come in and take over.
This is a good technique that more companies should adopt. Along with the physical structure change of the new American Airlines Group, there will also be changes that affect the consumers. Frequent Flyer miles will be able to be used interchangeably with either American Airlines or US Airways flights. Customers will be allowed to accrue mileage from either airlines. AA.com (n.d.) lists several benefits that AAdvantage members will be afforded with US Airlines, and vice versa. There are also gate changes that affect customers and employees, as seen with the closing of US Airways Pittsburgh Terminal. In an interview with the Pittsburgh Post Gazette, Spokesman Todd Lehmacher said “US Airways says most of the 600 employees at the Pittsburgh center will be given the option to relocate to Texas, though it acknowledged it doesn’t expect all of them to do so. Those who chose not to go will be given a severance package.”(Mutzabaugh, 2014) Having lived in the Pittsburgh area for years, actually within a few miles of the airport, I know that the pullback will greatly affect the local economy.
Human Resources Management Practices
Anytime you combine two separate companies into one, there will be differences to iron out. Corporate culture will undoubtedly be one of the many Human resource challenges that the merger will have to overcome. Organizational cultural differences have been negatively associated with various accounting measures and stock market value following domestic M&As. (Webber & Drori, 2011) Being that the companies have similar duties and responsibilities, it should not be too difficult to work through these issues. There may be past practices at each company that will have to be adjusted in order to make the transition smooth. Merging also presented the opportunity to increase employee pay and benefits packages, which would be in line with the other large airlines. With the expected increased revenue, there would be more funds to share amongst the employees and shareholders. In behind the scenes meetings, Parker secretly negotiated deals with American’s three main unions, creating “provisional contracts” that would give American’s workers far better pay and work rules. (Tully, 2013) These negotiations gave the union’s reason to buy into and promote the merger.
While the merger between these two airline giants did not go without hiccup, they were in a better position to make the transition due to a need to by American Airlines and a want to by US Airways. American appears to be the winner of the merger by coming out of bankruptcy, maintaining their company, and expanding their routes and terminals. The merger was finalized on December 9, 2013
Krishnamurti, C., & Vishwanath, S. R. (2010). Mergers, Acquisitions, and Corporate Restructuring. South Asian Journal of Management, 17(2), 169-171. American Airlines, US Airways close merger to create world’s largest
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