Mergers and Acquisitions, Research Paper Example

Mergers and acquisitions occur for many reasons in the business world. Perhaps one company is failing to turn a profit and an acquisition will allow them an opportunity to avoid bankruptcy. Or an opportunity to merge two companies could provide the groundwork for a powerhouse in its industry. Regardless of the reason, mergers and acquisitions change business for the companies and consumers alike. One of the most notable mergers that has taken place recently is that of American Airlines and US Airways. This merger made them the largest airline company, and provide them with the opportunity to dominate the market. Examining the reasons for the mergers, positive and potentially negative effects, and the structural changes will allow a better understanding on how beneficial this merger really is. American Airlines and US Airways successfully merged which resulted in a larger, more dominate company with many more advantages for competing in the airline industry.

Merger Speculations

There are many circumstances that resulted in the merger of American Airlines and US Airways. Clearly the idea that two large airlines such as American and USAirways could joint efforts and dominate the market. The first speculation on the merger is the finance situation that both companies were facing. The parent company of American Airlines, American Airlines Group Inc., recently filed protective bankruptcy. Their entire financial position was in check, limiting their potential advancements and earnings. It also threatened the company in general.  American Airlines was struggling with maintaining operations and profitability, which in turn got them into a financial situation they had to publically rectify.

US Airways did not prove to be in financial distress prior to the merger, however they were not a dominate airline provider in their market. They were middle-ranged and had significantroom for corporate improvement. Their routes did not have the reach that American Airlines provided either. The merger proved to be favorable for both companies to join their ventures and increase their total revenue. As a result of the merger the judge allowed American Airlines Group Inc. to exit the bankruptcy and tie up the loose ends of their financial struggles. With financial stability and the necessary resources to restructure, both companies, now one, had a much better future potential.

The second reason per speculation is to become the largest airlines in the market. This is a highly believable speculation because the merger did in fact allow them the opportunity to become the largest airline provider in the market. This permits them to dictate the prices of fairs and reach virtually any destination they choose. For that reason as well, it also sparked a lot of controversy with the merger as well. Clearly creating a monopoly, even if it is not truly a monopoly, is controversial and potentially illegal business practices. The merger was challenged on these grounds in attempt to block the merger from occurring.

As a result of the merger, the need for the parent group of American Airlines to continue on with their Chapter 11 bankruptcy was no longer relevant. “The U.S. Department of Justice had challenged the merger, which was to serve as the basis for AMR’s plan to pay back creditors and exit bankruptcy. The DOJ’s antitrust watchdog had said the plan could impede competition and drive up ticket prices” (Rueters, 2013).This was settled by the new powerhouse agreeing to divest the landings and takeoffs at the major airports. The ability to maintain their dominance was separated by the company’s willingness to divide their presence within the major airports.

Significant Effects, Positive or Negative, of the Merger

There are significant positive effects that resulted from the American Airlines and US airway merger. The first and most prominent one is the financial aspect. The purpose of the merger is to open the door for higher revenue and a much more consistent profit. “After months of courting, the companies on Thursday announced an $11 billion merger that will turn American into the world’s biggest airline, with 6,700 daily flights and annual revenue of roughly $40 billion” (Koenig & Freed, 2013). Clearly restructuring the airlines and opening the doors for double the flight allows for that much more profit as well. It took one company that was having significant financial struggles and one that was average and created a significant financial increase within the first few months of merging.

The second positive effect of the merger is it provided the airlines to almost dictate the price and terms of travel. The other airlines such as United and Delta does not have the same market reach, so they essentially need to follow the pricing and standards dictated by American Airlines. This is highly controversial, but it is a positive effect of the merger. They have double the locations and can reroute flights to make sure they reach the destination desires of their consumers. They can also eliminate duplicate flights that are not proving to be profitable. This a very prevalent factor that allows American Airlines to control the flight travel terms, prices, and destinations. This merger has already shown this to be truly positive within its first few months.

Organizational Structure

The merger inevitably will change the structure of the company and how American Airlines and US Airways use to do business. There was no longer a need for two separate operational areas. This started at the top and went all the way down to the entry level employees. The CEO of US Airways Doug Parker and American Airlines Tom Horton would no longer both have a need within the newly united companies. This left a very large decision as to what organizational structure would be suit the newly merged companies. There was a new purpose and direction, and whichever CEO would carry on, had to have the vision for a whole new company.

As a result of the need, Doug Parker was assigned to carry on his role as CEO to the newly formed company. “US Airways CEO Doug Parker will be CEO of the new company, which will be called American Airlines Group Inc. Horton will serve as chairman for about a year before stepping down” (Koenig, 2013). Tom Horton was given a severance package that is valued around 20 million dollars. The package included stocks, ongoing employment, free flights for life, and many other perks that showed his tenure with the company was respected despite the decision to choose the other CEO.

Clearly the company also had other decisions to make as well. As a result of the merger, the company will no longer use Star Alliance and will shift to Oneworld. This will prevent any points from being redeemed on the Star Alliance carriers and in turn will begin using Oneworld effective March 31, 2014. As a result the earned points were void if not used prior to the switch. Oneworld will allow the members to begin to earn points and dividends through flights that start at the beginning of their merger and can be redeemed through their new company, Oneworld, as soon as they are accrued.

The website, booking system, and flight tracking/check in also needs to be merged into one affiliation. “The company, however, has yet to put firm timelines around other customer-facing initiatives, including a singular website, a truly combined frequent-flyer program, co-located airport facilities and harmonized products, among others. But they expect to quickly begin addressing the corporate market as one entity” (Boehmer, 2013).Incorporating a single point of contact will save the company a considerable amount of money because they will no longer be paying for double services. This will take some time to incorporate effectively, but the long-term benefit will be clear.

Lastly, the company has to determine flight schedules and routes now that they have two services that could ultimately be overlapping in destinations. Determine the best routes, prices, and opportunity to meet the consumer’s needs. This will ensure that flights from one destination to another is not overbooked or under booked. It will also allow the company to focus on higher demands in destinations and ensure their flights are at maximum capacity when allotted. In the long run it will give American Airlines and US Airways the potential to capitalize on flights and meet their customers’ needs through convenience, service, and even price.

Human Resources Management Practices

The merger resulted in many departmental changes as well as policy and procedural revisions. The details of the human resource management practices of American Airlines and US Airways were not readily disclosed before or after the merger so it is hard to know the extent of change that occurred. They both were large companies prior to the merger so their HR department had to have strong practices in place to ensure company success and employee satisfaction. However, under speculation it is assumed there would need to be significant changes made.

When a company grows to the extent that the merger created, the effectiveness of the old management may no longer prove to be valid. Small companies can utilize incentives like profit sharing and employment performance based merit. However when a company grows larger those incentives are no longer beneficial and individual who perform subpar are rewarded anyway.  The structure of a company this size has to have a very structured human resource management team because they will have to continually strive to learn what works well for all employees and the company alike.

The merger has proven to be favorable and the suspected outcome occurred. “American Airlines Group Inc., parent of American Airlines Inc. and US Airways Inc., said Thursday it earned a record $480 million in the first quarter, its first full quarter since the carriers’ Dec. 9 merger. Excluding special items, AAG earned $402 million” (Maxon, 2014). Clearly the numbers reflect taking an average company and a struggling company and combining them into a powerhouse that turns such a significant profit even during the restructuring process.  This shows that this merger did what most mergers strive to accomplish, find greater success by joining forces.

American Airlines and US Airways successfully merged which resulted in a larger, more dominate company with many more advantages for competing in the airline industry. The merger was not without objection and it also had red tape the companies had to work through. However when all was resolved, the companies joint in venture hit the ground running.  Their market dominance potential has not created the conflict that others speculated and merely created an opportunity to provide more services for their consumers.  The profitability they have reflected in the short period after their merger shows the merger has been well accepted by their consumers. The future potential of this new company is endless and it will be great to see how it evolved in the future.

References

Boehmer, Jay. (2013) As Merger Closes, AA And US Airways Get To Work. Retrieved from http://www.businesstravelnews.com/More-News/As-Merger-Closes,-AA-And-US-Airways-Get-To-Work/?ida=Airlines&a=proc

Koenig, David. (2013) American Airlines CEO Tom Horton’s Severance Package Will Be Nearly $20 Million. Retrieved from http://www.huffingtonpost.com/2013/02/15/american-arlines-ceo-severance-package_n_2695434.html

Koenig, David & Joshua Freed. (2013) American Airlines, U.S. Airways Merger: Companies Agree To $11 Billion Deal, Creating World’s Largest Airline. Retrieved from http://www.huffingtonpost.com/2013/02/14/american-airlines-us-Airways-merger_n_2685042.html

Maxon, Terry. (2014)American Airlines Group reports a record $480 million in Q1 profits. Retrieved from http://aviationblog.dallasnews.com/2014/04/american-airlines-reports-a-record-402-million-in-q1-profits.html/

Rueters. (2013) American Airlines, US Airways Merger Approved By Bankruptcy Judge. Retrieved from http://www.huffingtonpost.com/2013/11/27/american-airlines-merger_n_4350026.html