Strategy: Airline Industry Consolidation

Posted on April 9, 2010

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British Airways and Iberia announced their merger plan in November 2009. Despite planning for a merger agreement on March 2010, they actually signed the agreement on April 2010. They created a new merged body, called International Airlines Group, that becomes the fourth largest airline group by revenues and the third largest in Europe. Despite having a new body, both British Airways and Iberia will retain their brands and have their own companies in London and Madrid. Doing so, they can preserve their existing flight rights.

Merger Rationale

The push for consolidation is due to the downturn triggered by the financial crisis and competition from no-frills rivals such as Ryanair and Southwest Airlines.

Pre-Merger

British Airways has an outstanding dispute with its cabin crew and has £3.7bn pension deficit. It is also going to announce its second consecutive full-year loss this year. Iberia, on the other hand, suffered its first annual loss last year, forcing it to re-work its domestic and European routes with lower operational costs.

Uncertain Future

It remains uncertain whether IAG can contain costs without triggering damaging strikes. While Iberia’s flight crew worry about the “lower operational costs” thing, they view the merger as crucial for Iberia’s long-term survival. However, it may end up with a large job losses in the sales, marketing and back office divisions, as they were being consolidated.

The new group expects to generate an annual savings of €400m by the fifth year of the merger. However, some investors are pessimistic, as the return of Air France-KLM tie-up was not impressive.

The U.S. Drama

US Airways and United Airlines hold tie-up talk, again, after called it off two years ago. It was called off due to the potential costs of integrating their complicated operations, including wage increases. Now, as the economy is emerging from the recession, their executives believe companies can now absorb the costs required to reduce capacity. The consolidation is also predicted to generate up to $400m savings annually, mainly by eliminating overlapping routes, taking out capacity from the US industry overall. However, they may confront their pilots unions of which members are impacted by fewer flights, fewer aircraft and fewer opportunities for advancement. Additionally, antitrust issues also loom large in any airline consolidation. The Department of Justice will almost certainly scrutinize a deal like one between US Airways and United Airlines.

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Posted in: Business