The American Airlines and US Airways Merger
A merger is a corporate finance and strategic management aspect that deals with buying and selling. The process involves combining companies that are in the same field of operation. Merger assists the combined companies to experience rapid growth by creating a new field or location and using a joint venture to improve business operations (Douma & Hein, 2013).
American Airlines and US Airways merger produced the United States’ largest airline carrier in domestic flights, American Airlines Group Inc. The merger came into being on December 9, 2013, creating the largest airline in the world. American Airlines Group Inc prides itself on more than 6,700 flights to 336 destinations in 56 nations across the globe. The operating revenue for the company is approximately $40 billion, with more than 100,000 employees. The company plans to acquire 607 new aircraft, including 517 narrow-body aircraft and 90 wide-body international aircraft. By the year 2015, the integration of American Airlines and US Airways will operate under one certificate in all its flights (McDonald, 2014).
According to Moss and Mitchell (2012), the merger was a stark turnaround for American Airlines after the bleak economic status it experienced some years earlier. In 2011, American Airlines filed for bankruptcy after experiencing annual losses for four consecutive years. Since 2007, the company has only posted a single profitable quarter and reported a loss of about $4.8 billion for the period of three and a half years. However, before the bankruptcy announcement, the company executives had denied that the company would file. In fact, American Airlines’ inability to compete with its rivals and $800 million in labor costs prompted the company to file for bankruptcy. In the restructuring plan, American Airlines reduced the labor cost by 17% and froze all pensions. As a result, the company incorporated a more cost-effective structure, which added more profit to its bottom line. The Merger was a strategic move to create airline dominance in the world. It displaced Delta Airlines as the biggest airline operator in the world.
Significant Outcomes of the Merger
Mergers take place to improve revenues and reduce costs. According to Government Accountability Office (2013), mergers may increase revenues by offering enhanced schedules and network connections and charging higher fares on the same routes. Cost saving is usually generated by eliminating operational efficiencies and redundancies in the companies. In addition, costs can be reduced by combining technologies and labor forces and using different aircraft. In the case of American Airlines and US Airways, the merger yielded more than $1.4 billion in annual benefits from the reduced costs and increased revenues.
The merger surpassed all other Airlines in the region to become the largest passenger airline by several measures. In fact, while American Airlines and US Airways overlap on 12 nonstop routes, no other competitors exist on 7 out of the 12 routes. According to research done by the Government Accountability Office in 2011 and 2012 concerning ticket data analysis, the merger would result in a loss of a popular competitor, which had more than 5% of the total airport-pair traffic. The merger also affected more than 53 million passengers in 1 665 airport-pair markets by creating new 210 airports-pairs for more than 17.5 million passengers. During the merger, US Airways and United Airlines terminated their pension plans for their labor groups and shifted $9.7 billion in claims to the Pension Benefits Guarantee Corporation (PGBC) (Government Accountability Office, 2013).
A potential adverse effect may arise from the merger. The transaction would harm consumers by substantially lessening the competition and creating a monopoly in the airline industry. In essence, the analysis of overlap routes demonstrates elevated levels of post-merger and merger-induced concentration that would hamper healthy competition. There are clear warning signs of the heavy burden from the previous mergers regarding services to smaller communities and post-merger fares (Dwyer, Bhaskara, & Rabinowitz, 2013). Competitive issues will also arise because of the dwindling Low-Cost Carriers (LCCs), which are facing the potential takeover from the mergers. In light of the US Airways and American Airlines merger, the competition is proving to be increasingly unreliable in the industry. As a result, any pre-to-post-merger fare increases will challenge the smaller airlines on the routes dominated by the legacy carriers. In addition, the concentrated hubs resulting from earlier mergers pose further barriers to LCC entry, a situation that could lessen the adverse effects of hiked fares.
Next, the merger outcome will raise competitive issues that call for broader remedies other than carve-outs and divestitures. It is evident from previous mergers that smaller communities, including mid-size and small cities, will be harmed by capacity adjustment of the post-merger. The communities must be protected from the degradation of service and anticipated hub loss from the merger of American Airlines and US Airways. Therefore, one approach may initiate a multi-year moratorium that would reduce the number of flights and seats on routes that are on the major airport hubs.
Organizational Structure After the Merger
In case of a merger, the companies involved attempt to integrate their operations and adopt a centralized command in their operations (Douma & Hein, 2013). The completion of the America Airlines and US Airways merger will take place later in the year 2015. However, there are several issues that remain unaddressed; as a result, there are many ongoing court battles between the company and the employees. Each Airline would like to retain its company control and, at the same time, retain its merger so that its employees’ jobs are secured. In addition, there is a struggle on the issues of integrated seniority in both cases. There is a thin line to dictate who is senior in the merged organization since some of the positions in individual companies were bureaucratic in nature, while in the merger, the structure may be altered (Dwyer, Bhaskara, & Rabinowitz, 2013). In fact, information from the merged organization suggests that shareholders of the most acquired firms usually realize lesser returns at the end of the financial year compared to their former company’s returns.
The management team from US Airways, including the C.E.O Doug Packer, retained the majority of their positions in operational management. The merged airlines also consolidated the airline headquarters in Fort Worth, Texas. US Airways was required to exit Star Alliance after the completion of the merger, while American Airlines had to exit its alliance with Oneworld. The new organizational structure requires both airlines to abandon their landing slots and gates across the seven major airports. The new American Airlines Group Inc sold 104 RRW National Airport slots and 34 slots at the La Guardia Airport (Charisse, 2013). In addition, the organization is phasing out older planes and acquiring new ones requiring less maintenance.
Human Resource Management Practices After the Merger
Human resource management did not change a lot after the merger. The new organization spent months working on corporate structure and selecting new executives. The focus was to integrate more than 100,000 employees into the new airline. In addition, American Airlines employees are looking forward to an increase of 4.3 % in their salaries and an equity share agreement when the merger is completely carried out. Still, many senior employees are waiting to benefit from $10,000 in stock in the new merger (Charisse, 2013). American Airlines pilots still work under contracts that were reached after bankruptcy negotiations. However, the pilot from US Airlines had never had a joint contract, and they still work under deals that are more than a decade old. The management has not been able to integrate the human resource since the move would jeopardize the management cost advantage enjoyed by US Airways.
Just to mention, after the merger, flight attendants from both airlines have been introduced to new working contracts, and they are looking forward to new negotiations at the merged airline. For store clerks, mechanics, and ground workers, a new individual working group brings them closer to the management. However, the benefits are yet to be experienced. In the old American Airlines, workers were involved in contracts that included pay rise and retirement benefits. In the process of bankruptcy, the airline left its maintenance facility at Alliance Airport and relocated to Tulsa and Fort Worth. However, the company is yet to benefit from the new maintenance settings. Still, mechanics and ground workers have been in contractual management talks since 2011. In fact, no progress was made even after Parker became the CEO of the merged organization (Portillo, 2013). After the selection of the C.E.O., the organizational structure of both organizations remained the same as the one intended in the merger. In fact, the C.E.O. observed that they had kept either American Airlines or the US Airways employees. Indeed, he maintained that the whole culture was the same, it only needed to start with how the CEO behaves, and the rest of the company would adapt to the organizational structure.
Another reason the practices were not modified in the merged organization is that every function takes place on a different timetable in any merger. Some events take time, while others happen faster; for instance, people and culture change at their pace, and IT systems integration is slower than envisioned. On the other hand, employee interaction can be enhanced and improved quickly if the management introduces avenues for team building. However, it is expected that to solidify the relationship between two entities that have merged would take longer time (Portillo, 2013). Under those premises, the merged organization decided to take time before changing the management of human resources until the merger concluded. The concept has made the New American Airline Group Inc to concentrate on its service operations as opposed to the drastic change in human resource management practices.
In essence, almost all studies about the merger report positive returns, indicating an overall positive net effect on the process. Therefore, it implies that American Airlines Group Inc has the potential to create more profit; thus, the transfer of assets to the management teams will enhance the operation of the company (Douma, & Hein, 2013). Despite the litigation process that characterized the merger process, both companies have benefited from working as a single organization.
Charisse, J. (2013). “US Airways shareholders OK American Airlines merger”. USA Today. Retrieved from http://www.usatoday.com/story/travel/flights/2013/07/12/us-airways-shareholders-ok-merger-with-american-airlines/2511675/
Douma, S., & Hein, S. (2013). “Economic Approaches to Organizations,” chapter 13. 5th edition. London: Pearson.
Dwyer, J., Bhaskara, V., & Rabinowitz, J. (2013). Updated: American Airlines, US Airways Seal Deal With DOJ on Merger. Retrieved from http://airwaysnews.com/blog/2013/11/12/breaking-american-airlines-us-airways-near-deal-doj-merger/
Government Accountability Office (2013). Airline Mergers: Issues Raised by the Proposed Merger of American Airlines and US Airways. Aviation Operations, Safety, and Security, Committee on Commerce, Science and Transportation, U.S. Senate.1-31.
McDonald, J., B. (2014) Successful Merger of American Airlines and US Airways Shows Facts, Facts, Facts Critical to Antitrust Review. Special Contributing Writer to The Texas Lawbook.1-7.
Moss, D., & Mitchell, K. (August 8, 2012). The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems. American Antitrust Institute (AAI). 1-28.
Portillo, E. (2013). US Airways, American complete merger; now, the work starts. Retrieved from http://www.charlotteobserver.com/2013/12/09/4532820/us-airways-american-complete-merger.html#.VG7ZKTSUd4