American Airlines’ and US Airways Merger

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Topic: Business & Economics
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Abstract

Mergers and acquisitions are common business practices that have both benefits and disadvantages to the involving firms. Essentially mergers and acquisitions are often perceived as expansionist strategies employed by firms to ensure increased market share and capabilities. Firms merge and acquire others for various reasons. However, increased competencies and capabilities, which in turn lead to augmented competitive advantage and market share, forms the main basis for mergers and acquisition.

Mergers and acquisition and business practices common in a highly competitive industry. In such, industries, large firms acquire smaller ones to reduce intense competition. Similarly, firm merge with other companies of equal sizes forms a formidable force against any form of competition within the industry. The merger between American Airlines and US Airways was attributed to various reasons, particularly countering intense competition and increase capabilities in several fronts.

Introduction

The US Airways and American Airlines officially merged on December 9, 2013, to become the American Airlines Group, Inc. The publicly traded holding firm has its headquarters in Fort Worth, Texas. With the merger, the American Airline Group has been touted as the largest airline company with over three hundred destination hubs around the globe and operating in over fifty countries.

Even though the merger has been publicized as the most successful, it has been received with mixed reactions, particularly concerning the possibilities of creating an airline monopoly. However, the merger of the two firms has presented opportunities as well as benefits not only to the firms but also to the airline industry (Shlleifer & Vishny, 2006). The American Airline Group Inc. has increased market share, and improved competencies, including financial, managerial, and technological that have resulted in increased competitive advantage.

Reasons for the Merger between American Airline and US Airways

As indicated, mergers involve the acquisition as well as the combination of two firms. In the case of acquisitions, one firm absorbs the other completely. However, in combinations, merging firms transfer or combine their operations (Shlleifer & Vishny, 2006).

In this case, the American Airlines and US Airways combined to form a larger firm known as the American Airline Inc. the main driver for the merger of the two firms within the industry was to cut costs as well as gain bigger market share. Essentially, the two firms merged in order to cut operation costs. Further, in order to bring American Airlines out of insolvency, the amalgamation was inevitable.

Reduced Costs

One of the reasons why the two firms merged was to reduce the cost of doing business (Holmes, 2006). The cost of operations in the industry is constantly increasing, particularly due to the general escalations of global fuel costs. The combination of the firms’ operations will ensure efficiency in the use of resources, which result in cost savings as well as benefit from the economies of scale. The resulting firm, which is American Airlines, is expected to benefit greatly increased efficiencies resulting from the elimination of duplication of functions.

Cost reduction measures could have been the motivating factors behind the two firms merging to form the larger firm relevant in the aviation industry. The firm that has benefitted hugely from the merger is the American Airlines that was struggling with issues of bankruptcy. Besides, the firm was almost becoming un-operational following the grounding of several planes. However, with the merger, the firm revamped its operations due to the availability of finances and increased capabilities.

Increased Market Share

The clients of the two airlines are expected to be part of the larger clients’ base of the new firm. The two airlines claim that the merger will create an increased value of services to the customers (Perry & Porter, 2005). With the merger of American Airlines and US Airways, travelers are expected to experience several changes.

The merger is also expected to bring the clients of the two airlines together. The expected changes include improved services delivery, reduced costs, and efficiency in the provision of services. The competencies are expected to increase the competitive advantage to the firm. American Airline Group Inc. is expected to be highly competitive due to improved capabilities.

Essentially, the merger means that the new-fangled mega-airline firm would have many flights as well as flight routes. Besides, travelers would be offered with the required expediency and comfort. In other words, even though the travelers may pay relatively higher prices, convenience, and comfort offered by the American Airlines Group Inc. would be appealing to the customers. Generally, the two airlines combined with having increased market share, which in turn would result in improved revenue.

Effects of the merger

Even though mergers are often criticized for resulting in monopolies, the combination of the two airline firms had positive effects in the industry. The first positive outcome of the merger is an improvement in the client’s services. For instance, the clients will have various alternatives given the fact the new firm would have many flights as well as flight routes. In essence, clients would be offered with the required expediency and comfort.

The improved services result from improved capabilities ranging from the availability of finances to the managerial skills (Holmes, 2006). Therefore, improved clients services are one of the positive outcomes of the merger between the two airlines. However, improved services are normally accompanied by higher prices. In other words, even though the travelers may pay relatively higher prices, the improved services offered by the American Airlines Group Inc. would be appealing to the customers.

Secondly, the merger of the two Airlines has strengthened the position of the American Airlines Group Inc. in the highly competitive global aviation industry market. Essentially, the merger has provided the new firm competitive edge to capture the global market share. The new firm is facing stiff competition from larger and well-established global firms within the US market alone.

Airlines such as Delta Airlines and the United Continental holdings offer excellent services and have improved capabilities, which enable them to capture a large percentage of the market share. However, within the global market, the competition would be stiff due to the availability of more excellent firms such as British Airways.

However, with the merger, the new firm has improved product and services offering, which increases its competitiveness in the market. For instance, the improved onboard services and luggage delivery time has enabled the new firm to penetrate various markets across the globe.

Besides, the new firm, American Airlines Group, is currently considered the world’s biggest Airline Company based on passenger traffic. Essentially, the increased competitive edge has enabled the firms’ rapid expansion and capturing a sizable market share within the global aviation market.

The Organization Structure of American Airlines Group Inc

Mergers are normally a gradual process (Gowrisankaran, 2009). In other words, mergers normally take time before it is completed. The reason is that it is not easy to diffuse the operations of the original firms and to come up with a new corporate structure. In most cases, the two firms agree on a hybrid structure that results in increasingly competitive advantage (Gowrisankaran, 2009).

In this case, the two merging companies agreed that the new firm, American Airlines Group, have a hybrid corporate structure adopting the management styles of both firms. The management structure involved the transfer of assets, liabilities, staffs as well as other operations of the two firms.

Besides, the clients of the two airlines are also expected to be amalgamated. Moreover, how the shareholders are to be merged and managed is also outlined (Holmes, 2006). For instance, American Airlines Corporation shareholders should be provided with approximately seventy-two percent of the new company’s shares while the remaining shares are to be given to the US Airways Group. The apportionment of the shareholders meant a different corporate structure.

The structural management ensured that the US Airways management team would have the most of the operational management positions while US Airways Group is having the chairperson and chief executive officer’s positions. The positions were distributed accordingly in the new corporate structure.

There seem to be minimal changes in the merged company as compared to the organizational structures of the two predecessors. However, in an attempt to accommodate the huge number of employees, several adjustments were made into the organizational structures of the original firms to come up with an elaborate structure. Essentially, changes in the management of the firms were critical for the success of the new firm (Perry & Porter, 2005)

The Modification of the Human Resources

The changes in human resources were necessary to accommodate the new transformations in the management of the new team of managers. Generally, the American Airlines Group had to come up with new human resources management structure and practices to accommodate a new management style, a huge number of employees, and the required goals and strategies.

In the new management, the human resources ensured the training and development of the employees and aligned the needs and goals of the organization with the requirement of the employees. For the new resultant firm to succeed, it was necessary to change the management style of employees that would see the attainment of the goals. Perry and Porter (2005) argue that changes in the management of employees are critical for the success of horizontal mergers.

Conclusion

Mergers involve the acquisition as well as the combination of two firms. In the case of acquisitions, one firm absorbs the other completely. However, in combinations, merging firms transfer or combine their operations. Firms often merge to cut costs as well as gain a bigger market share. For instance, America Airways merged with US Airlines to cut operation costs.

Further, to bring American Airlines out of insolvency, the amalgamation was inevitable. However, the merger of the two firms has presented opportunities as well as benefits not only to the firms but also to the airline industry. The American Airline Group Inc. has increased market share, and improved competencies, including financial, managerial, and technological that have resulted in increased competitive advantage.

References

Gowrisankaran, G. (2009). A dynamic model of endogenous horizontal mergers. Journal of Economics, 30(16), 56-83.

Holmes, T. (2006). Can consumers benefit from the policy limiting the market share of a dominant firm? International Journal of Industrial Organization, 14(2), 365-387.

Perry, M. & Porter, R. (2005). Oligopoly and incentives for horizontal merger. American Economic Review, 75(14), 219-227.

Shlleifer, A. & Vishny, R. (2006). Large shareholders and corporate control. Journal of Political Economy, 94(6), 461-488.