US Airways and American Airlines Merger

Abstract

Mergers and acquisitions are common business practices that have both benefits and disadvantages to the involved firms. Essentially, mergers and acquisitions are often perceived as expansionist strategies employed by firms to ensure increased competitive advantage. Increased competencies and capabilities, which in turn lead to an augmented competitive advantage and market share, form the main reason why firms merge and acquire others.

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Mergers and acquisition and business practices common in a highly competitive industry. In most industries, large firms acquire smaller ones to reduce intense competition. Similarly, firms of equal size merge with each other to create a formidable force against some 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 on 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 Airlines 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 new firm but also to the airline industry (Shlleifer & Vishny, 2006). In fact, American Airline Group Inc. has increased market share and improved competencies, including financial, managerial, and technology, which has resulted in increased competitive advantage.

Circumstances and 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 join their operations (Shlleifer & Vishny, 2006). In this case, the American Airlines and US Airways combined to form a larger firm known as American Airline Group Inc. The main driver for the merger of the two firms within the industry was to cut costs as well as gain a bigger market share. In other words, the two firms were operating under constrained costs arising from external environmental factors such as increased oil prices and slow economic recovery. Essentially, the two firms merged in order to cut operating 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 ensured increased efficiency in the use of resources, which resulted in cost savings as well as benefit from the economies of scale.

The resulting firm, which is the American Airlines Group, was expected to benefit greatly due to increased efficiencies resulting from the elimination of duplication of functions. The firm that has benefitted hugely from the merger is 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 customer base of the new firm. In fact, the two airlines claimed that the merger would 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 service delivery, reduced costs, and efficiency in the provision of services. The competencies are expected to increase the competitive advantage of the new firm. In fact, American Airlines Group is expected to be highly competitive due to the improved capabilities.

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Essentially, the merger means that the newfangled 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 would be appealing to the customers. Generally, the two airlines combined in order to have 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. In fact, the first positive outcome of the merger is the improvements in the client’s services. For instance, the clients will have various alternatives given the fact that the new firm would have many flights as well as flight-routes. In essence, the clients would be offered the required expediency and comfort.

The improved services would result from improved capabilities ranging from the availability of finances to the increased managerial skills (Holmes, 2006). Therefore, improved client 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 would be appealing to the customers.

Secondly, the merger of the two Airlines has definitely strengthened the position of the American Airlines Group in the highly competitive global aviation industry market. Essentially, the merger has provided the new firm a competitive edge to capture the global market share. In fact, 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 service offerings, which increases its competitiveness in the market. For instance, the improved onboard services and luggage delivery time have enabled the new firm penetrate various markets across the globe. Besides, the new firm, American Airlines Group Inc., is currently considered the world’s biggest airline firm based on the 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 increased competitive advantage (Gowrisankaran, 2009). In this case, the two merging companies agreed that the new firm, American Airlines Group, should have a hybrid corporate structure through the adoption of 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, the manner in which the shareholders were to be merged and managed was also outlined (Holmes, 2006). For instance, American Airlines 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. 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 including the chairperson and Chief Executive Officer (CEO). The positions were distributed accordingly in the new corporate structure.

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In the newly formed firm, there seems to be minimal changes in terms of organizational arrangement compared with the management structures of the two predecessors. However, in an attempt to accommodate the huge number of employees, a number of 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 the human resources were necessary to accommodate the new transformations in the management of the novel team of managers. Generally, the American Airlines Group had to come up with new human resources management structure and practices to accommodate the newfangled management style, huge number of employees and the required goals as well as strategies.

In the new management, the human resources ensured continuous training and development of the employees, which is aligned to the needs and goals of the organization. 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. Essentially, firms often merge to cut costs as well as gain bigger market share. In this case, America Airways merged with the US Airlines in order to cut operating costs and increase their market share. Further, in order to bring American Airline 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. In fact, the American Airline Group Inc. has increased market share and improved competencies including financial, managerial and technological that has 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.

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

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