US Airline – American airways

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Context
On December 9, 2013 the merger between AMR Corporation, the parent company of American Airlines and US Airways Group, the parent company of US Airways has been officially claimed by the Department of Justice (DOJ) to result in the largest airline among global airline industry. Two airline companies would have been integrated to combine the frequent fly programmes since the middle of 2015, as reported by The Economist (2014). After the successful integration transaction, American Airlines Group Inc. would have chosen Dallas-Fort Worth as the headquarter and have been branded as a publicly traded airline holding company . There are, in average, over 6,700 daily flights to transport customers to more than 300 destinations and 50 countries served by the world’s largest airline which would possess more than 113,000 employees, according to Kim and Jacobs (2013). Isidore of CNN Money (2013) analysed that the merger between American Airlines and US Airways, valued at $11 billion, would be targeted as the final movement to complete the series of combination from 10 main airlines in 2001 to four largest ones in 2015. These ten airlines include American Airlines, TWA, America West, US Airways, Delta, Northwest, United, Continental, Southwest and AirTran. After the number of merger transactions, there are still 4 major alliance players, containing American Airlines-US Airways, United Continental, Delta Airlines and Southwest Airlines that would dominate approximately 83% of US airline passengers.
Background
Since when the United States started to loose the control of the airline industry so that the airline industry could develop in the commercialised and market-oriented direction whilst customers could experience the optimal service benefits. There is an increasing number of airline firms, hubs, airports and flights that contributed to allow much more passengers to be served to travel to expected destinations. According to McDonald (2014), in order to decrease costs as well as broadening the network, airline companies such as Delta and Northwest, United and Continental implemented merger activities. Meanwhile, the low cost airline model developed remarkably with the typical example of Southwest Airlines, leading to the severe competition in the airline market. Additionally, due to the rising costs of labour and fuel, carriers had to determined to restructure unless they would be suffered from bankruptcy. This is a really prioritised task to enable airlines to exist and compete with each others. As a consequence of the finacial struggle of the airline industry, American Airlines and US Airways wanted to get marriage in a merger deal so as to reinforce their own existence. The most powerful obstacle between these two airlines was regarded as Departmenf of Justice (DOJ) who is responsible for evaluating the potential benefits and potential drawbacks stemmed from this merger transaction, as analysed by Dillingham of the United States Government Accountability Office – GAO (2013). The issue making DOJ concern was reported as American Airlines’ unexpected net profit of around $357 million in the middle of 2013 although it was being supervised by the court to assess the bankruptcy situations (Bolte, 2014). As a consequence, DOJ suspected the manipulation behind the merger deal that could be a tactic to raise air ticket price instead of allowing American Airlines to escape from bankruptcy.
Problems
Prior to making a decision to join a merger business, American Airlines had to filed for bankruptcy protection in 2011. The reason derived from the annual loses lasting in 4 continuous years. As reported by Isidore and Ellis (2011), the losses has reached $4 billion since 2007 while values of American Airlines’ shares fell down about 80% from 81 cents per share to 30 cents. In addition, labour costs per year accounted for more than $800 million.
However, due to the suprising profitability of American Airlines against bankruptcy, the merger deal propose was blocked by DOJ for inspection after a half of year of announcement. Actually, American Airlines was suited by DOJ who complaint that the integration of two airlines would reinforce the control power of legacy airlines towards the market, that seemed negative and harmful for consumers. According to Bolte (2014), if the deal was approved, there might be a situation of monopoly accounted for about 60% of the nonstop flights ranging from Reagan National Airport in Washington D.C. As a result, this merger transaction could lead to a high increase in air ticket price that consumers would still have to pay because of no other choice. Moreover, in the most extreme case, when the number of legacy airlines was decreased, they would be motivated to play the games of growing prices together rather than making a competitive market that would make prices reduce.
In order to protect the merger, the alliance of American Airlines and US Airways have borrowed evidences of several previous airline merger transactions such as Delta and Northwest, the United and Continental, the Southwest and AirTran mergers in 2008, 2010 and 2011, respectively. As analysed by Martin (2014), the merger of airline industry would contribute to eradicate the unprofitable and redundant flights while more fuel-efficient airplanes would be invested. That good chance would create entry movement for such low-cost airlines as Southwest or JetBlue to compete in the low ticket prices with legacy airlines.
In DOJ’s opinion, any merger in any industry must be carefully assessed prior to making approval. DOJ argued that there was a considerable difference in the decline between from four to three and from five to four or six to five. Furthermore, unprofitable and redundant routes that might be abandoned by American Airlines and US Airways might not be welcome by low-cost carriers since they lacked of a wide enough network covering both domestic and international flights. It appears difficut for them to become a restraint force in develop lower ticket price. In addition, although the ticket prices were reported to reduce, they excluded the added fees charged for luggage and other passenger services.
History of Merger
According to Martynova and Renneboog (2008), there are six remarkable waves of merger and acquisition transactions since the 19th century. They include 1890-1903, 1910-1929, 1950-1973, 1981-1989, 1993-2001 and 2003-2007. The study has highlighted that the point at which each wave of M&A tended to end, a financial crisis or recession period would arise. For example, in their research, the latest wave ended in 2007 when the economic crisis started to boom in the global scale. Also, the research stressed three factors driving the M&A waves, including industrial and technological shocks, regulatory changes and credit availability.
The first wave started from the 1890s to early 1900s in the United States where companies established trusts that is a form of horizontal integration so as to create monopoly in their markets, as stated by Ferris and Petitt (2013). The typical cases during this period could include Standard Oil Company of New Jersey (1899), United States steel Corporation (1901) and International Harvester Corporation (1902). Nevertheless, the purpose to create an incompetitive situation in their markets was soon prohibited by the government. Thus, the horizontal integration model gradually shifted towards vertical integration to strengthen power in the market. For examples, companies in the oil and the gas industries tended to conquer other supported markets such as refining, transportation, retail instead of focusing on only exploring oil and gas.
The following wave was created as a result of the first wave activities since the monopolies, by chance, push small companies to cooperate with each other in merger or acquisition deals. They had to implement this strategic movement to become bigger and more efficient so that they got benefits from economies of scales to compete with giant corporations.
The third wave from 1950s to 1970s was considered as one of the most active M&A waves. This period remarked the birth of conglomerates and holding companies that attemped to diversify their business into numerous unrelated fields to increase revenue as well as allocating potential risks for smaller businesses. General Electric was recorded as a pioneer for that movement during this time. Regardless of hayday in the late of 1960s, these conglomerates loss credit of investors and capital markets since conglomerates’ shares prices seemed more unpredictable and unstable than ones of focused companies who used all resources to develop one industry they have competitve advantages. Diversifying business too much into different businesses could cause conglomerates to lose core values. Hence, the equity markets appeared to give more favourite to benefits gained from shares of pure business companies.
The high inflation rates and high borrowing interest rates were mentioned as the reasons for the next wave. During the period from 1970s to 1980s, because of high interest rates and high inflation rates, companies had to shrink the business in terms of cutting operation activities and financial costs so that they avoided losing profits. Moreover, the prioritised task was to remain the survival to wait the economic crisis solved; therefore, size-reduced companies sought merger transactions with another as a tool to survice. By integrating together, each company could take advantages of mutual resoucres and competitve advantages to compete with big corporations.
It was an appearance of new instruments and new markets during the 1980s that contributed to encourage the next merger wave. Companies who were classified as poor credit also started to issue bonds to create a low-quality bond market. Exploiting the availability of credit, the leveraged buyouts and leveraged recapitalizations were utilised to finance companies in risky conditions. In contrast, there were some companies who expected to sell out a number of business divisions that were not related to core values. Those divisions were either purchased or developed from the previous wave but they could not perform well enough since companies did not have suitable competencies and resources to develop them more.
The wave of 1990s was rooted from the intensive growth of globalization process that allowed companies to implement international mergers rather than only domestic deals like previous time. The goals of merger transactions began to change from simply financial target to achieve knowledge-based power. The first mover advantages encouraged companies to open the network for seeking the number of appealing specific competencies that were possessed by only several companies. Thus, instead of focusing on domestic ranges, companies tended to look at foreign deals. This movement would bring two major benefits. First of all, they could access to the foreign knowledge pool and culture that would contribute to increase the diversity of their competencies. Secondly, merger could be considered as the most rapidly and efficient strategy to make an entry into the foreign market. It is clear that the opportunities to both gain more resources and expand the customers database motivated the establishment of trade zones such as European Union (EU) or North Atlantic Free Trade Agreement (NAFTA). This trend was witnessed in the global scale from oil and gas, pharmaceutical to automobile industries.

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