Abstract
This report is based on the case of the US Airways and American Airlines merger that began in 2013 and was successfully accomplished in 2015. It discusses the challenges experienced at the onset and during the merger processes and the risks the management had to mitigate to complete the process. External risks identified included lowering competition, loss of jobs, giving undue market power to a few legacy airlines, the possibility of forcing low-cost carriers out of business, and reduced flight frequencies to smaller towns. Internal risks were related to integration failures, miscalculated synergies, overpayment, increase in operating costs, and low morale among employees. In addition, the paper reviews the outcome of the merger to determine if it was a success or a failure. The report ends with recommendations for project managers who will work in the M&A field, detailing skills required for successful mergers and the processes involved.
Brief Introduction to the Project
This report features the merger between two major American airlines, US Airways and American Airlines (AA). The airlines’ need to expand their networks and AA’s near insolvency state led to the merger. In 2011, AA filed for bankruptcy with the court, but its profits rebounded around July of the same year (Figueira, 2018). During this period, airlines were facing a myriad of challenges from high fuel prices to the grounding of Boeing flights due to battery problems (Song et al., 2014). The merger was announced in 2013 as AA was in the recovery process, causing objections from various stakeholders. Officially, the merger was signed on December 9, 2013 (Chan, 2014). The reasons for the merger were to gain access to a bigger customer base, expand destination networks, enhance synergies, increase flexibility, and be stronger financially (Figueira, 2018). AA needed the merger more than US Airways because of its challenges with financial risks in the previous years.
The merger provided benefits to both airlines immediately after it became official. The newly created company, named American Airlines Group (AAG), had access to more than 300 destinations spread across 50 countries, which created over 6,500 daily flights (Le, 2019). AAG has grown into the world’s largest airline group, increasing revenues and harnessing the power of combined resources. Customer loyalty and satisfaction were also enriched as AAG allowed booking from the AA and US Airways’ websites, creating a superior traveling network than any other airline. A new loyalty program was initiated through which customers would accumulate and redeem miles across the AAG’s broad network.
The merger also created new management for AAG and changed the individual airlines’ governance. The US Airways’ CEO, Doug Parker, was retained to lead the new firm while the board of governors also underwent significant changes. The new bard composition included US Airways and AA employees and credit representatives, respectively. The human resource strategies of AAG were adopted by US Airways and remained unchanged. Leaders believed that retaining employees from both airlines would provide AAG with a competitive edge in the industry.
Almost two years later, AA and US Airways merged their systems into one airline system, including social network accounts and websites. On October 17, 2015, all the US Airways reservation systems were closed, allowing employees to now use AA’s system (Harlan, 2015). Before the full migration, US Airways employees had received training and engaged in scenario bookings using the AA system. In addition, the airlines had engaged in a gradual migration of US Airways services into AA’s systems throughout the two years. The process involved merging different policies and complex computing systems, requiring the retraining of employees from the outgoing firm (Harlan, 2015). For example, US Airways employees were moving from using the Shares reservation and ticketing system to Sabre, which is used by AA.
Risk Management
The AA and US Airways merger faced serious objections due to the many risks. Internal risks would affect the newly formed entity, and external risks that would influence the industry, customers, and other stakeholders outside the new firm. Most external risks were identified by opponents of the merger in Congress hearings or court proceedings (Sawyer, 2015). Some of these included the effects of the merger on competition, jobs, market power distribution, low-cost carriers, and flight frequencies. The merger would see the leading airlines control over 80% of the market, giving them undue power and creating a monopoly at the route level (Figueira, 2018). This occurrence would allow the airlines to increase traveling costs through higher change, baggage, and seating fees (Das, 2019). Reduced competition in the industry would force low-cost carriers out of business and make it difficult to enter the market. Mid-size communities and markets would also see a decrease in flight frequencies (Sawyer, 2015). Finally, merging two large companies leads to layoffs, which increases unemployment.
Internal risks are related to integration failures, miscalculated synergies, overpayment, increase in operating costs, and low morale among employees. Integration of airlines is a complex process because of their technical differences. The Shares reservation system is different from Sabre and requires fresh learning for the ticketing staff (Harlan, 2015). A failed reservation system integration would delay flights, create misunderstandings between customers and staff, and even lead to booking cancellations. Das (2019) established that the AA and US Airways merger increased delays but reduced cancellations. Such errors would cost the newly established airlines money and taint their reputation.
Miscalculating synergies might show that AAG will be more profitable than the separate merging entities, which is quite the opposite. A failed merger would result in the new business reporting poor performance and lower value. Overpayment arises when the amount paid for the deal is much more than the real value of the acquired company. Employees from the organization being acquired are scared of losing their jobs and under pressure to learn the required skills to cope with the new entity, which could lower their morale.
Careful preparations are necessary to manage, deal with, and mitigate these risks. In this merger, both companies engaged legal and financial experts who utilize specialized tools to prevent synergy miscalculations and overpayment and ensure that operating costs are properly estimated (Capodaglio, 2019; Figueira, 2018). For example, Capodaglio (2019) found that simulation software can predict the outcome of a merger correctly. Integration failures were managed through gradual shifting from US Airways to AA systems, which took two years. This gradually managed migration also supported employees through a change management process, providing ample time to adjust to the new working environment and changes in culture.
Stakeholder Management
A merger of legacy airlines would involve varied stakeholders because it would significantly affect the industry and national economy. For AA and US Airways, the stakeholders were leaders of both companies, their employees, shareholders, customers, and government representatives. The merger utilized three steps in its stakeholder management approach: identification, grouping, and creation of a power grid to determine each group’s needs. Leaders include the executive teams and boards of governors of the merging organizations. They are the ones who develop the idea and follow through with the implementation (Lawton, 2013). The failure or success of a merger depends on the due diligence undertaken by these leaders. Employees are the most critical because the union has the most significant psychological impact on them. Their concerns and fears must be addressed throughout the process to prevent resistance and fallout. They are the force that will drive the new entity to success. These stakeholders are treated as the high interest and high power group, requiring close monitoring to prevent resistance.
Shareholders are the owners of the merging firms, and executors of a merger must ensure that the new entity will continue to maximize wealth; hence are also high power and high-interest group. The merger must consider how customers will benefit from avoiding losing them to competitors and going out of business. Government representatives are regulators who investigate and approve a merger. Government regulators were doubtful about the merger of the legacy airlines because it would reduce the biggest airlines in the US to just three, lowering competition and giving them undue market power. The company representatives had to counter the objection by proving that the merger had more benefits than disadvantages (Sawyer, 2015). Employees from US Airways were most affected, but they were trained and given up to two years to adjust.
Synergies were projected to show that shareholders would benefit from increased revenues and profit margins as networks would expand to include 300 destinations worldwide. The merger was to offer more consolidated services to customers. In addition, it was the surest way of ensuring that AA remained in business, and it was the customers’ most loved airline. However, the customers were not directly catered for in the deal.
Success Review
The AA and US Airways merger was a successful project that created the world’s leading airline. It achieved most of its intended goals, including cutting costs, increasing market share, better use of resources, and offering customers more flight routes. The merger also resulted in improved services to customers due to the extensive availability of financial and human resources. Nevertheless, the merger failed in pricing as it increased flight prices due to incentives to coordinate the activity increasing among the legacy airlines (Turner, 2021). AAG is the leading global airline with over $29 billion in revenues and approximately 165 million yearly customers (The ten biggest airlines in the world, 2022). Since the airline has the highest number of annual customers, it shows that its services improved after the merger. In addition, the high revenues indicate increased prices and fees but customers are willing to pay the price for superior services (Zhang and Nozick, 2018). AAG also boasts of an extensive network with flight routes across 48 countries. Therefore, the project was successful in most aspects and has created the most competitive business worldwide.
Other groups consider the merger a success as well, with the media reporting enormous returns in earnings and general business growth. AAG leaders and employees also believe that the merger was successful. Shine (2018) reports increasing profits, rising salaries, new job opportunities, almost double the routes and higher stock value. These reports in the media are evidence that other people and groups hold the same perspective as me that the airline has grown after the merger. Another evidence is in the continued failures of Boeing, reported as recently as this year (Reuters, 2022; Schmuck, 2021). Although challenges with new flights may persist, AAG has harnessed the power to thrive through the difficulties.
Recommendations to Project Managers
While there is no evidence that the merger employed professional project managers, it is a practical example of M&A project management. Managing a merger, especially in the airline industry, is a complex process (Manuela Jr., Rhoades, and Curtis, 2016). Therefore, project managers must utilize exceptional skills in managing a merger project. This section highlights the lessons project managers can learn from the AA and US Airways merger. Firstly, according to the risks involved in the analyzed merger, project managers must have excellent skills in leadership, cost and quality management, communication, planning, and information management (The complete guide to M&A project management). Strong leadership and clear communication are necessary to manage the transition period, especially among affected stakeholders. In addition, the manager must communicate with each group of stakeholders as required, only conveying the necessary and useful information (Feix, 2020a). Cost management is an essential skill in mergers because costs are critical for the survival of the new entity. If the project manager does not understand these concepts, their input into the process may be faulty and cause catastrophic failures of the mergers.
Quality management does not only apply to engineering and production projects. It helps the project manager to achieve maximum benefit in every stage of the merger. M&A transactions involve volumes of information. For example, the AA merger studied in this case involved volumes of data from both airlines and regulatory bodies. These include agreements, certificates, policies, and legal documents for each entity and process. The project manager must have excellent information management skills and tools to prevent overload (The complete guide to M&A project management). In addition to skills, the project manager must embrace the processes of successful mergers discussed in this report.
Specific processes undertaken during the AA merger include objective setting, due diligence, risk management, and phase gate technique. Project management is now recognized as a key component in a successful merger process (Galpin, 2021). Due diligence is critical in mergers because it helps to avoid overpayment, synergy miscalculations, and underestimation of costs. Without this process, the merger will eventually fail due to blind spots that were either ignored or not identified during the M&A process. Synergy management involves due diligence at the beginning and after the merger is implemented (Feix, 2020b). Every project manager must understand the steps of due diligence in M&A transactions.
The phase-gate technique involves dividing the entire process into phases to allow easier project management. For a merger like this one, there can be three distinct phases: strategy approval, intermediate, and deal completion stages (The complete guide to M&A project management). In the AA case, strategy approval was during the period of acquiring the go-ahead from regulatory bodies. The stage can be short or long depending on the obstacles encountered by the legal experts. For example, AA and US Airways experienced widespread opposition, leading to court cases and Congress proceedings. These challenges extended the merger’s approval stage beyond the expected scope. A project manager in charge of a merger must foresee such risks and prepare for them to keep the project within schedule and on budget.
The intermediate stage follows the approval of the merger and encompasses negotiations, valuations, and planning for future stages. During this phase, the project manager’s negotiation and communication skills are the most useful. Valuations are completed by financial experts but the project manager must remain aware of every transaction. This stage takes longer than the approval stage and determines the outcome of a merger. Most mistakes including synergy miscalculations, over valuations, and wrong projections take place in this step.
Conclusion
The AA and US Airways merger became successful due to the proper management of the process. Pressure from regulators and other government authorities must have driven the team managing the merger into thoroughly studying all involved variables and risks. The opposition the merger experienced allowed it to embrace project management skills that were inevitable in its success. Although most opponents predicted doom to the industry, the merger created a globally competitive airline that is now the world leader in services and revenues. Project managers can learn important lessons from this merger process, including the critical skills required and the central processes of a merger.
Reference List
Capodaglio, G. (2019) On the reliability of structural methods in merger review. Evidence from the US airline industry. Web.
Chan, M. (2014) Politics in the American Airlines-US Airways Merger and Antitrust Settlement. Fordham J. Corp. & Fin. L., 20, p.175.
Das, S. (2019) Effect of merger on market price and product quality: American and US airways. Review of Industrial Organization, 55(3), pp.339-374.
Feix, T. (2020a). M&A Project Management & Governance: The M&A Playbook. In End-to-End M&A Process Design (pp. 283-302). Springer Gabler, Wiesbaden.
Feix, T. (2020b). Synergy Management. In End-to-End M&A Process Design (pp. 245-281). Springer Gabler, Wiesbaden.
Figueira, M.J.A. (2018) US Airways: The ugly girl gets married again (Doctoral dissertation).
Galpin, T.J. (2021) As another M&A wave begins: Three keys to success. Strategy & Leadership.
Harlan, C. (2015) Landing a mega-merger: The last days of US Airways. Web.
Lawton, T. C. (2013) Why America Airlines and US Airways tied the knot. Web.
Le, H.B. (2019) An Ex Post Analysis of the US Airways/American Airlines Merger. Review of Economic Analysis, 11(3), pp.383-398.
Manuela Jr, W.S., Rhoades, D.L. and Curtis, T. (2016). The US Airways Group: A post-merger analysis. Journal of Air Transport Management, 56, pp.138-150.
Reuters. (2022). Boeing reports $4 billion loss tied to problems with 787 Dreamliner. Web.
Sawyer, J.T. (2015) Unexpected Turbulence: An Examination of External Factors That Influenced the DOJ’s Intense Review of the American Airlines/US Airways Merger and Its Potential Impact on Future Mergers. J. Air L. & Com., 80, p.595.
Schmuck, R., 2021. Global supply chain quality integration strategies and the case of the Boeing 787 Dreamliner development. Procedia Manufacturing, 54, pp.88-94.
Shine, C. (2018) What’s next for American Airlines five years after its merger with US Airways? Web.
Song, T., Li, Y., Song, J. and Zhang, Z., 2014. Airworthiness considerations of supply chain management from Boeing 787 Dreamliner battery issue. Procedia Engineering, 80, pp.628-637.
The complete guide to M&A project management. Web.
The ten biggest airlines in the world 2022. Web.
Turner, D. (2021) Coordinated Effects in the American Airlines-US Airways Merger. Available at SSRN 3917112.
Zhang, Y. and Nozick, L. (2018) Investigating the Pricing Impacts of the American Airlines and US Airways Merger. Transportation Research Record, 2672(23), pp.15-19.