Analysis and evaluation of strategic choices in the airline industry - Essay Example

? CORPORATE STRATEGY ANALYSIS AND EVALUATION OF STRATEGIC CHOICES IN THE AIRLINE INDUSTRY TASK: To analyze a real life example of how organizations have pursued various methods of development as a means of strategic expansion. NAME OF STUDENT NAME OF COUSE COURSE TUTOR DEPARTMENT 22ND NOVEMBER 2011 ACKNOWLEDGEMENT My sincere thanks go to my department and especially to my lecturer, for according me the opportunity to undertake this noble study. Secondly I would like to recognize the enormous work done by the airline industry as it is my area of research; specifically to the following airlines; British Airways, Iberia Air, the Continental and United air in my study of mergers. Not to forget Air Canada, American Airways, Air New Zealand, India airs, and other smaller airlines studied under the ventures and alliances. INTRODUCTION Strategic measures in the business world are part and parcel of the developments tools that must be imparted to enhance growth and development. It is imperative that every business organization keeps in pace with the ever growing and changing business environment. This influences companies to come up with strategic measures and plans that aims at the business remains active and makes incredible returns. According to Barrett (2010), mergers involve the combining or coming together of two or additional companies, with the aim of offering the stockholders of a company the security to the owning company, in exchange for the surrender of the other company’s stock. An acquisition refers to the procurement of one business or company by a different one which may also lead to consolidation. This occurs when two business organizations come together and outline a new venture in general and neither of the preceding organizations survives independently. Barrett (2010) argues that, Mergers and acquisition in general refers to the aspect of corporate strategy, corporate finance, and the management department involving themselves; with the buying, selling, separating, and integration of different business organizations and similar entities that can help an enterprise expand rapidly in its sector, or place of origin, new field or location; without creation of a subsidiary; smaller entity or using a joint business enterprise. According to Barrett (2010), the airline industry has embraced mergers and acquisitions that have seen leading airline companies combine, or even own other companies in the quest to expand their investment, as well as, counter the ever changing environment; of this type of business venture. In the period of 2004-2011, a number of Mergers and acquisitions were encountered in this industry. For purposes of proper and effective analysis, few cases have been chosen in this study and will be looked at in the following section. According to Transatlantic airline alliances (2010), the airline industry can be described as complex and volatile; major crises face this industry like, fuel prices, world and regional economies. MERGERS AND ACQUISATIONS Mergers in the airline industry are a reality in the business world. A number of mergers have been experienced in this industry notably with the popular airlines as well as the smaller airlines. According to Barrett (2010), history has shown that substantial airline mergers yield inconsiderable results at their best. This paper looks at two mergers that occurred in this industry between the years 2004 and 2011- merger of British Airways-Iberia and the Continental-United merger. This paper aims at evaluating the strategies behind these decisions, projected achievements and what prompted the companies in this industry to come up with the ideas of mergers and acquisitions. On critical analysis of the above mergers, various reasons can be deduced for coming up with the merger strategy. British Airways mergers and acquisitions The tough global economic situations being experienced has seen British Airways get into mergers and acquisitions as a way of trying to remain on board. British Airways has made four acquisitions, has taken no stake and one divestiture in this period. Year Acquisitions Stakes Divestitures 2011 1 0 0 2010 0 0 0 2009 0 0 0 2008 1 0 0 2007 1 0 1 2006 0 0 0 2005 1 0 0 2004 0 0 0 Total 4 0 1 Table 1.1 Accessed from British Airways plc Mergers and Acquisitions available at http://www.alacrastore.com/mergers-acquisitions/British_Airways_plc-1002499 The reasons to these mergers and acquisitions are as discussed below. Rising oil prices According to British airways CEO, escalation of oil prices in the world will lead to more airline mergers in 2011 than it was last year (Cohen, 2011). The CEO said more join ventures are expected and highlighted on the tie ups with American Airlines and Iberia. This will see the companies coming together to overcome the ever increasing cost of running the industry. Consolidation of the industry British airways according to the CEO, view the idea of coming together as the answer to the structural financial problems. He exclaims that this will extend to the Asian region where less consolidation has been realized (Cohen, 2011). British Airways has acquired Lineas Aereas from International Consolidated Airlines Group. This was aimed at consolidating the two to form a strong company with a firm financial base. This achievement was, through the incorporation of the companies’ asset and earnings, to ensure stability in the industry (Alacrastore.com, 2011). According to a report by CAPA, Centre for Aviation (Anon. 2011) made by IAG and Iberia chairman Antonio Vazquez, he said that it was the dawn of a new key player in the international aviation with the achievement of an ambition of playing a complete role of industry consolidation. According to CAPA, Centre for Aviation (Anon. 2011); IATA argues that mergers across the borders will go a long way into providing crucial part of a solution in the airline industry. Expanding the scope of their carrier With Iberia, this combination means having more facilities for travel to Asia, as British Airways is well established. On the other hand British Airways will have the chance to reach the Latin American market, where Iberia is the leading market operator from Madrid to other nineteen destinations. This is as reported by CAPA, Centre for Aviation, (Anon, 2011) this will also see the coordination of the services of the two airlines. Increase dominance According to the centre for aviation (Anon , 2011), this merger has been described as an effort by the two companies to increase dominance and view of the future as a multinational and to acquire the multi brand s airline group. This has been orchestrated by the merger coinciding with the global economic downturn and the rising of industry expenditure. According to a statement by IATA as stated in Centre for Aviation (Anon., 2011), the opportunity of airlines merger across borders can be proved viable as other industries have worked well. Dominance will be achieved in the sense that the merger will enhance operation and improve service delivery. This will make the two acquire a reputation across borders and thus, dominate the market. United-Continental Merger Increase dominance in the Atlantic region Cark, A. (2010) describes this merger as the birth of world’s biggest airline. The coming together and incorporation of the two companies’ assets amounting to billions of dollars will create a carrier dwarfing the rivals in the Atlantic region. With the two airlines, the forecast is that their annual revenue is projected to be $30 billion and carry one hundred and forty four million passengers a year to fifty nine countries. (Clark, 2010) This makes it larger than Europe’s top carrier; Air France-KLM and above it United states rival Delta Air Lines and Northwest. Financial survival According to Miyuru (2010), the core goal of airline mergers has been to ensure financial survival. The airline industry has a remarkably low profit margin and as a result of this sensitive connection to the world economy, any misfortune can be very destructive to the entire industry. Thus the coming together of Continental-United merger will ensure survival of their working sustainability among the best performing companies in the industry. Promote unity and enhance cooperation According to Continental Airlines (Anon, 2011) article, this merger saw the United Airlines and Continental Airlines combine to form the United Continental Holdings, Inc. This was brought together by two of the world’s best airlines and in turn created a newer united airline. Promote customer service delivery Barrett, P. (2011) discusses that Continental and United worked strategically to align key customer services, marketing strategies and airport undertakings. Further, Barrett (2011) argues that complete merger integration is expected in the future. Summing up with superior products and services; the new integrated airline has the vision of delivering meaningful, profitable, and sustainable long-term valuable services to the customers, society served the shareholders and co-workers all over the world. The upgraded services were to ensure a continuous improvement, and to achieve success not just like any other player in the industry, but also as a high performing organization. According to Barrett (2010), the company is committed to being transformed to the airline the customers want to fly, and to the employees, the airline they want to work for. With the consolidation of the two operations, the united integrated airline is bound to perform tremendously in the airline industry. Promote workforce by ensuring employment creation According to Barrett (2010), the workforce of the two airlines exceeding eighty thousands is all over the world and with the merger; it is expected that the employee capacity will increase significantly. The merger aims at taking actions and decisions that matters in the airline industry and then, learn about the responsibility and commitment for doing the right things in the improvement of the industry. It also involves the exploration of available, dedicated individuals ready to move their careers in positive new directions that are geared towards the growth of the industry. Improving on the fleet carriages and enhancement of the contract of carriage, and be at per in the sector. Employee Group CO Union UA Union Pilots ALFA(Air Line Pilot’s association) ALFA F/As IAM (International Association of Mechanists and Aerospace Workers) AFA (Association of Flight Attendants) Maintenance IBT (International Brotherhood of Teamsters) IBT Ramp IBT IAM Counter N/A IAM Table 1.2 Current Union Setup of two carriers: The two carriers have almost similar union representations in their departments; this will enhance smooth merging.1 JOINT VENTURES AND STRATEGIC ALLIANCES Ramya and siji (n.d) argues that the airline industry has also seen the integration of joint ventures and strategic alliances among the key players in the industry. Joint ventures involve companies coming up together and contributing towards the growth of a certain business venture geared towards developing the industry. According to Ramya & Siji, (n.d) airline industry incorporates various activities ranging from hospitality to technical, which culminate to the achievement of a specific purpose. Strategic alliances as discussed below involve the combining of ideas and strategies by different companies to develop the airline industry. Launch of new routes and increase network According to Boehmer (2010), the joint venture of American Airlines, British airways and Iberia will saw each company launch new routes. The venture called antitrust-immune joint venture, laid out strategies for new routes, departures schedules that were optimized and flying programs that were constantly coordinated. The joint venture ensured that the cooperation bring in significant benefits in the market with combined business efforts. Lowering fares According to AcessFares (Anon, 2010), the joint venture by American Airlines, British airways and Iberia also referred to as the OneWorld Alliance aims at equaling its footing with other airline alliances. This will see better service delivery and allow customers to have lower air fares and more convenient connections. Promote business growth and Increase profit making in the Industry Air India is the country’s national flag carrier airline. According to Ramya & Siji (n.d.), the alliance Air India with Sahara was aimed at ensuring that the local aviation sector was well catered for as the Indian Airline was an international service provider and Sahara being a local player in the industry. Consequently, the Indian Airline formed alliances with Jet Airways, Kingfisher Airlines, Spice jet, Air Deccan and Go-Air. Each carrier had an advantage of operation at the local industry but, many could not withstand any eventuality of global economic crises. They embraced the ventures and alliances to build a strong aviation industry in their country. The reason behind aviation dream is the growth potential; this is estimated at 25 percent with domestic players like Indian airlines, Jet airways, Kingfisher Airlines, Spice Jet, Air Deccan Go-Air and Air Sahara carrying approximately twenty five million passengers every year. Ramya & Siji (n.d.) further argues that growth in the industry can also be accredited to macro economic perspectives. With these alliances and ventures, the airline industry has grown considerably, and projected output is evident. Consolidate service delivery Air Canada, Continental, Lufthansa and United airlines joint venture was launched in 2010 to all North Atlantic Routes. This was collectively referred to as the “Transatlantic Airline Alliances” by the report prepared by the European Commission and the Department of Transportation in the United States (16th November 2010). The trends towards the integration of joint ventures and global alliances do not necessarily represent consolidation or minimize competition in the industry. According to joint ventures and Alliances (Anon, 2011), they are termed to improve on the service delivery, enhancing fleet management and cargo safety, and efficiency in the delivery. The members of the alliances come together and enhance the aspect of customers’ experiences. Promote service delivery and timely flights According to British Airways- Travel Industry news (Anon, 2011) the new joint venture of British Airways and American Airlines was aimed at providing better timed flights during the peak periods. The peak periods refer to late afternoon and evening time when there are a lot of passengers. The partnership principal aim is to provide connections that ran at the same times and space them at different periods to provide a wide range of flight times’ choice to the passengers. Also cargo delivery is enhanced at thus efficiency is improved. Newark Airport September Cargo Carrier Ranking at Newark International Airport, the figures are cumulative for the 12 months ending September from data provided by the Port Authority of NY & NJ. Airline 000’s Tons* % of total cargo 1 FEDERAL EXPRESS 367.497 48.4% 2 UNITED PARCEL 130.878 17.2% 3 CONTINENTAL 101.580 13.4% 4 LUFTHANSA 23.436 3.1% 5 BRITISH AIRWAYS 21.598 2.8% 6 KALITTA AIR LLC 20.365 2.7% 7 SAS 16.915 2.2% 8 VIRGIN ATLANTIC 11.966 1.6% 9 AIR TRANSPORT INT’L 7.454 1.0% 10 JET AIRWAYS 5.958 0.8% 11 SINGAPORE AIRLINES 5.585 0.7% Airline 000’s Tons* % of total cargo 12 DELTA 5.060 0.7% 13 ABX AIR INC 5.037 0.7% 14 EVA 5.034 0.7% 15 EL AL 4.863 0.6% 16 ASTAR AIR/DHL. 4.128 0.5% 17 AIR INDIA 3.870 0.5% 18 AIR PORTUGAL(TAP) 3.746 0.5% 19 AIR FRANCE 3.436 0.5% 20 CARGOJET AIRWAYS 2.635 0.3% TOTAL CARGO TOP 20 751.039 98.8% TOTAL CARGO NEWARK AIRPORT 760.052 n/a Table 1.3 By Marco Babic - Nov 18, 2011 10:47 AM GMT+0300 available at http://www.bloomberg.com/news/2011-11-18/newark-airport-september-cargo-carrier-ranking-table-.html# Enhance competition According to an article titled “Joint Ventures and Alliances: more popular than ever” (Anon., 2011). The Air New Zealand is another superb example discussed here and exemplifies alliances. The strategic alliance incorporating fifteen airlines all over the world and remains a stronghold of air New Zealand in the airline industry. This ensures it remains competitive and effective in service delivery and economic growth contribution. Through share customer referrals, air port loyalty by customers that are global recognition to marketing, as well as, resources derived from other stakeholders without the extensive capital insertion. This also alleviated the risks associated with acquisition and eventually the airline benefiting as well as the shareholders. This improves customer confidence to the company as the shareholders are satisfied and the company is seen to fair well in the industry; this is according to Joint Venture and alliances(Anon, 2011) KEY OPPORTUNITY In the period, 2011/2012; the surfacing of the global financial system from near collapse, mergers and acquisitions in the airline industry are bound to enhance growth and development of the carrier business. As per Barrett (2010) argument, prevailing companies have to get into agreements with failing companies to boost their performance while at the same time ensure standard service delivery. One skill the carriers have clearly brought to light is the combined effort in the realization of a lucrative business is the incorporation of ideas from different ventures. Joint Ventures and Alliances (Anon, 2011) show that they bring together stockholders increasing the capital base; thus, the companies are able to venture into more avenues in the industry in the quest of service delivery and improve on the technicalities. The opportunity of merger and acquisition integration and enhancement is bound to create a firm foundation of the industry to stand. Elmuti and Kathawala (2001) argue that the industry is deemed to withstand the ever changing global economic face. Most studies only tend to focus their studies on joint ventures strategic alliances as well as mergers and acquisitions success, but fail to evaluate the reasons why they fail to surface successfully. This study clearly illustrates the profound achievements made in the airline industry via strategic alliances, joint ventures, mergers and acquisitions. Progressive success is far from reach, and sustainable success is a mirage. My proposal to the airline industry in the future 2011/2012 to be precise is to get into technological improvements that will enhance service delivery, improve fleet management and ensure sustainability in the customer satisfaction. Customer availability is the core to the development and growth of any business organization. Therefore, the airline industry is not exception in the strategic growth plan of ensuring customer service is efficient to the best standards possible. Expansion of the airport, carrier fleets and improving on cargo delivery, are opportunities that can be enhanced to ensure the company remains competitive in the airline sector. Goods transportation remains one activity that is vital in the growth and development of the global economy. With the exportation of the perishable goods across the continents solely depending on air transport, cargo delivery remains one subject of interest in the airline industry. Therefore, improvement of cargo fleet to cater for all modes of cargo transportation ensure customer satisfaction and confidence is enhanced. The freight and passenger safety, as well as, the efficiency of service delivery are vital to the success of the airline industry. Customer satisfaction is a strong marketing tool that can build or break down an organization. CONCLUSION With a rise in joint ventures and strategic alliances popularity, their complexity and range of alternatives also increases. Thus, there is profound necessity for advisers to alert the parties in the airline industry the probable occurrences in the future. There is also need to understand the various circumstances and structures associated with these ventures and alliances. Structures of ventures include; an incorporated company, partnership and trading trust. Strategic alliances are less formal; also they might involve collaboration agreement. All ventures in general have one thing in common which, involve the fundamental aspect of a relationship working. Joint ventures and strategic alliances have continued to be in style world wide across all industry and specific to the airline industry. Notable points in the realization of effective and strategic achievements in this area are; legal advisors of mergers and acquisitions have the obligation of keeping up date with the ways and changes of the idea at hand. This will ensure that companies get to know both the profit and the risks behind getting into mergers and acquisitions, as well as, combined ventures and strategic alliances. REFERENCES Alacrastore.com, 2011. BA Holdco SA acquires Iberia Lineas Aereas de Espana from Intl Consolidated Airlines Grp. 2011 Alacra, Inc., 100 Broadway, Suite 1100, The New York, NY 10005 available at http://www.alacrastore.com Barrett, P., 2010. Airline Merger’s aren’t Storybook Romances (May 6, 2010) Bloomberg Business Week available at http://www.businessweek.com/magazine/content/10_20/b4178007849046.html Boehmer, J., 2010. AA, BA, Iberia Launch Joint Venture with New Routes, Services. BusinessTravelNews. Available at http://www.businesstravelnews.com/ downloaded on November 22, 2011. CAPA; Centre for Aviation, 2011. British Airways and Iberia merger completed; plan to add more airlines to group 26th January, 2011 available at http://www.centreforaviation.com/analysis Cohen, A., 2011. BA’s Walsh: 2011 To Bring “Significant’ Air M&A’ BusinessTravelNews available at http://www.businesstravelnews.com Elmuti, D. and Kathawala, Y., 2001. An Overview of Strategic Alliances. Management Decision MCB University Press (ISSN 0025-1747) 39/3 205-217 More popular than ever: Joint ventures and alliances, 2011. available at http://www.findlaw.com/12international/countries/nz/articles/1942.html Ramya, K. & Siji, S., n.d. Strategic Alliances and Joint Venture in Civil Aviation available at http://dspace .iimk.ac.in/bitstream/2259/490/1/309-322.pdf Transatlantic airline Alliances: Competitive issues and Regulatory Approaches, November 16, 2010. A report by the European Commission and the United States department of Transportation. Available at http://ec.europa.eu/competition/sectors/transport/reports/join-alliance-report.pdf Read More