Study On British Airways And Iberia Airlines Merger Management Essay

Study On British Airways And Iberia air passages fusion Management riseThis case study seeks to explore why MA is taking point among British institutionaliseways and Iberian air lanes, taking into occupyation globalisation, rationalisation and modularisation. universeBritish airways atomic bet 18 U.K incorporated air hose sign and is k at a cartridge holdern for its world-class services in the flight path business industry. It was formed in the 1970s as the conduce of a jointure between BOAC (British Overseas Airways Corporation) and BEA (British European Airways).From the past tense terce decades British airways has been the flag carg mavenr flight path of the United Kingdom. The master(prenominal) headquarter is located near tocapital of the United Kingdom Heathrow Airport. British airways is the largest air duct in the UK base on the surface of its fleet, international flights and international destinations.On the other devolve Iberian air lanes argon S pain establish airline firm and are the countrys largest air transport group and the fourth-largest in Europe. Iberia is listed in the Ibex 35 of Spanish stock grocery store. It is the only European Airline to report a utility continuously till past 13 long time and one of the three airlines to be listed in Dow Jones Stock index. In addition, the caller-up carries its social responsibleness in a better and a distinguished manner.From the year 1927 the airline is operating its business successfully and conducts primary(prenominal)ly three trading operations provokealise of passengersandcargoAircraft maintenanceHandlingservices in airports some(prenominal) the airlines firms gather in had their share of success barely are now facing a mo of industrial occupations due to ecological niche and globalisation.Problems of the companiesThere utilize to be a time when British airways (BA) was give tongue to as the worlds favourite airline, as its banners conceitedly confirmed. o nly, taking the present scotch scenario BA is undergoing a number of problems in the industry. British airways are lock up struggling with the legacy of assign ownership even after it has been privatised for last twenty years. Even deferral has hard- soak up the airline industry and to overcome the buttones that British airlines had faced during recession it had settled to cut down on its apostrophize by reduce cabin crew and by discouraging an increase in the salary. However this acted as a catalyst in the industrial disputes and the effect of which is gloss over very more than felt in the daily business of BA there have been a number of deadlocks and strikes within the airlines which have left hand passengers to decide on for other airlines.(ECONOMIST, 2009). referable to economical crisis business approach path from North Ameri nates r bulge outes was hard-hit due to a fall in the business-class drop dead. However, this could be recovered with the recovery of Ame ri apprize economy as well as reviving the long-haul travel which makes a major part of BA profits. oneness of BAs major problems is Pension Deficit. BA has also been facing tough competitor from low-cost airlines that have been providing customers with cheaper fares on short-haul travel.So, the only cure to overcome much(prenominal) losses is seen in creating or teaming up with a low cost partner. (ECONOMIST, 2009)Iberian airlines have been suffering from lower air cost travel demand as well. It has reported a trouncing of 16.4 gazillion euro in the tierce quarter compared to revenue of 30.4 million euro earned in the before quarter. The standard fares of this airline have declined by 14% and even the lodge factor i.e. how filled the air-crafts are, declined to as much as 1.1% points to 82.1%. To cope up with the credit crunch it has decided to freeze the wages for 2010 and 2011 thus enhancing yearbook savings up to 37 million euro by 2011. It also plans to constitute ton ic airline to cater to the needs of the traffic of Madrid Hub. (MENAFN, 2009)British airways decided to join hands with Iberian airlines as a result of credit crunch. By coming together they would come in the confederacy of spacious European airlines. The nuclear fusion with the Spain based airlines was looked upon as an appealing work a year ago. However, taking the present state of affairs it seems to be worth a joint rescue process. This is so because twain of their airlines economies are dumb under the influence of pecuniary crisis struggling with be high school than the income.Iberia is stock-still non moved by Mr. Willie Walshs, chief executive of BA, disagreements with the union. It still holds optimistic view towards BAs major problem of Pension Deficit. However if we consider the articles or the memorandum of the optical fusion which was signed in November 09 between the 2 companies, Iberia has the right to call of the contract if BA is unable to meet up to t he requirements of the trustees concerning the two pension funds. As recalculated on December 14th 09 by the trustees, the shortage of the two funds was declared to be at 3.7 billion, based on March 31st 09 valuation. Presently BA is putting in cash worth 131m a year. The Pension Regulator is helping to decide whether the valuation performed by the trustees is right or not and what further actions are required to overcome the credit crunch. In this context, Iberian airlines produce that it can decide to call of the stack if BA lands up paying more than cash. (ECONOMIST, 2009)Airlines fusions and skills are based upon strategies which involves several conditions. Airlines MA is beneficial for both travellers and airline employees. The issues which are considered while aviation MA are time, approvals, efficiency, rival, passenger benefits, and conflicts.Mergers and acquisition in airline industry is an emerging formulatement across the world. that such MA are extremely plot ted and several important factors are considered. Such important factors areThe country covered by the airlineThe services and image of the airlinePartnership of the airline with a rival group of airlines.Merger A strategic planThe BA and Iberia pact leave rear form a carrier of $25 billion, for instance. This be intimate makes a lot of sense and result cement the leading positions of the big three European network players. The fusion seems to take place when the airline sector is badly hit by the decrease in number of passengers and cargo traffic. Apart of that the merger became the need of the hour, British airways reported a 20% decline in revenues to 4.1 billion poses resulting in an operating loss of 111 million pounds in the six month period remnant at September 2009. According to psychoanalyst Tony Shepard at the British brokerage firm Charles Stanley, the fraternity is equally to report a 400 million pound loss for its full fiscal year ending in April 2010.Britis h airways important North American routes and business have been hard hit by the collapse in business-class travel. This could bounce back quickly with economic recovery in America and, provided that cost increases from environmental measures are not too onerous the long-haul travel on which BAs profitability depends should revive in time. tho, like all former national carriers in Europe, it is facing ruin competition on its short-haul flights from low-cost airlines. .On the other hand the merger is unimpeachably in need by Iberia also as the airlines faces hardships because airline sector in Spain is facing exceptionally difficult conditions amid the economic crisis and competition from fast rail. Iberian airlines financial position is quite weak as the conjunction had plunged into the red in the second quarter of 2009, recording a broad net loss of 72.8 million Euros. Afterwards the party declared its tertiary quarter results where it reported a loss of 16.4 million Euros (24.4 million dollars. Due to such extreme losses and no signs of recovery in the market, the merger was seen as a best strategic move by Iberia. The planned merger with Iberia, the Spanish airline, looked as if it would be a winning compounding a year ago when it was first mooted. Today it seems more like a mutual rescue operation. Both airlines national economies are still in the doldrums both firms are struggling with cost great than their revenues. It is also reasonably sanguine about BAs other big problem its enormous pension famine. But according to the merger memorandum signed, Iberia can call off the wedding if BA cannot reach a satisfactory agreement with the trustees of its two pension funds. As on 9th November 2009 there was an substantiating declaration that both of them (British airways and Iberian airlines) reached an initial agreement for a merger which is planned to be completed by late 2010.As per the market this merger, which will need the European Commissio ns seal of approval, will lead to the creation of the worlds third biggest airline. The deal would see the new company beingness split with Iberia being allocated a 45% stake and BA the remaining 55%. The new business would have 419 aircraft and over 200 destinations. In their last financial years, their joint revenues are almost 15 billion. The airlines believe there is a compelling strategic rationale for the transaction, which is expected to generate annual synergies of approximately 400 million, and benefit both companies shareholders, customers and employees. The new group will accept the two companies leading positions in the UK and Spain and enhance their strong presence in the international long haul markets, while retaining the individual brands and electric current operations of each airline. In July 2008 there was news show of pair being in talks for an all-share merger. But, because of issues such as the balance of control and the size of BAs pension-fund deficit th e discussions were put at a stop.Market situationAs per the current market scenario passenger traffic appears to have stabilized, and airlines have been able to incline their workforces that the industry is in crisis, pushing through some labour concessions and cut back capacity. BA is making genuine progress in lowering costs, says analyst Nick Cunningham of Evolution Securities. As per the British airways ongoing activities it seems the situation of the company has started improving after announcement of the merger, the company has recapitalized following a cashable bond offering over the summer last year and now has a cash balance of 1.5 billion pounds. In addition the company has seen an increase in long haul flights which is one of the major areas where airline companies make most of the profit. But still after all the positive convinces British airways still face a number of issues related to their workforce.Competitors in the market have a very mixed reaction towards the merger of both the airline. Virgin Atlantic which as per the market view faces the biggest competition from this merger its official said in a statement that the merger will increase BAs dominance at Heathrow with 44% of takeoff and arrive slots this winter, and added its impossible for any other airline to replicate their musical scale. Other airline companies have the view that the deal could very help them win business. Michael OLeary, chief operating officer of discount Irish carrier Ryanair, told CNBC that the deal was like two drunks property each other up on the way home. All you get when you put two high-fare, loss-making airlines together is even higher fares and even larger losses. Mr. Leary operates a regional carrier and doesnt fight on long-haul flights against carriers like BA. though these statement can be said as speculation in one sense as the true effect of this merger is still to be seen. But as per in a public announcement by BA chief executive Willie Walsh The merger will realize a strong European airline well able to compete in the 21st century. The deal would create Europes second biggest airline by stock market capitalisation, and third biggest by income, with around 60 million passengers per year, As per market experts. The Times quoted various news on disparate dates regarding job cuts which were likely at existing head offices in London and Madrid, in maintenance facilities and the merged sales forces. In review of news Mr. Walsh will be chief executive, and Iberia airlines electric chair Mr. Antonio Vazquez will be chairman of the new company to be based in London and listed on the London Stock Exchange.MR.Vazquez hailed the agreement, saying they were laying the foundations of what will be one of the most important airlines in the world, a real global airline.It is said that if the merger results fruitful and the economy begins its recovery in 2010 or maybe 2011 then it will be a major boost to both of them. One thing can be predicted that If the deal gets successfully put to death the customers are going to have a wide variety of destinations as BA customers would gain access to up to 59 new destinations, of which 13 will be in Latin America, while Iberias customers would gain up to 98 new destinations across the BA network. In addition to it the effectuate of merger will result in featured stock market capitalisation of some 4.9 billion Euros (4.3 billion pounds, 7.2 billion dollars).Ways to deal with problemsBritish Airways, the UK flag-carrier pension deficit was revealed and it was found that the deficit was more than image amounting to 3.7 billion pounds at the end of March, which was higher than analysts expected but it is not a bug enough to be a reason for ending up of the merger with Spanish airline Iberia. As told to Reuters by a source in Iberia airlines Were not surprised by this radiation pattern. It falls within the expected range, As it is already implied before, BAs pension defi cit is the crucial area in the negotiation of merger and Iberia has the right to pull of the merger if the honorarium of this deficit turns to be too big. Moreover, there are chances that the deficit figure could arise till the time the valuation process is completed in next year in June because as per Britains Pensions Regulator the assumption which is used to calculate the deficit are too optimistic. In view of this BA said in a statement The regulators provisional view is that the practiced provisions may be materially below a take aim it feels appropriate,As per the problem the British airways management is trying to figure out different ways to solve the problem. As per in one of the announcements BA said that the company and the pension trustees will work together to develop a recovery plan, a process through which the company will consult its employees and their trade unions and will try to take out a decision from it by the end of June 30, 2010. The strategy which is empl oyed now is to change the nature of any pensions deal BA can strike with its staff and calculating the proportion of gap which can be covered by the company. As said by Deutsche Bank The Company may be forced to renegotiate pension benefits with employees if it is to avoid using more shareholders cash,Merger Theory PracticeThe reality that only 20 per cent of the acquisitions actually succeed and the rest erodes shareholder wealth (Grubb and Lamb, 2000) can highly contradict with examples of successful takeovers like Swiss by Lufthansa in 2005.Talking about mergers, they create shareholder value with most of it accruing to the resultant company. One of the important reasons behind merging a company is that it helps in increasing shareholders value much above the sum total of the two companies.(Watson and Head,2007)The optimistic impact of mergers extends to and involves economies of scale or synergies, helps to gain power in the markets by creating monopolies, manages agency cost s and manages put on the line for undiversified managers ( Gregor Anrade, Mark Mitchell, Erik Stafford, 2001).Mergers create synergies, reduce operational costs and enhance market share. On the other hand it results in the propagation of agency problems as the managers can cause mergers for their own benefit. It also results in decentralisation of power that reduces responsibility and accountability. Merger which can be defined as when two (or possibly more) business combine. In other oral communication one can say that merger is defined as a situation when two companies/firms decide by mutual agreement to combine the businesses. The term takeover holds a different meaning in likeness to merger. It means when a larger business takes over control of a smaller business and the smaller business gets immersed by the larger business. But in todays era it is not cleared that whether the business has been merged or it has been taken over.According to the relationship between the busin esses being merged, mergers and takeovers can be divided into three parts and they are Horizontal merger occurs when two businesses in the similar industry, and at theSame point in the yield process decides to combine.Vertical merger occurs when two businesses in the similar industry, but at differentpoints in the said(prenominal) production process decide to combine.Conglomerate merger occurs when two businesses in unrelated industries decideto combine.As it can be implied from the academic studies supporting the article the merger between British airways and Iberia airlines is Horizontal type of merger as both the companies are from the airlines sector leading to same production process and they have got high presence at international level.According to research, the last few years werent an acceptable period for the air line industry as a result of rapidly increasing fuel costs and due to economic downturn. Airline mergers and acquisitions have clustered and most of the airline bosses exclaimed consolidation is inescapable. The bighearted examples of merger and acquisition in the industry are Air France KLM in 2003, Swiss- Lufthansa in 2005, US Airways-America West in 2005 and Delta- Northwest in 2008. The Europeans lead the way in establishing mega-carriers. By revenue Air France-KLM is the world attractor with $34 billion, followed by the Lufthansa Group at $30 billion. (The Mating Game.Airline Business, 02687615, Jan2009, Vol. 25, Issue 1). At the same time, US Airways and America West merger drained their expenses by over $250 million a year and created a company better able to weather $100-a-barrel oil. USAirways, the nations fifth-largest carrierearned $427 million on revenue of $11.7 billion. (A Cautionary Tale for Airline Mergers, Palmeri, Christopher, Business hebdomad 3/17/2008)Therefore it can be determined that mergers and acquisitions had sustained airline industry during the economic downturn achieving significant synergies and economies o f scale.Although the mergers and acquisitions prevented air lines from liquidation, adverse impacts can also be emphasized. Even US Airways exists bankruptcy the expanded company still face the internal struggle of affiliating two separate airlines. The main obstacles are employee dissatisfaction and customer complaints (A Cautionary Tale for Airline Mergers, Palmeri, Christopher, Business Week 3/17/2008 )However the worlds airlines are forming themselves into huge alliances. Does this matter? Yes the risk is that the airline industry is moving from one extreme and its time to fear about the competition.ConclusionAccording to our studies and research it can be seen the airline industry has been hit by the economic downturn. They struggled with the cost hikes higher than their incomes. Both the airlines have been faced by the problems of industrialization and globalization, the competition of other airlines such as low cost airlines and rail services like Euro Star. well-nigh of th e airlines restructured and merged and gave them a competition as well.Pension black heap is one of the main current problems occurring in the British airways and some of the analysts say that they need more time to recover from the deficit than their estimated time of 2016.(in practice)Longer time is required for the closure of the deficit according to some analysts. But in the situations of cash in hock the company can consider making non-cash contributions such as non-monetary incentives instead of cash. If the company utilizes its assets for pension funds it might cripple the company with the same forces reducing its net worth. The impeccable size of the deficit is not known by the BA and at the same time they have released before announcing the recovery plan the size of the deficit effectively.However, airline and trustees are now working together to develop a recovery plan to negotiate with employees and trade unions. Unless and until BA manages come up with a solution to de termine the pension deficit the merger will remain unsettled.