Question

Instructions:

1- The answer to this question must not

exceed 2 standard pages in Ariel font 12pt

2- Marks will be awarded for format of answers with a logical flow of arguments and points, one mark for each valid point or argument correctly articulated will be awarded

3- Resources used should always be referenced but your ideas and communication of those ideas in line with previous and current course material is most essential

Question :

In the context of growth through mergers and acquisitions in the airline industry; discuss, with the support of actual examples that have occurred since 2003, the implications and impact on those airlines’ financial position and operations during the periods prior to, during and after such transactions – your response should be considered in the context of the airline industry and global economy.

Answer 1

The Airlines Industry is a historically low profit margin industry that also affects global economy financially.The profits in the good years are generally very low usually in the range of 2-3%,while in recession periods situation became worse.Since 1979,more than 100 airlines industry have been filed for bankruptcy cases.So airlines mergers are generally considered as a weapon for financial survival as well as for controlling deregulation in international market and for reducing overcapacity.

In between 2007-2008,Aviation industry witnessed major restructuring-Jet airways acquires Air Sahara at Rs.1,450 crores,Kingfisher acquires 49% stake in Deccan Aviation at Rs.550 crores.Also one of the important merger in aviation industry took place that was the merger of Indian Airlines and Air India.The main objectives behind these restructuring was to increase the market power so that better deals with suppliers can be negotiated,to improve performance,profit,revenue,to achieve cost cutting targets and to acquire market growth etc.

For example if we discuss Kingfisher-Air Deccan merger:-

Air Deccan was known for it's low cost carrying service but when Kingfisher established in 2003 and started it's operation in 2005,Indian Aviation sector faced overcrowding issue and severe competition resulting into heavy loss in the industry.In 2007 after announcing the merger of Kingfisher and Air-Deccan the merger became effective on 2008.

The expectation from this merger was that Kingfisher will focus on international routes as full service carrier whereas Air Deccan will provide domestic reach to the passengers at cheaper cost.The motive was to reduce the overall functional cost including maintenance cost and thereby achieving maximum operational Synergies.

However combining the low cost carrier with high star rated carrier became extremely difficult,also the large network and diverse operations became difficult to maintain,at the same time the duplication of band was proved to be damage to the reputation of Kingfisher.So in 2011 Kingfisher announced to call off it's low cost operations.comparing to pre and post merger net profits of the group we can find that in 2011-12 net loss became 2328.01 crores and current ratio became 0.19 while in 2007-08 that was 188.14 crores and 0.97 respectively.However average fleet size increases from 41 to 66 and passengers numbers also increased significantly.

so not only the financial benefit but also estimating the operational challenges,inefficiencies or administrative problem, over-payment problem also contribute for the successful merger in the long run.

on the other hand there can be example of successful merger like United Airlines and Continental Airlines where Prior to the merger, United Airlines was rated as having the worst customer satisfaction among US airlines, while Continental Airlines was rated as second best. The quality dissatisfaction was related to ground services, such as check-ins, the boarding processes, and baggage handling.In the first three years of post‐merger United Airlines observed an increase in customer satisfaction, and thus leads to an improvement in the level of service quality.

Thus apart from thinking about only financial growth maintaining customer's satisfaction and quality of service play equal role for a successful merger.

This is good also for global context.