Running Head: TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY

Triple Merger: An Organizational Change Strategy Jeremy Paul Stephens Embry-Riddle Aeronautical University

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY Abstract This paper will examine the various strategic planning issues that must be confronted by organizational senior leadership brought on by organizational change, specifically in the context of a merger or acquisition. It will show how Frontier Airlines has successfully overcome these hurdles in the face of its recent triple merger with Republic Airways and Midwest Airlines.

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY

Triple Merger: An Organizational Change Strategy In todays fast paced business environment organizational change has moved from being a consideration in the back of a managers mind, to a topic of frequent discussion in the board room. Todays world is changing, and companies that do not change with it are bound to fail. Change has become so prevalent in business today, that strategic planners for todays firms must incorporate change management into their overall corporate strategy. Strategic Planning Strategic planning, also known as strategic management, is the process by which a firm develops, executes, manages, and evaluates the plan or process for achieving its goals. Firms today communicate their goals to their employees and customers through vision or mission statements, but defining the companys goals is only one step of the process. A company must develop a plan, or strategy, to achieve those goals. After the strategy has been developed, it must be implemented, overseen, and constantly evaluated for successes and shortfalls. At times it is necessary to change the strategy to fit the way the firm operates, or change the firms operations to fit the strategy (Carpenter & Sanders, 2009). There are two basic types of strategy in which firms engage: business strategy and corporate strategy. Business strategy refers to how a firm positions a particular brand, product, or business line to compete in a specific industry or market segment. Conglomerates and companies with multiple product lines compete in several industries at the same time. The companys plan for achieving its goals in the particular industry or market segment would be considered its business strategy (Carpenter & Sanders, 2009). A company is said to have a corporate strategy once it develops an overall strategy that guides multiple businesses to achieve the overall corporate objectives. Large companies that

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY compete in multiple industries and segments must develop a plan that achieves symmetry and value for its shareholders across its entire business portfolio. The difference between the two

types of strategies lies in whether or not the firm is competing in multiple industries or segments (Carpenter & Sanders, 2009). Organizational Change Organizational change is any variance made to an organizations operations, focus, structure, size, etc. The change can come from internal forces, such as restructuring by the corporate staff, a change in focus or product, from an external force, such as government regulation or laws, or various market or industry shifts. Todays business environment is rapidly changing. This change is being brought about by economic advancement in parts of the world, new and changing technology, the accumulation of knowledge, as well as the recent economic downturn (Department of Veterans Affairs, 2000). With todays dynamic business environment, it is safe to say that businesses must change with the environment. In order to stay profitable, or retain a competitive advantage, firms must realize what is changing in their particular market or segment, and develop a strategy to deal with that change. Whether a firm decides to remain in a particular market segment, or develop a new product, downsize, upsize, or merge with or acquire an existing firm, they are making a change to the organization. This change must be properly planned for, implemented, managed, and reviewed, and it must not be taken lightly (Lee, 2010). Because of these dynamic settings, it is evident that organizational change must in effect be married to a firms overall strategy, in order for the change to be successful. Todays strategic planners must either incorporate change into their strategies, or develop strategies that

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY allow for change within their framework. The most notable types of strategies that involve organizational change at their core are those of mergers and acquisitions. Mergers and Acquisitions

Mergers and acquisitions are often spoken of together because they imply the same basic concept; however, the two terms are different and not interchangeable. A merger of equals is the consolidation of two or more firms that are usually fairly equal in terms of size, market share, revenue, and influence. This is the most common type of merger. An acquisition, on the other hand, is the transfer of the ownership, or purchase of a firm, usually by a larger firm (Carpenter & Sanders, 2009). Acquisitions are usually made by the purchasing of a firms assets or stock, with the purchased firm retaining most of its independence and identity, and the firm becoming a subsidiary of the new owning firm (DePamphilis, 2010). When a firm engages in a merger or acquisition as a strategy, it is usually using the action as a vehicle to enter a new market, or expand its market share in a certain industry or segment. Mergers are often done to accomplish the expansion of market share, when it is realized that the two firms can be more profitable and control a greater market share together than they could hope to achieve separately. By the combination of assets, resources, and capital, they hope to achieve greater economies of scale, and thus realize greater profits in the industry. A firm will usually acquire another firm when the acquisition is a greater value adding strategy than that of starting a new venture from the ground up in the given industry. (Kalpic, 2008) Mergers and acquisitions bring with them a host of issues that affect the new firm which must be dealt with swiftly and decisively lest the action fail. Research has shown that nearly two thirds of mergers and acquisitions fail. The most cited reasons for failure include: corporate

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY

culture, integrations and restructuring, and communication (Fulmer, 1988; Harwood & Ashleigh, 2005). Acquisitions and mergers are highly complex tasks for any organization to undertake, and require vast amounts of time, energy, and capital that must be properly planned and executed in order for success to be achieved. Mergers and acquisitions have been on the rise in recent years, following a brief lull in this type of business activity between 2001 and 2003 (Kalpic, 2008). This recent trend upwards in mergers and acquisitions is very evident in the airline industry. The past few years have seen the following mergers and acquisitions: America West and U.S. Airways, Continental and United, Delta and Northwest, Southwest and Air Tran, and finally a different type of merger was recently completed by Republic Airways, Frontier Airlines, and Midwest Airlines. The Triple Merger Republic Airlines is a regional jet airline that is a wholly owned subsidiary of Republic Airway Holdings. Republic offers regional jet service through fixed-fee contracts and partnerships with major airline carriers such as American Airlines, Continental Airlines, Delta Airlines, Frontier Airlines, and US Airways. (Republic, 2010) Though Frontier was initially founded in Denver, CO, in 1946, its assets were purchased by a competitor in 1986. Frontier Airlines was reconstituted and launched again on July 5, 1994, with two Boeing 737s in service. Between 1994 and 2009, Frontier Airlines grew to a fleet of 59 Airbus aircraft, with service to over 50 destinations. In light of the economic downturn, Frontier Airlines was purchased out of bankruptcy in October 2009, by its regional partners, Republic Airlines, parent company Republic Airway Holdings (Frontier Airlines, 2010). Republic had also recently bought another carrier in July 2009, Midwest Airlines.

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY Midwest Airlines was originally founded in Milwaukee, WI, in 1948, as an executive carrier exclusively for the Kimberly-Clark Corporation. In 1969, a new corporation was developed out of the carrier, named K - C Aviation, catering to corporate customers. Following

Airline Deregulation in 1984, K C Aviation was spun off into Midwest Express, and eventually changed its name to Midwest Airlines in 2003. Midwest faced financial problems following the industry wide downturn caused by 9/11, which were exacerbated again by high fuel prices and the recent recession. After a series of transactions, Midwest was purchased by Republic Airway Holdings in July 2009 (Daykin, 2009). When Republic initially acquired Midwest, the initial intention was to operate Midwest as a wholly owned subsidiary of Republic, much like its current regional carriers, Republic Airlines, Chautauqua Airlines, and Shuttle Express (Daykin, 2009). However when it bought Frontier Airlines it soon became apparent to CEO Brian Bedford, that maintaining two brands is just not cost-effective for us. After extensive employee and customer research, Republic decided to merge the two airlines under the brand of Frontier Airlines. The choice to use the Frontier name was made largely due to Frontiers brand image and larger customer base, which was four times that of Midwest (Midwest, 2010; Republic 2010; Compart, 2010). Mr. Bedford has referred to these transactions as a triple merger of Republic, Midwest and Frontier (Lambert, 2010). In reality, this action was two separate acquisitions and a subsequent merger of the two acquired firms. Although the executive levels and duplicated staff as well as administrative and back-office positions were all subsequently merged into that of Republic Airways, Midwest and Frontier are now Frontier Airlines, a wholly owned subsidiary of Republic Airway Holdings (Daykin, 2009; Republic Airways, 2010).

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY Strategic Reasoning On the surface, it may seem like a blunder strategically for an organization that only operates in the fixed-fee regional commuter segment of the airline industry to enter the highly

volatile and competitive commercial segment. Even more disturbing to analysts, was Republics choice of entry vehicle into the market, the purchase of two airlines out of bankruptcy. This move opened Republic to further risk, not just in its original regional market, but also in the traditional airline market. Due to this, analysts predicted slow growth and a loss of profit for Republic (OMalley, 2010). Another cause for concern was that the purchase and operation of a traditional airline was not in keeping with Republics core competencies. This was the rationale that Republic used when it had the opportunity to purchase US Airways in 2005. The risk outside of its core competencies was too great (Ranson, 2009). The purchase of Midwest and eventually Frontier was slightly different. Over the last several years Republic had partnered with Midwest and Frontier to handle a large portion of its regional flights. Republic had also been involved financially with the two airlines. Through the years, Republic lent money or financed several deals with both (Daykin, 2009; Ranson 2009). Due to the fact that both Frontier and Midwest had grown out of regional carriers, Republic was familiar with a large portion of both airlines operations. Republic did not view the acquisition of these airlines as drastic a departure from its core competencies as the US Airways venture would have been; but rather an expansion into the traditional airline market as well as its traditional regional market (Daykin, 2009). The strategic decision to enter a new market segment was made based on the fact that the outlook in the fixed-fee business was stable and profitable; however there was no room for

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY growth. Its long term contracts with American, Delta, United, US Airways and Continental Airlines, typically net Republic pre-tax profit margins around 7.5 to 8.5 percent. Due to major airline mergers and labor issues seen on the horizon, the outlook in the contract market was likely to shrink. Faced with these issues, Bedford noted that the risk of doing nothing . . . we thought from a shareholder perspective was not acceptable. Despite the analysts predictions, Republic actually posted a profit for the second quarter of 2010 (OMalley, 2010). As stated previously, mergers and acquisitions are very complex tasks for any firm to undertake. Once the initial purchase of an organization takes place, the complex and often confusing task of integration must be tackled. Shortly after announcing the merger of Frontier

and Midwest, Republic released a very aggressive and relatively short timeline for integration of the two brands. In a press release in April 2010, Republic announced that the integration would take roughly 12 to 18 months to complete (Frontier Airlines, 2010). Merging Corporate Cultures One of the most difficult tasks facing acquired and merging firms is that of the merging of corporate culture. Will the newly acquired firm take on the corporate culture of the new owners, or will it be able to retain its own? This idea of corporate culture and identity is likely one of the most difficult to navigate and requires special attention from the executives in order for the combined companies to develop synergy and begin functioning as one (Fulmer & Gilkey, 1988). In fact, Fulmer and Gilkey relate the entire process to that of blending families, complete with problem children like a stepchild. They further state that the management will have to deal with reactions from employees that fall into the following five themes: anxiety and uncertainty, helplessness and rejection, divided loyalties, withdrawal and avoidance, and conflicts over new values. These reactions can

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY

10

be dealt with, and a new corporate culture can be established as long as the new company deals with the problems faced by the firm. These feelings and reactions can be alleviated by dealing decisively with the following issues: defining new structures and systems, reducing or eliminating the power of outsiders, solving territorial battles, answering the question of who fits where, and dealing quickly with startup problems (Fulmer & Gilkey, 1988). The executives must be willing to draft and implement a comprehensive strategy that deals with each of these problem areas. This strategy must clearly deal with and communicate the desired results to the employees. If the mission and strategy of the change are properly communicated to the employees, and everyone is treated with respect, then these problems will be effectively dealt with (Fulmer & Gilkey, 1988). The major issue that Republic faced with the merging of Midwest and Frontier was the difference in their brand identities. These brand identities had filtered to into the cultures of both firms. Frontier was known as a low-cost carrier and Midwest had been previously known for catering to high end business travelers. Fortunately for Republic and their strategy to merge the two airlines, Midwest had ended the majority of its high-end perks and slashed fares in order to attempt to compete in the rapidly shrinking market following 9/11 and the recent recession (Midwest, 2010). Both airlines were known for outstanding customer service, as well as their excellent maintenance and safety records. The task of blending these two corporate cultures was not as difficult as it seemed on the surface. CEO Brian Bedford stated that "Combining two customerfocused, highly complementary brands is a singular opportunity to improve efficiencies throughout our Company while offering more value to our customers." (Republic Airways, 2010) This strategy included retaining the commitment to safety and customer satisfaction, as

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY well as adding a Class Plus program to high end business travelers that offered a few more perks, such as free bags and better seating, than the typical low-cost carrier does (OMalley, 2010).

11

Through its commitment to not only retain, but further develop the strong points of both airlines brand identities and the subsequent cultures, Republic was able to successfully merge the two airlines into one. The complementary nature of these two cultures was a key cornerstone of being able to blend them successfully and allow the new Frontier to find synergy and success. Republic also decided to honor the old Midwest Airlines by adopting its practice of serving fresh baked chocolate chip cookies on every flight, and to also paint one of the Frontier aircraft with a badger, to commemorate its Wisconsin roots (Compart, 2010). Corporate Integration With the merger announced and the branding decision already made, the most complex task of actual integration is what Republic needed to tackle next. Some of the complexity of integration is removed from this particular merger due to the fact that both airlines had similar operations with different hubs, and little overlap of locations. In the locations that both carriers had operated, the consolidation to one brand was rather simple. All that was required was to simply change the Midwest name to Frontier and continue operations. Instead of operating one counter under each brand, Frontier would operate two counters under one brand (Lambert, 2010). The integration of the general workforce, while seemingly complex, was actually rather simple. This was accomplished by maintaining all operations of both of the previously separate brands. Not only did Republic not reduce service, it actually added service to more destinations. Republic used the integration of the two brands general workforce to expand its service to customers. By taking this type of action, it was able to realize an annual growth of seven percent

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY in seat miles. This amount of growth is three times the industry average (Frontier Airlines, 2010). Republic was able to successfully navigate a cited reason for merger failures, by its chosen workforce integration strategy. It was able to sidestep the issue of potential layoffs

12

within the workforce by restoring previous routes and adding new ones, thus justifying a need for the entire combined workforce. Communication during a Merger Lack of communication being another reason for the failure of an acquisition or merger, it is vitally important that the lines of communication throughout the organization be open. Executives must clearly state the plan to achieve integration and what is expected of its workers. Not only should the plan and timeline be laid out, management must also ensure that the lines of communication are opened coming from the employees. Successful strategy and change in an organization must be constantly monitored for issues that may arise throughout the process. A pitfall in the integration process that Republic faced with the merger of Midwest and Frontier was that of differing pay scales and seniority lists. The workers at Frontier were forced to take a ten percent pay cut across the board, in order for the newly merged company to make a profit (Lambert, 2010; Schrader, 2010). Although it was communicated to the work force that it was a necessary step to take in order to make a profit, there was little communication as to when or how employees would begin to see a return to their normal rate of pay. This lack of communication directly led to a loss of trust between the workers and the executive staff (Lambert, 2010). Despite showing that lack of communication from the top - down is a major cause of failure, Harwood and Ashleigh (2005) neglected to show that communication from the bottom up is also equally important in this situation. In the case of Frontier, it had chosen to develop

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY what it refers to as cross-utilization agents for use in some of its smaller markets. Crossutilization agents are employees tasked with working multiple tasks that are usually separated

13

under different job titles and worked by separate employees. This new agent was responsible for tasks as varied as performing ticket counter duties, as well as ramp duties like baggage loading and aircraft appearance, all within the same shift. With the cross-utilization agent idea, communication from the workers to the executives was nonexistent, and it was simply assumed that this idea was working well (Lambert, 2010). The failure of the workers to give feedback, and the failure of the executives to monitor the initiative was quickly leading to an issue of mistrust due to the broken lines of communication. Having been confronted with the other stated changes in the organization due to the merger, such as pay cuts and workforce integration, these particular workers were beginning to feel that the executives really did not care how successful this initiative was. In addition, the broken lines of communication further added to workers frustrations in not being able to provide alternate methods for this idea to be implemented in order to make it more successful (Lambert, 2010). Fortunately for Republic, the perfect opportunity presented itself to see the merger in progress from the employees point of view. The CEO, Brian Bedford, participated in the CBS television show Undercover Boss. In this show, an executive from a company goes undercover disguised as an entry level worker. This allows the executive to perform some of the more menial jobs in the firm, as well as to connect with a handful of the employees on an equal level. Bedford specifically agreed to the opportunity specifically as a means to view the merger from the employees point of view, and to get their impressions and feelings on how the merger was proceeding (Lambert, 2010).

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY Through the course of his undercover assignment, Bedford was able to see that the

14

corporate culture was blending nicely, and the organizational integration had occurred smoothly. All of the employees he came in contact with enjoyed working for Frontier, and had adopted the desired corporate culture. He was also able to learn about a few of the issues that still needed to be dealt with in regards to the merger, namely the issues of the pay cuts, and the cross-utilization agents. Bedford has since charged an executive with developing a plan to better use the crossutilization agents, as well as vowed to restore the cut wages over the next three years (Lambert, 2010). Conclusion Republic was able to successfully merge Frontier and Midwest because it was able to navigate and appropriately deal with the three major causes of failure in mergers and acquisitions: merging corporate culture, restructuring and integration, and communication throughout the merger. Republics strategy for dealing with these issues paved the way for a successful merger. It was able to deal with its few missteps through an opportunity to communicate with the employees on a different level, an opportunity that the CEO was wise to accept. Republic laid out a detailed strategy for the merger and communicated it effectively to all parts of the organization. Despite the aggressive and short timeline, the company has met all deadlines set out in the merger timeline. The only tasks that remain are those of: Frontier uniforms, to be completed December 13, 2010; signage, to be completed July 1, 2011; consistent fleet interior and livery, to be completed December 31, 2011; stretch seating in its Embraer 170s, to be completed January 31, 2011; and the installation of wi-fi on its Embraer 170s & 190s, to begin December 31, 2010. The majority of these uncompleted tasks deal with the fleet inventory

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY and must be completed with scheduled downtime for the aircraft, thus some of the dates reflect ones outside of the announced 18 month timeline (Frontier Airlines, 2010). The success of the merger is further evidenced through the fact that it has seen a rise in profits, and increased market share at its two hubs. This success has not gone unnoticed by its competitors, as both of its chief rivals, Southwest and Air Tran, have stepped up their competition at Frontiers two hubs. It is entirely possible that the acquisition of Air Tran by Southwest is a strategic move to better compete with Frontier Airlines. This triple merger undertaken by Republic is an outstanding example on how a firm can successfully navigate the issues that it will face when it undertakes the complexity of strategic organizational change through mergers and acquisitions.

15

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY References Carpenter, M.A., & Sanders, W.G. (2009). Concepts and Cases: Strategic Management: A Dynamic Perspective. Upper Saddle River, NJ: Pearson Prentice Hall

16

Compart, Andrew. (2010, April 14). Republic Picks Frontier Brand Over Midwest, Establishes Integration Timeline. Aviation Daily. Section Low-Cost Carriers; 380 (10), 1. Daykin, Tom. (2009, June 23). Republic Airways to buy Midwest Airlines. Journal Sentinel Online. Retrieved December 5, 2010 from http://www.jsonline.com/business/48905032.html DePamphilis, Donald. (2010) Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, 5th edition, Elsevier Academic Press Department of Veterans Affairs. (2000, May) Organizational Change: Primer. Retrieved December 5, 2010 from http://www1.va.gov/hsrd/publications/internal/organizational_change_primer.pdf Frontier Airlines. (2009) Frontier Airlines Newsroom. Retrieved December 5, from http://media.frontierairlines.com/ Frontier Airlines. (2010) Timeline. Retrieved December 5, 2010 from http://www.frontiermidwest.com Frontier Airlines; Republic Airways Announces Branding Decision. (2010, May). Leisure & Travel Week,57. Fulmer, Robert M., & Gilkey, Roderick. (1988). Blending Corporate Families: Management And Organization Development in a Post Merger Environment. The Academy of Management Executive, 2(4), 275.

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY

17

Harwood, Ian., & Ashleigh, Melanie,. (2005). The impact of trust and confidentiality on strategic organizational change programmes: a case study of post-acquisition integration. Strategic Change, 14(2), 63-75. Kalpic, Brane. (2008). Why bigger is not always better: the strategic logic of value creation through M&As. The Journal of Business Strategy, 29(6), 4-13. Lambert, Stephen. (Producer) (2010, October 17). Frontier Airlines. Undercover Boss. New York, NY: Columbia Broadcasting System. Lee, Jay. (2010, February). Conceptual framework for integrating strategic planning systems and organizational changes. International Journal of Strategic Management, 10(1), 120127. Midwest nameplate will get lost on the Frontier: Onetime upscale carrier's name will be replaced with sister airline's. (2010, April 18). Orange County Register. O'Malley, Chris. (2010, October). Airline's big moves pay off. Indianapolis Business Journal, 31(31), 1. Ranson, Lori. (2010, May). Midwest fades into new Frontier. Airline Business, 26(5), 14. Ranson, Lori. (2009, August 19) INTERVIEW: Republic chief executive Bryan Bedford. Flightglobal. Retrieved December 5, 2010 from http://www.flightglobal.com/articles/2009/08/19/331221/interview-republic-chiefexecutive-bryan-bedford.html Republic Airways. (2010) Republic Airways. Retrieved December 5, 2010 from http://www.rjet.com/whoweare.html Republic Airways Holdings reports rise in load factor to 86% for July 2010. (2010, August). Airline Industry Information.

TRIPLE MERGER: AN ORGANIZATIONAL CHANGE STRATEGY Republic Airways Holdings; Republic Airways Announces Details of Brand Unification Plan for Frontier and Midwest Airlines. (2010, April). Telecommunications Business,27. Schrader, Ann. (2010, October 19). CEO vows to roll back Frontier staff's pay cut. Denver Post,p. B.9. Schrader, Ann. (2010, September 28). FRONTIER TO FEEL SQUEEZE AT ITS HUBS. Denver Post,p. B.5.

18