11

Mergers and Acquisitions in the

Airline Industry

Introduction

Airline industry mergers happen in line with changes in the dynamic

economic conditions of the aviation industry. The nature of international
aviation has changed dramatically as international markets have been
gradually deregulated. Mergers are considered to be an efficient response
to deregulation. Deregulation of the airline industry has also led to the rise
of low-cost airlines. The airline industry is a cyclical industry. Airline merg-
ers take place basically for financial survival and to reduce overcapacity.
The airline industry is historically a low profit margin industry that is
very sensitive to the global economy. The airline industry as a whole has
made cumulative losses in its 120 years of existence. More than 100 air-
lines have filed for bankruptcy since 1979. The profits in the good years
are generally low, in the range of 2 to 3 percent, while in times of reces-
sion profitability is severely affected. Airline mergers also take place for
market accessibility and profitability. Hampered by overcapacity, price
competition and economic recession, several top airline carriers, particu-
larly in the US, filed for bankruptcy protection early in the past decade.
There are basically two types of models in the industry. The classical
network carriers have a complex hub-and-spoke network (large airports
with connections with many destinations), while the low-cost carriers
only have a point-to-point network (from airport to airport and no
transfers). These airlines are basically smaller companies and focus on
specific profitable routes. Major examples of network carriers are British
Airways (UK), Lufthansa (GER) and Air France-KLM etc. Southwest
Airlines is the pioneer among the low-cost airlines. The low-cost carriers
have been successful in capturing market share from the network car-
riers. A trend observed is that classical network carriers have acquired

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B. R. Kumar, Mega Mergers and Acquisitions

© B. Rajesh Kumar 2012
 Mergers and Acquisitions in the Airline Industry 227

low-cost carriers in order to adapt the low-cost business model. So

Lufthansa has an investment stake in US low-cost carrier JetBlue Airways.
Another example is Air France KLM acquiring low-cost airline VLM for
short-haul routes to London.
One of the strategic motives for M&As is to gain market power on a par-
ticular hub and spoke that could become a profit driver. Domestic airline
mergers are considered as a means to create significant domestic route
networks and cut costs. Global airline mergers could result in matching
international routes with domestic route networks and creating a global
hub and spoke system that can lead to lowering the cost of providing
international flight services.
The merger of two overlapping networks has immense potential for
anti-competitive effects, especially on overlapping non-stop (hub–hub)
routes and overlapping connecting routes.
Strategic alliances have also emerged as an alternative to mergers and
acquisitions in the industry. Bilateral airline partnerships and strategic
alliances have been able to overcome regulatory restrictions to some
extent. Three major alliances—Star Alliance, Oneworld and SkyTeam—
represent 70 percent of international scheduled traffic, according to IATA
Report 2010.

Mega mergers in the airline industry

The Delta Airlines/Northwest Airlines merger

In 2008, Delta Airlines and Northwest Airlines merged to create the
world’s largest airline, named Delta Airlines at the time of the merger.
Prior to the merger, Delta was the world’s third largest carrier and
Northwest the fifth largest, but the combined company was bigger than
American Airlines, the previous largest carrier. The new global giant had
more than 800 jets, 6400 daily flights and nearly $32 billion in annual
revenue. The combined airlines were valued at $17.7 billion. Northwest
shareholders received 1.25 new Delta shares for each Northwest share.
The deal combined two big airlines with complementary routes, espe-
cially in the Northeast, South and West of the US. Delta customers ben-
efitted from Northwest’s greater service to Asian markets. Northwest’s
customers benefitted from Delta’s strengths across the Caribbean, Latin
America, Europe, the Middle East and Africa. Delta and Northwest’s com-
plementary networks and common membership in the Sky Team helped
the integration of the merger. The merger created a global US carrier that
could compete with foreign airlines. The merger led to more destina-
tions being available for customers.