To Merge or Not To Merge?

We have heard endlessly about the Northwest-Delta merger and the Continental-United proposed merger, from which Continental walked away. This has become more topical given Microsoft and Yahoo acquisition games. We know cost cutting, synergies, efficiencies and scale to be primary reasons for a merger. So, it would follow that when the above mentioned factors are not in play, a merger is not a good idea. But is that why Continental walked away from a merger with United?

These are the typical factors that are considered in an airlines merger.

Scale: The Continental-United Merger would have created the world’s top ten carriers, even though, these airlines are separately part of that list, which is measured in annual RPKs (revenue passenger kilometers, (in millions)

1. American (224)
2. Air France/KLM (197)
3. United (189)
4. Delta (159) *
5. Continental (127)
6. Northwest (117) *
7. British Airways (115)
8. Lufthansa (110)
9. Southwest (109)
10. Japan Airlines (96)

* Delta and Northwest have since merged creating the world's biggest airline.

Complementary Routes: Continental’s presence in Europe, Asia and the Middle East would have complemented United’s presence in Asia and Australia.

Aircraft Integration: Continental operates an all-Boeing family of 737s, 757s, 767s and 777s. United, too, flies each of these. The only additions would be United's Airbus A320 and Boeing 747 fleets.

Employee Assimilation: The employees of both airlines will have to be integrated and this has historically been painful with seniority lists and benefits having to be restructured. So, this might have been a reason for pause in the otherwise media created foregone conclusion.

But the Continental Chief Executive and President wrote to their employee was that they decided to pursue the alternative route of forging alliances instead of merging operationally with another company. From what we know, one reason to walk away from the merger was to not put Continental at risk, financially and operationally even though Kellner would have been slated to run the combined entity.

The lesson here is that sometimes, a merger does not make sense despite the industry wide call to do so. This is especially true if one of the companies is profitable and well run and the other one is not. An alliance is probably going to give Continental all that it would have gotten from a merger with United but without the integration hassle and a hefty price tag. A merger is not good if it is not good for the shareholders and it is not a good option when it is not good for the employees of either companies, sans the regular attrition such events suffer.

But alliance or not, merger or not, this hardly would have been game changing in this very mismanaged industry. As we go forward in this globalized world, travel is only going to increase both for business and leisure.

So, what can the airlines do to save themselves?
-Understand the key drivers of profitability
-Develop businesses so that key drivers remain key both in strategy and execution
-Take preemptive action to keep those drivers protected
-Understand the consumers’ unspoken requirements
-Redesign processes to maximize the value captured across the chain