A Study On British Airways And Iberia Management Essay

The learning point behind this assignment is to assess the financial consequences of the merger of British Airways and Iberia. In this activity I have studied the importance of Merger activities and how does the merger of BA & Iberia will benefit the stakeholders. In short words I have execute a strategic analysis of the merger plan between the two organisations with the help of various strategic tools and models.

2. Introduction:

2.1 Merger and Acquisition

In the contemporary world Merger and Acquisition is an inevitable tool for the organisations willing to expand and make a mark in the highly globalised market.

In the first half of 2007, there appeared no end in vision to the unprecedented global boom in Merger and Acquisition, it even outstripped the dot.com era of the late 90s. But things appeared rather difficult with the so-called ‘sub-prime credit crunch’ making credit availability scarce and expensive towards the end of 2007. There is no suspicion to the fact that at the multi-billion dollar deal end of the market, credit crunch did build a brick wall to the Merger & Acquisition activity for the financial buyers. There are still plenty of strategic investors looking to expand in spite of the doom and gloom of the credit market. Merger and acquisition will still be required to fill up the growth gaps that organic growth cannot fill.

[The European Consulting M&A Report 2008, Equiteq p12]

2.2 History of British Airways

British Airways was formed in 1974 by the merger of two British government owned airlines the BOAC (British Overseas Airways Corp.) and the BEA (British European Airways). BOAC operated long hauled international routes whereas; BEA operated Short hauled European routes. BA was floated on the London Stock Exchange (LSE) in 1987, when it acquired the competitor British Caledonian. In 1992 BA acquired Dan-Air. In the drive to make itself more competitive BA introduced the ‘oneworld’ alliance in the 1990’s. BA airways acquired 9% share in Iberia in March 2000 for £155m (Ptas 41 billion). Today, BA is the UK’s largest international airline flying to 148 destinations and fleet of 245 aircrafts in service.

[www.ba.com/history]

2.3 History of Iberia

Iberia was founded on June 28, 1927 by Horacio Echeberrieta. It was not only Spain’s first airline, but also the first to fly between Europe and South America (as of 1946), the first to establish a walk-on air shuttle service (between Madrid and Barcelona), and the first in Europe to offer an international frequent flyers customer loyalty programme (Iberia Plus).Today Iberia is an international transport group operating in around 100 airports. It is a member of one of the most important airline alliances, oneworld, and is renowned for its corporate social responsibility. Iberia is a Leader in Spain and in the Europe – Latin America market. It flies to more than 100 destinations all over the world. It has Europe’s most modern fleets.

[www.iberia.com/uk]

2.4 Research objectives

As the title of my Research and Analysis project suggests the main objective of research was to study the drivers and the financial and operational consequences of a merger between the renowned BA and Iberia.

Research Questions and Objectives:

Strategic analysis of the Merger decision

The first objective of this assignment was to analyse the strategic decision of merger. How did the Environmental Variables affect the decision of the merger and what are the strengths and weaknesses of the decision? What would be the effect of the culture of both the organisations on the decision? How would the resultant organisation benefit from the merger?

How will the decision fulfil the expectations and aspirations of the stakeholders?

Identify the stakeholders and analyse how will the merger affect them? What are the views of the stakeholders on the merger decision? How will the fears and resistance of the employees and other stakeholders resolved?

What were the Financial and Operational Consequences of the merger?

After the above questions were answered, I wanted to find out what will be the financial and operational consequences of the merger, to what extent will these organizations be successful to maintain and acquire their merger objectives. What will be the ultimate effect of the whole event on the resultant organisations constitution, its management and the financial report?

2.5 Research Approach/Methodology:

The Research was started with the collection of background information on Merger and Acquisition and the basic information on BA and Iberia. The main objective of this was to gain the understanding of the topic area and the acquaintance with the organizations in concern. After the general background information the preliminary research was conducted to outline the research methods to be used, and the sources for information to be collected. The research is mainly based on the qualitative and quantitative information collected from the secondary data sources like books, case study materials, annual reports, magazines, news paper articles and online search engines. The information gathered is analyzed using The Johnson, Scholes and Whittington (JSW) model of strategic management. It consists of three elements Analysis, Choice and Implementation as explained below:

The Strategic position/analysis

Strategic Choices Strategy into action (implementation).

[ACCA Paper P3 Business Analysis The Complete Text 2007/08 p10]

3. Literature Review

3.1 Merger and its types

“A merger is a complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity.”

[Corporate Finance Fundamentals by Ross, Westerfield & Jordan, Eighth Edition Chapter 25 p816]

Acquisition by merger results in a combination of assets and liabilities of the acquired and acquiring firms.

3.1.1 Advantages and Disadvantages of using a merger to acquire a firm:

Advantages

A primary advantage is that a merger is legally simple and does not cost as much as other forms of acquisition. The reason is that the firms simply agree to combine their entire operations.

Revenue Enhancement is one of the important reasons for an acquisition. The combined firm may generate greater revenues than two separate firms. Increased revenue come from marketing gains, strategic benefits and increase in the market share and reduced competition.

The driving force behind many mergers is the concept of synergy. The synergy of two like companies joining forces can often increase revenues drastically.

One of the other important reasons to merge is that a combined firm may operate more efficiently than two separate firms. Operational efficiency increases through economies of scale and complementary resources (missing ingredient of success).

All firms must invest in working capital and fixed assets to sustain an efficient level of operating activity. A merger may reduce the combined investment needed by the two firms.

Disadvantages

A primary disadvantage is that a merger must be approved by a vote of the shareholders of each firm. Obtaining necessary votes can be time-consuming and difficult.

Furthermore the cooperation of target firm’s existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained.

3.1.2 Types of merger

Mergers may be broadly classified in

Congeneric Merger

Congeneric merger occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship. Congeneric mergers are of two types (a) Horizontal merger: In this case both the companies are in the same stage of production and also in the same industry e.g., a car manufacturer merger with a car manufacturer (b) Vertical merger: Two companies selling different but related products in the same market e.g., a cone supplier merging with an ice cream maker.

Conglomerate.

A conglomerate is a combination of two companies engaged in entirely different businesses together into one overarching company.

There are two types of mergers that are distinguished by how the merger is financed.

Purchase mergers – As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument.

Consolidation mergers – With this merger, a brand new company is formed and both companies are bought and combined under the new entity.

4. Analysis

4.1 Strategic Analysis of the merger decision

The study of the Environmental Variables using the PESTEL and SWOT analysis was conducted at this stage of the research to evaluate the points for the merger of the BA and Iberia. The Analysis of these factors affecting the decision is detailed as follows:

4.1.1 PESTEL Analysis

Political Factors: One of the preconditions for the merger deal is getting appropriate confirmations from the UK and Spanish Civil Aviation Authorities as to the suitability of the UK and Spanish bodies and as to the implementation of the structure.

Economic Factors: Merger is expected to generate annual synergies of approximately €400 million. The new group will combine the leading positions of both the companies, attain EOS and substantially increase the market share, thus enhancing their presence in international longhaul markets.

Social Factors: Merger is expected to bring significant customer benefit. BA customers will gain access to 59 and Iberia customers will gain access to 98 new destinations with better frequencies, connections and reduced prices.

Technological Factors: BA customers will benefit from modern fleet of aircrafts of Iberia airlines.

Legal Factors: Merger cannot go ahead without appropriate antitrust and other regulations clearance. Iberia reserves the right to terminate the agreement if the outcome between BAand its pension trustees on the deficit is not satisfactory.

4.1.2 SWOT Analysis

Strengths

The new group will save some €400m annually by cutting overlapping routes, and by combining maintenance, office functions and business-class lounges.

The pair may also have more muscle when it comes to negotiations to buy new planes from Boeing and Airbus. 

The BA/Iberia merger will increase BA’s dominance at Heathrow with 44% of take-off and landing slots this winter. It is impossible for any other airline to replicate their scale.

There is a compelling strategic rationale for the transaction, which is expected to generate annual synergies of approximately 400 million Euros, and benefit both companies’ shareholders, customers and employees,”

Weaknesses

Iberia’s cabin crew have just finished one round of strikes and are promising more in a dispute over changes to their jobs. BA’s attempts to cut cabin crew and freeze pay could also result in strikes. Ground staff and pilots are equally willing to use industrial action to get their way.

The attempt to keep two separate brands alive, with separate corporate operations could eat into some of the advantages of the merger and even prove to be a potential diseconomy of scale.

Opportunities

This enhanced scale and ability to compete with other major airlines and will enable BA-Iberia to participate in future industry consolidation – opening the door for BA’s long-held ambition to forge a partnership with American Airlines.

The merger will create a strong European airline well able to compete in the 21st century.

Threats

The credit crunch has hammered ticket sales (especially of premium priced Business class tickets) and fuel has been expensive. The International Air Transport Association, an industry body, estimates that total losses for the world’s airlines this year will be some $11 billion.

4.2 Expectations and Aspirations of the Stakeholders of the organisations

“A stakeholder can be defined as someone who has an interest in the well-being of the organisation” ACCA course notes from Kaplan financial for Paper P3 Business Analysis

In this context, the stakeholders can be identified as the shareholders, managers, employees and suppliers of BA and Iberia and the customers, government, locality and society at large. Success in the strategic decisions can not be achieved without regard to the stakeholders.

Shareholders:

Shareholders are the owners of the organisations; it is the duty of the organisations to act in the best interest of its shareholders and to maximise their wealth. The benefits of the merger to the SH’s can be listed as follows:

The anticipated annual revenue of the combined group estimated to be 15 billion euros.

Expected cost saving of about 400 million euros a year.

The combined group will be the third largest airline.

Increased market share and dominance.

Suppliers:

The merger is set to create the third largest airline and hence bound to reduce the bargaining power of the suppliers.

Managers & employees:

Employees play a vital role in the success of the organisation. Thus the organisation has a duty towards its workforce. According to the recent updates merger is unlikely to bring any benefits to its staff, on the contrary both the organisations have ambitious plans to cut costs by way of redundancy and pay cuts. The unite union has asked for assurances to avoid compulsory redundancies.

Customers:

According to the sources, the customers of the combined grouped are said to benefit from;

Better frequencies

More connections

Competitive prices

Access to more VIP lounges

Enhance frequent flyer benefits

Government:

The government are interested in taxes from the revenue, higher the revenue more the tax. Furthermore it is interested in maintaining healthy competition and abiding of the antitrust law. The deal is expected to improve the future revenue and requires clearance from antitrust and other regulatory organisations, thus it is not threat to the governments interests.

Locality and society at large:

Locality and society expect the combined group to maintain and improve its CSR policies. The organisations are responsible to the surroundings and the environment in which they operate.

4.3 Financial Consequences

The graph reflects the loss making position on BA. There has been an increase in revenue for the year 2009 as compared to 2008. The loss thus can be attributed to the high operating expenses which increased to £9,212 million in 2009 from £7,880 million in 2008. However the Operating income increased just to £8,992 million in 2009 from £8,758 million in 2008.

Key Performance Indicators/Key Growth Indicators

The KPI’s and KGI’s can be used to compare the performance of the organisations. Kpi’s indicate the improvement in performance, while Kgi’s indicate the growth of the organisation.

The KPI in this scenario can be noted as:

Liquidity Ratio

The liquidity ratio shows the company’s ability to pay its debt. Hence higher the ratio better the performance of the organisation.

Earnings per Share (EPS)

The performance can be measured based on the return to the shareholders. The increase in EPS reflects the efficiency in performance

Number of passengers per year

The figures show that the number of passenger carried per year will substantially increase after the merger and thus making TopCo a leading airline in terms of passenger. This is reflected in the figures shown below.

Figure 1.1

Figure 1.2

5. Conclusion

Objective 1

The strategic analysis showed that the merger is bound to bring various benefits to the consolidated group. The merger will help the companies to reduce the costs and hence reduce the loss to a certain extent. The merger will increase the market share of TopCo and make it the third largest airline company given benefits to its customers and shareholders. There are certain weaknesses which can be overcome and the merger opens up various opportunities and synergies for the future growth.

Objective 2

The analysis shows that the shareholders and customers are bound to benefit from the merger decision. However, there is a considerable amount of risk of redundancies and pay cuts due to heavy cost cuts by both the organisations.

Objective 3

The financial analysis reflects the need to substantially reduce the operating costs. The merger plan is set to set to save 400 million euro a year from reduced costs. Hence the merger decision can be beneficial in driving the organisations through the economic crisis.