Merger Between British Airways And Iberia

British Airways plc, widely recognised as the largest airline of the United Kingdom, has very recently signed an agreement with the Spanish airline, Iberia, for the merger of the two organisations. The merger agreement, when complete, will result in the formation of the world’s sixth largest airline, in terms of revenues. In Europe the merged airline will rank third in the pecking order, behind Air France-KLM and Lufthansa. The new company, valued at USD 7.5 billion, will be known as the International Airlines Group, even as both the Iberia and BA brands will continue to function as they have done till now.

Mergers and acquisitions commonly occur when it is felt that the existing synergies between two organisations can enable them to work with greater efficiencies if they act together, than what they can achieve if they operate on their own. Such synergies can arise from a number of reasons, the more important of which arise from the combined ability of the merging organisations to exploit scale economies, reduce work duplication, share managerial, technological, and knowledge resources, and raise greater amounts of funds. Mergers are also motivated by the desire of firms to retain or increase market share or power. Apart from such reasons, M & A activity occurs because of strategic objectives associated with diversification, exploitation of new markets, spreading of risks, and maximisation of value.

The merger of British Airways and Iberia is being driven by a number of such reasons. One of the most important factors behind the merger is the ability of the new organisation to provide customers with a much larger combined network. BA as of now operates 245 aircraft and flies to 149 destinations. Iberia on the other hand flies to 106 destinations with its fleet of 174 aircraft. The merged group will in future be able to operate 419 aircraft and fly to more than 200 destinations. With the two airlines having few overlapping routes, losses on account of post merger cannibalisation are expected to be low. Both BA and Iberia are also facing severe marketplace competition because of (a) the growth of low cost carriers like Ryan Air and Easy Jet, and (b) the consolidation of large European carriers like Air France-KLM and Lufthansa. The merger will help the two companies to compete far more effectively with domestic and international carriers.

Both the organisations have also been hit very badly by the ongoing recession and the sharp escalation in oil prices. BA made its biggest ever loss in 2009 and Iberia has also turned in miserable financial results. BA’s revenues have slid from 8753 million GBP to 7994 million GBP between 2008 and 2010, even as its earnings figures have crashed from profits of 883 million GBP to losses of 531 million GBP over the same period. Iberia’s losses, whilst lesser than those of BA, have also been very substantial; the company recorded pre-tax losses of 381 million GBP in 2009, compared to profits of 30 million GBP in 2008.

The merger will allow the companies to exploit significant cost and operational synergies. British Airways employs about 39,000 staff, even as Iberia’s workforce totals up to approximately 22,000 people. Their coming together will enable the combined organisation to reduce its manpower significantly and to consolidate its operations. It is estimated that existing cost synergies will enable the merging entities to save approximately 530 million USD every year. In fact cost synergies seem to be the major driving force behind the merger. With both companies trying to combat the current slump through various cost cutting measures in areas related to staff remuneration and on board food and refreshments, the merger will allow the two organisations to make much better use of cost synergies, reduce duplication, and trim surplus staff.

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One of the biggest hurdles to the development of successful mergers arises from areas related to leadership and strategic vision for the future. The much hyped merger between Daimler and Chrysler fell through mainly because of differences at the level of the top managements of the two companies. Mergers essentially involve the joint working of people and managements from different organisations. The effectiveness with which the managers and staff of the two merging organisations are able to work together often plays a key role in the success of the merged enterprise.

Leadership in merged organisations is often distributed in the ratio of ownership. In the present case, the ownership ratio of 55:45 in favour of BA would appear to indicate that BA is likely to have the predominant say in leadership matters. Media reports however indicate that both organisations have agreed to share leadership. Willy Walsh the CEO of BA is designated to be the Chief Executive of the merged company, even as the President’s position will be occupied by Antonio Romero, the current Chairman of Iberia. The two organisations have now been collaboratively working together for more than a decade and are expected to share similar world views and visions for the future. In any case announcements from both companies indicate that management will be joint and participative and that the managements of both BA and Iberia will contribute equally to formulation of strategic direction and operational management.

The organisational cultures of two merging firms also play key roles in the success of mergers. Whilst the organisational cultures of different business firms are essentially dissimilar and are reflected through features like symbols and totems, organisational communication processes, remuneration systems and hierarchical structures, they become operationally relevant in the way organisations work, as also in their approach towards issues like innovation, competition, expansion and aggression. Organisational cultures, in terms of Geertz Hofstede’s theory on national cultures, are also significantly influenced by the national cultures of the countries in which organisations are based.

Managers of organisations with dissimilar organisational cultures by and large find it difficult to function harmoniously in one merged entity. With BA and Iberia expected to have significantly different organisational cultures, the success of the merger will overly depend upon the ability of the leadership of the merged entity to develop a common organisational culture, which is unique and yet takes the best from the cultures of both organisations.

Question 2:

Important Post-Merger Issues for BA and Iberia

The merger of BA and Iberia is being driven by two key factors, namely (a) the achievement of greater market power and market share through the combined operations of the two organisations and (b) the exploitation of significant cost synergies in different operational areas.

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The achievement of greater market power and market share will not be difficult to achieve because of the complementarity between the operations of the two organisations and the fact that BA and Iberia have very few overlapping routes, (where the two organisations actively compete against each other). The revenues of the merged enterprise are thus not expected to suffer on account of cannibalisation, and future sales should reflect the combined effect of the efforts of the two firms. The deployment of a substantially larger fleet of aircraft and the availability of two operational hubs, one in the UK and another in Europe should provide the merged company with significantly greater operational flexibility and enable it to effectively counter the competitive advantage and infrastructural strengths of Air France-KLM and Lufthansa. UK customers will benefit from improved access to Iberia’s strong South American network, even as Latin American and Spanish travellers will be able to avail of BA’s extensive offerings to Asia and Europe. The customers will also benefit from cooperation between the Frequent Flyer programmes of the two airlines, availability of common passenger terminals, code sharing and the usage of their passenger lounges.

Whilst it is probable that the merged organisation will benefit significantly in areas of sales, customer loads, and market power, the position in areas of cost synergies is far more unclear. In the first place BA and Iberia expect to achieve cost savings of approximately 500 million USD per year, a figure that is far smaller than the combined losses incurred by the two companies during the last financial year. It is thus clear that the merged entity will have to achieve much more than the planned cost savings in order to climb out of their current financial difficulties.

The achievement of cost synergies will presumably arise in large measure in areas pertaining to staff expenses and will involve large scale termination of existing staff. BA has already carried out thousands of staff terminations and is facing the ire of an extremely volatile and dissatisfied workforce. Cabin crew strikes have paralysed its working more than once in recent months and it remains to be seen whether the two airlines will be able to achieve the indicated cost synergies. Iberia also has the option to withdraw from the merger if BA is unable to carry through its plans of reducing its pension deficit through greater employee contributions.

In any case, the achievements of greater market power, cost synergies and resulting competitive advantage is often dependent upon the actual success of a merger and in many cases the linear pre merger calculations that project rosy post merger results are often belied by actual happenings. Most important mergers between large organisations fail because of a few specific reasons like the absence of a good business fit, strong leadership differences and the failure of the leadership to build a composite organisational culture that bridges the cultural differences between the two organisations and draws for the best elements of both cultures.

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It is reasonable to assume that both organisations complement each other in terms of routes, destinations and customers and should be if things go well be able to achieve strong market benefits. The organisations have also worked in close co-operation with each other for a decade and are presumably familiar with each other’s working systems and methods. The actual test for the success of the merger will thus essentially emerge from inside the organisations and will concern the organisational cultures of the two companies and the ability of the senior management to create a lean and efficient business.

There is some scepticism and cynicism in the industry about the ability of these two huge organisations to respond to the challenges of a modern day environment. Michael O’Leary, the CEO of Ryan Air, the largest discount carrier of Europe compares the merger to two drunks leaning on each other. His recent comments in an interview are nothing short of castigatory: “If you put one high- fare, loss-making airline together with another high-fare, loss-making airline, you will get an airline with higher fares making much bigger losses.” It becomes clear from an examination of different perspectives on mergers and the facts of the present case that whilst the two airlines have created space for the exploitation of a number of market and operational opportunities to improve their market power, reduce their operational costs, and increase their competitive advantage, a number of challenges still lie ahead.

The management of the merged entity will in the first place have to effectively tackle apprehensive and insecure staff members and suspicious unions in order to arrive at cost effective solutions that will enable it to exploit merger synergies. Apart from handling the sensitive and difficult labour issue, the biggest challenge of the senior management of the group lies in using the tacit and implicit knowledge held by both sides into common organisational knowledge and thereafter use it for enhancement of competitive advantage.

Much of this transformation will depend upon the commitment of the senior management to the interests of both organisations and to their seriousness in bridging the likely divide between cultures of two organisations that are based in culturally dissimilar nations. Cultural divides among two merged organisations can best be removed through the encouragement of an inclusive and new organisational culture that contains the best of both cultures. Whilst the evolution of a new organisational culture is an essentially long term process, useful beginnings can be made by the showing of respect for the members of both BA and Iberia, greater and more transparent intra-organisational communication, and the formation of teams with members of both organisations for handling post merger activities. Such actions will help in the development of cooperation and collaboration between BA and Iberia employees, build organisational belonging and commitment and form the foundation for a close knit organisation committed to common objectives and shared visions.

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