Mergers And Acquisitions Between Lufthansa And Swiss Management Essay

This document provides information of mergers and acquisitions between Lufthansa and Swiss and Lufthansa and Austrian Airlines. It will focuses on the single airlines Deutsche Lufthansa AG, Swiss International Airlines and Austrian Airlines and about overall collective bargaining in Germany. This paper will also introduce you into the complexity of mergers and acquisitions and why these actions are obligatory in the airline sector.

Key Words: Airline sector, mergers and acquisitions, collective bargaining.

Table of Contents

Abstract 2

Introduction to Lufthansa 5

Labor Relations and Bargaining in Germany 6

Main actors of labor relations at Lufthansa 7

Introduction to Swiss International Airlines 8

Introduction to Austrian Airlines 10

Merger and Acquisition 13

Introduction 13

Merger between Lufthansa and Swiss 14

Merger between Lufthansa and Austrian Airlines 16

Conclusion 18

References 19

Table of Figures

Figure 1 – Lufthansa Corporate Structure 5

Figure 2 – Management of Swiss 9

Figure 3 – Management Structure AUA 11

Figure 4 – Employees by divisions AUA 12

Introduction to Lufthansa

Deutsche Lufthansa AG was founded in the year 1926 and was re-established after the Second World War, in 1953 (T. Schulten, H. Seifert and S. Zagelmeyer, 2002). The airline is a worldwide operating aviation company. The corporation operates in five business sections the so called Lufthansa Group, each segment in this is known for its high quality standards. The Group includes the passenger airline business, logistics with Lufthansa Cargo, MRO with Lufthansa Technik, catering with LSG Skychefs and IT services with Lufthansa Systems. All business units play a major role in the industry in which the single segments operate. The whole Lufthansa Group has a total of more than 400 subsidiaries and associated companies. In the figure below is the Corporate Structure of Lufthansa provided. (Deutsche Lufthansa AG, 2010).

In the year 2009 Lufthansa attained total operating revenue of EUR 22.3 billion (Deutsche Lufthansa AG, 2010) and has transported 76.5 million passengers and 1.7 million tons of cargo (Annual Report 2009 of Deutsche Lufthansa AG). These numbers leads to the evidence that Lufthansa is the largest European airline by means of passenger number (Deutsche Lufthansa AG, 2010). Deutsche Lufthansa employed about 118,000 human resources at the end of the year 2009; within this number Lufthansa employs 14,400 personnel as cabin crew and 3.752 as pilots (Deutsche Lufthansa AG, 2010). Due to these high numbers of human resources, labor relations signify a big component of corporate strategy of Lufthansa.

Labor Relations and Bargaining in Germany

Collective bargaining in Germany applies primarily at industry level. Nevertheless, collective bargaining agreements are covering no more than the minimum conditions, but this can be modified at business level. Consequently, big company or highly beneficial companies can afford it to pay higher wages and in addition provide better working conditions, not such as small companies. In the 1960 s, in the second pay bargaining round which was conducted at company level, was regularly more significant than the collective bargaining which was conducted on industry level between trade unions and employers. At that time human resources was very rare, and companies were under compulsion to give incentives to the potential employees in context of offering high salary, but resulting in extensive wage-drift. These salaries were bargained by the works councils, not by the unions. At that point in time, the unions were worried that negotiating at company level would dent bargaining at industry level. As a result, the unions thought about to set up a so-called opening and authorizing clauses into the collective bargaining agreements with the intention of to reclaim their bargaining power which they had lost to the works councils at the company level. The idea to set up such clauses was rapidly discarded, because the unions feared

that they lose the collective bargaining power at industry level.

In the late 1980 s the decentralization of collective bargaining was once more a topic, even though at that time under totally diverse conditions. The matter at stake was no longer defense of wage-drift bargained at the company level by the works council or so, but to a certain extent, decreasing the employment conditions under the bare minimum standards offered, which was defined in industry level agreements, and delegation if certain bargaining topics to the company level.

In the late 1990 s, the trade unions suggested a national alliance for work, with the aim to replace control in pay bargaining for certain working policy promises from employers and the regulator. On the contrary to the decentralized level, an area that can be exploit by influential actors, predominantly by employers and works councils, a national level discussion for collective negotiations is absent in Germany and all try to put one place have failed (Bosch, G. 2004).

Main actors of labor relations at Lufthansa

These days, at Lufthansa there are three main actors present in the regarding labor relations. ver.di (Vereinigte Dienstleistungsgewerkschaft) is representing the interest of the ground staff and several employees of the flight attendants. While the rest of the remaining cabin crew belongs to the union UFO (the Unabh nglge Flugbegleiter Organisation ). The group of pilots is presented mainly by the union named Vereinigung Cockpit (VC) (Deutsche Lufthansa AG.2004).

Introduction to Swiss International Airlines

The flag carrier of Switzerland, Swiss International Airlines was formed in February 1975 as Crossair AG, from a Swissair DC-9 captain. The airline started with only three routes. Crossair s base was in the French territory at the Euro-Airport at Basel/Mulhouse. This exceptional bi- national location unchained Crossair from having to attain work allowance for its non-Swiss work force.

Then the DC-9 pilot for Swissair Suter maintained to fly for that airline. Suter was not flying for the company but he did a so called double duty at the new formed airline, including serving drinks and sandwiches. This in-flight service was soon established into hot meals services in the business class to provide Crossair s high amount of business class travelers which were 80% of the total amount of the airlines passengers (Fundinguniverse (n. a.).

Now a day, Swiss International Airlines offers 73 destinations in 39 different countries worldwide from their hub in Zurich and further international airport in Switzerland like Bsael and Geneva. The airline is operating a fleet with 85 aircraft. Swiss is committed to the sustainable and careful use of resources at various stages, and considers a responsible attitude to the environment as an essential part of the airlines corporate culture. As a part of the Lufthansa Group and at the same time a Star Alliance member, stands Swiss by its mission to connect Switzerland with Europe and the rest of the world Swiss International Airlines, (2010). Swiss International Airline also provides cargo services with Swiss Worldcargo, IT solutions with Swiss AviationSoftware, and education with Swiss AviationTraining. In the following figure you can see the management structure:

Figure 2 – Management of Swiss

Swiss International Airlines a total amount of employees of about 7,342; 1,13 1 are working as pilots; 3,276 are employed as flight attendants and 2,935 are ground staff. In the year 2009 Swiss international Airlines carried about 13.8 million passengers and has performed 136 thousand flights to transport this amount of passenger with an seat load factor of 80.1% (Swiss International Airlines 2010).

Introduction to Austrian Airlines

Austrian Airlines the flag carrier of Austria established the first regular international route on the 1st of April 1918, by serving the cities Vienna and Kiev. Originally, this flight between these cities was operated to transport mail freight. Then, Austrian Airlines, started to serve another route between Vienna and Budapest. On 14 May 1923, the first aircraft to be operated by LAG ( sterreichische Luftverkehrs AG) served the route from Vienna to Munich. LAG soon extended its operation to become the fourth-largest carrier in Europe. Following the occupation of Austria in the year 1938, LAG was forced to close down their operations. As Austria regained control over its airspace in 1955 with the signature of the State Treaty, two separate carriers were founded, Air Austria and Austrian Airways. None of the two carriers began operating flights at this stage. On 4 April 1957, the two airlines finally fused to form a single airline, with the name Austrian Airlines. On 30 September 1957, Austrian Airlines AG was founded, and the new company began to run scheduled services on 31 March 1958. In the figure below you can see the management structure (Austrian Airlines AG Annual Report 2008):

Figure 3 – Management Structure AUA

The Austrian Airlines Group continued to implement a series of further education and professional training measures for the employees for the duration of the financial year 2008. The training programs show the degree to which the airline values the people working for it. The specific measures demonstrated were the result of an employee survey, and represent a further step towards improving the overall employee satisfaction. The attractiveness of the Austrian Airlines Group as a company, confirmed by a prize granted in 2008 for its family-friendly employment policies, was emphasized by many hiring schemes.

The employee development shows that in 2008 the number of employees working for the Austrian Airline Group sank facing the previous year. In the 2008 the total amount of employee shows a number of 7,914 who are working with the Austrian Airline Group. 6,110 of this number is working directly for Austrian Airlines, the rest is working for Tyrolean Airways (1,634),

Technik Bratislava (76) and other Group employees (94) (Austrian Airlines AG Annual Report 2008). The figure below shows the employees separated in the different divisions:

Figure 4 – Employees by divisions AUA

The responsible parties at Austrian Airlines regarding labor relation implemented a two-year collective agreement completed in March 2007 stipulating a 3% wage increase, an economically feasible agreement was reached October 2008 in cooperation with union representatives and the Staff Council to raise the wages of all commercial-technical staff of the Austrian Airlines Group by a basic rate of EUR 10 per month and an additional 3.7%, valid for the next period of validity of the collective wage agreement. This collective agreement can be considered to be fair in the light of the high inflation rate which prevailed in the middle of the 2008 financial year. Relatively speaking, the basic monthly increase mainly benefits employees with lower wages. A collective agreement had already been concluded in August 2007 for cabin staff, Stipulating a 2.4% salary increase for the period April 2007 March 2008, and an additional 2.4% increase from April 2008 to March 2009 (Austrian Airlines AG Annual Report 2008)

Merger and Acquisition

Introduction

First of all it is important to explain the reasons why a merger between two airlines occurs. There are several points to discuss to answer this question. The reason why airlines merge is similar as in other business sections, to increase the competitive advantage to other businesses. Through mergers or acquisitions airlines are able to combine their assets, among others the most expensive assets are the aircraft, follows by the man power and also very important the traffic rights. The competitive advantage is the increasing connectivity, this leads to additional revenue.

All in all, it is an improvement for both airlines in operational efficiencies. Airlines or companies have to face some challenges, in case of an airline merger it must be considered, the different IT systems, different fleet types, labor integration issues and cultural discrepancy.

Mainly, there are two structural merger types; on the one hand is the so-called full operational integration model. In this integration model the airline A takes over everything including employees form airline B. On the other hand, there is the so-called no operational integration model, a holding company with operational entities (the double breasting model). In addition there is the so called fragmentation model, in this model airline A takes over just a part of airline B. In a short sentence, the transaction between two carriers concerning, assets only or the transaction between two carriers involving assets and people (Industry Council Meeting 2005).

Merger between Lufthansa and Swiss

In the year 2001, Swiss had suffered a huge financial dilemma, at that time the in earlier times named Swissair collapsed. The increase in low cost airlines in Europe was the major reason that Swiss numbers declined (McGowran, My Hue, 2005). In the case between the flag carrier of Switzerland and Lufthansa, had started a fragmented merger process in the harsh examination of the Competition Committee of the European Union and the United States of America before starting the buy-out system. The acquisition was permitted behind the parties assurance to keep hold of the average airfares and / or improving the services. This drastic measure was to avoid a monopolistic position, higher prices or a decrease in service quality of the result from this merger, which would otherwise be negative for the passenger and particularly would have a negative impact for the airline sector at all. In view of the fact that the operations of carriers has an global impact on micro- and macro implications, the approval of starting the merging process did not exclusively come from either Lufthansa and Swiss nor their shareholders and the governments but also the regional and international authorities of the airline sector including the keenly worried, enormous America.

The most important synergy resulting from the merger was without doubt the expansion of Lufthansa s network and access to new passengers. The former Swiss Air had as a minimum 37 medium- and long-haul flights and 75 short-haul flights with destinations in Europe, North Africa and the Middle East while Lufthansa had 330 destinations in 90 countries. In addition, as Lufthansa lags behind FedEx in the cargo business, the merger will provide the airline a improved reliability in its European customers. In conclusion, the acquisition by Lufthansa led to synergies that have a huge positive effect on Lufthansa s cash flows and market share in this industry. Lufthansa did not only receive through the occupation and selected markets the broader

air traffic of the former Swiss Air, but the firm gained also new opportunities to enlarge the services. There were some constraints and restricted access in the process but the internal issues of the former Swiss Air particularly the financial problems including Lufthansa s call for destructive penetration of the market had pushed trough. In consequence, the acquisition between these airlines had a superior effect on future income of the airline in spite of the merger shows the firms retaining their own individual brand names (Lufthansa and Swiss Air Merger 2008, July 23). After the approval by the EU European Commission on the 5th of July 2005, there were no hindrance for the purchase of Swiss International Air Lines, which costs Lufthansa about 310 million Euros (McGowran, My Hue, 2005).

Merger between Lufthansa and Austrian Airlines

The crisis of the international aviation industry in 2008 and the costs for restructuring measures left their impression on the earnings figures of the Austrian Airlines Group in the 2009 financial year. Austrian Airlines posted a net result for the time of EUR 325.9m, compared to EUR -429.5m in 2008. The business results include major unexpected non-cash items, for example losses on aircraft issues totaling EUR -78.8m, and reorganization provisions for the planned decrease in the number of employees, amounting to EUR -145.1m. The adjusted earnings before interest in 2009 was EUR -93.8m (2008: EUR -35.2m). Austrian Airlines posted an development in the second half of the year: the adjusted EBIT in the time July-December 2009 was EUR – 5.4m, up from the prior-year level of EUR -13.0m. “The results are anything but satisfactory”, says the Austrian A irlines Management Board members Andreas B ierwirth and Peter Malanik. “They clearly show that we still have a lot of work ahead of us. One can see that the measures being implemented began to have a positive impact in the second half of 2009. However, we cannot rest on our laurels, but must determinedly move ahead with our restructuring program in 2010” (Austrian Airlines AG 2008). The Austrian government’s holding company OeIAG then has hired Boston Consulting Group and Merrill Lynch to measure tactical options for Austrian Airlines, as the carrier’s losses are widening due to rising kerosene prices (Eturbonews 2008). Meanwhile, Lufthansa was quickly turned its focus on Austrian Airlines, by seeing this airline is making losses. The Austrian Government announced to sell the majority stake of the flag carrier AUA in the time October November 2008. AirFrance KLM showed also interest of taking over the share of AUA, but this airline decided to drop its bid. Lufthansa then was announced to as winner for purchasing the stake of AUA.

Mergers And Acquisitions Between Lufthansa And Swiss Management Essay

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