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Mergers: When Too Big Is Really Too Big  
User currently offlineTavong From Colombia, joined Jul 2001, 835 posts, RR: 4
Posted (4 years 11 months 1 week 6 days 4 hours ago) and read 7819 times:

First of all excuse me for the poor grammar on the topic. But my question is the following.

At this times we see that airlines are in fusion progress (DL/NW), or already have fusioned (AA/TWA), looking for someone to fusion themselves (CO?, UA?, SWA?) and this trend keeps comming al over the world (AF/KLM, IB/BA?).

My question on this is...when is really too big. i mean it's possible for an airline become that big that in itself it becomes unsustainable? I know my question does not have much "capitalistic sense.", since when a business grows into a monopoly it technicalle becomes self-sutained. Bue i'm thinking in an airline, where they have a lot of expenses, labor, planes, fuel etc. Could be possible that an airlines becomes vicitim of their own success and becomes unsustainable from a economical point of view?

Please share your tougths.

Gus
SKBO


Colombian coffee, the best...take a cup and you will see how delicious it is.
30 replies: All unread, showing first 25:
 
User currently offlineFlyby519 From United States of America, joined Jul 2007, 1128 posts, RR: 0
Reply 1, posted (4 years 11 months 1 week 6 days 3 hours ago) and read 7604 times:

I believe the free market would take care of the problem. If an airline grew too large and its costs were too high they wouldnt be able to profit (airlines have a hard enough time as it is) and would get to a point where they are bankrupt or they reduce their costs (shrink) to a point they can sustain themselves.

If there was ever a monopoly then the carrier would have the power to charge whatever price they want, and would make a profit. Usually when a carrier gets to a point they have a monopoly on a certain route another carrier swoops in and undercuts them, which starts a cycle of undercutting each other until one carrier cant make a profit on the route.



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User currently offlineTharanga From United States of America, joined Apr 2009, 1861 posts, RR: 1
Reply 2, posted (4 years 11 months 1 week 6 days 2 hours ago) and read 7531 times:



Quoting Flyby519 (Reply 1):
If an airline grew too large and its costs were too high they wouldnt be able to profit (airlines have a hard enough time as it is) and would get to a point where they are bankrupt or they reduce their costs (shrink) to a point they can sustain themselves.

I think the point of the question is to identify precisely which costs would get too high if the airline grew too large. That the airline would then either suffer or adapt is the obvious part.

It's an interesting question. We've seen clear cases of overexpansion and poorly managed/ill-thought out expansion, like Braniff and PeopleExpress. But their troubles weren't due to their inherent size, but the way they went about reaching their size.


User currently offlineLTBEWR From United States of America, joined Jan 2004, 13040 posts, RR: 12
Reply 3, posted (4 years 11 months 1 week 6 days 2 hours ago) and read 7445 times:

To me a better comparison is like here in the USA when you have a few huge banks and financial service companies that have become 'too big to fail', where the Government has to bail out with lots of taxpayers money. Look at Alitalia and due to politics was and still on government life support as 'too big to fail' for the politicians there. Being a 'supersized' airline can also mean becoming arrogant to customers, higher fare pricing, less ability for competitors as can fix the market against them, and corruption of politicians. Also if get too big, you may lose the flexibility to deal with variables in demand, too many layers of corporate management, try to serve everyone and so on.
So yes, to me an airline can get 'too big'.


User currently offlineLipeGIG From Brazil, joined May 2005, 11418 posts, RR: 59
Reply 4, posted (4 years 11 months 1 week 6 days 1 hour ago) and read 7292 times:
AIRLINERS.NET CREW
FORUM MODERATOR

To Not create confusion if this thread is about planes, routes, markets or any other subject, we included on the topic the word "Mergers" to better explain the focus.

Regards,



New York + Rio de Janeiro = One of the best combinations !
User currently offlineN104UA From United States of America, joined Dec 2007, 902 posts, RR: 0
Reply 5, posted (4 years 11 months 1 week 6 days ago) and read 7189 times:

It is too big when DOJ says it is  Smile


"Learn the rules, so you know how to break them properly." -H.H. The Dalai Lama
User currently offlineQF744FAN From Australia, joined Jan 2007, 121 posts, RR: 0
Reply 6, posted (4 years 11 months 1 week 6 days ago) and read 7183 times:



Quoting Flyby519 (Reply 1):
Usually when a carrier gets to a point they have a monopoly on a certain route another carrier swoops in and undercuts them, which starts a cycle of undercutting each other until one carrier cant make a profit on the route.

Unless a certain government won't permit a certain airline to enter the price war...

Sometimes resulting in a high profile A380 flight being sent to one of that country's airports to act as a very metaphorical finger sign  Silly


User currently offlineBMI727 From United States of America, joined Feb 2009, 15719 posts, RR: 26
Reply 7, posted (4 years 11 months 1 week 5 days 23 hours ago) and read 7035 times:



Quoting Flyby519 (Reply 1):
I believe the free market would take care of the problem. If an airline grew too large and its costs were too high they wouldnt be able to profit (airlines have a hard enough time as it is) and would get to a point where they are bankrupt or they reduce their costs (shrink) to a point they can sustain themselves.

This is the way it works. It gets to the point where the gigantic carriers must change or die.

And furthermore, there are always small new entrants to exploit or fill in the large carriers' failings. When the local service carriers grew, got their jets, and dropped many smaller cities the air taxis popped up and filled the void. Many of them became the expresses and airlinks of today.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineJbernie From Australia, joined Jan 2007, 880 posts, RR: 0
Reply 8, posted (4 years 11 months 1 week 5 days 22 hours ago) and read 6931 times:

Well it depends on how the airline gets "too big". Qantas got too big almost overnight with the failure of Ansett but it didn't change in size fleet wise etc, with only two major airlines in Australia at the time and one ceasing operation on short notice they basically inherited the whole market for a brief while. Now there is competition again and Virgin Blue & Tiger amongst others having been reducing Qantas' market share though there might still be some underlying concern regarding the power Qantas has with its Frequent Flyer program and tying people to the airline. But Virgin Blue is now around 30-35% of the market so they are still quite influential.

The only way an airline could truely get too big would be through political intervention where only one carrier is "legally" (used loosely) allowed to exist and therefore there is no competition or two or more carriers are colluding to avoid true competition (price fixing). When you have multiple carriers in true competition you have varying prices, different products on offer, different styles, different aircraft etc. It is almost impossible for one company to be all things to all people all of the time.

Here in the USA I don't think any one airline is too big, at least at the moment I'm sure a few carriers would celebrate quite heartily if a major carrier like UA, CO, AA or DL actually went completely out of business. For the passengers it may not be good news but removing a major player might restore some stability (sensability?) in the market and the airlines may just head back towards common sense pricing that would allow them to be profitable without necessarily charging an arm and a leg for a ticket.

With mergers themselves, the various competition commisions that investigate the mergers would most likely prevent any merger that causes one entity to suddenly take a massive share of the market i.e.DL & AA merging... (just an example guys...settle down!!!!). Though I would think in some cases it would be a miracle if the could make the merger work as the large airlines have such different systems etc that the cost of merging can quickly outweight the benefits and nullify any potential synergies for years if not for good.


User currently offlineTharanga From United States of America, joined Apr 2009, 1861 posts, RR: 1
Reply 9, posted (4 years 11 months 1 week 5 days 16 hours ago) and read 6689 times:

There are two different ways to view 'too big': too big from the point of view of the airline's own good - can the airline operate efficiently anymore?; and too big from the point of view of the government, in terms of whether there is still a healthy competition. These are two different ideas, and think the OP was talking about the first, not the second.

The part of the reply below does begin to address it. A huge company of any sort can be a challenge to manage effectively, especially as market conditions change.

Quoting LTBEWR (Reply 3):
Being a 'supersized' airline can also mean becoming arrogant to customers, higher fare pricing.... Also if get too big, you may lose the flexibility to deal with variables in demand, too many layers of corporate management, try to serve everyone and so on.



User currently offlineTavong From Colombia, joined Jul 2001, 835 posts, RR: 4
Reply 10, posted (4 years 11 months 1 week 5 days 16 hours ago) and read 6676 times:



Quoting LipeGIG (Reply 4):
To Not create confusion if this thread is about planes, routes, markets or any other subject, we included on the topic the word "Mergers" to better explain the focus.

Thanks mergers whas the perfect word i could´t find :P

Gus
SKBO



Colombian coffee, the best...take a cup and you will see how delicious it is.
User currently offlineDLPMMM From United States of America, joined Apr 2005, 3589 posts, RR: 10
Reply 11, posted (4 years 11 months 1 week 5 days 16 hours ago) and read 6666 times:

With good management, size itself would not lead to higher costs. In fact, the whole concept of "economies of scale" essentially mean that as a company gets larger, its costs per unit decrease. The decrease in costs is attributable to two factors: 1. Lower material costs through buying everything in larger quantities, and 2. Lower management costs per unit by spreading management costs across more units (in this case, airline seats).

Where large companies usually fall down is by becoming slow and bureaucratic in their decision making processes, allowing smaller and more nimble companies to adapt quicker to changing market conditions.


User currently offlineRwy8l From United States of America, joined Aug 2009, 28 posts, RR: 0
Reply 12, posted (4 years 11 months 1 week 5 days 11 hours ago) and read 5234 times:



Quoting LTBEWR (Reply 3):
To me a better comparison is like here in the USA when you have a few huge banks and financial service companies that have become 'too big to fail', where the Government has to bail out with lots of taxpayers money. Look at Alitalia and due to politics was and still on government life support as 'too big to fail' for the politicians there. Being a 'supersized' airline can also mean becoming arrogant to customers, higher fare pricing, less ability for competitors as can fix the market against them, and corruption of politicians. Also if get too big, you may lose the flexibility to deal with variables in demand, too many layers of corporate management, try to serve everyone and so on.
So yes, to me an airline can get 'too big'.

Well said!


User currently offlineBurkhard From Germany, joined Nov 2006, 4386 posts, RR: 2
Reply 13, posted (4 years 11 months 1 week 5 days 11 hours ago) and read 5162 times:

Free market takes care for this, always.

No merged companies have a market share that is the sum of the two after three years. Look at the Boeing MDD merger, and others show the same.

No merged companies have a stock value that is the sum of the two before merger. Often they are below the stronger of the partners, since a lot of the value is burned in the merger process, and companies are inefficient, paralyzed in inner battles for 7 to 12 years.

Mergers have the only purpose to be a big scale money transfer from share holders pockets to management pockets. And free market takes care automatically, no reason to worry, unless you are a share holder yourself.

There are a few exceptions, where mergers create a clear cooperation of still intact buisiness units. AFR/KLM is such an example.


User currently offlineAndyGarrett From United States of America, joined Jun 2009, 44 posts, RR: 0
Reply 14, posted (4 years 11 months 1 week 5 days 6 hours ago) and read 3862 times:

Does anyone know if unit costs really decline when airlines get bigger like the DL/NW merger?

I understand in theory, they should, but this is the Airline industry we are talking about.

Or is the undoing the usual fault of mismanagement?


User currently offlineR2rho From Germany, joined Feb 2007, 2579 posts, RR: 1
Reply 15, posted (4 years 11 months 1 week 4 days 8 hours ago) and read 3202 times:

Problem is that many companies merge only for the sake of merging, and not as part of a well thought out long-term business strategy. Many mergers happen out of domino effect (other competitors have merged making your company small in comparrison, therefore you merge too), or between two companies that are in trouble, and occur out of financial emergency or as a "knee-jerk reaction". These mergers tend to provide quick, short-term benefits to shareholders (which is all that matters nowadays anyway), but not necessarily long-term benefits to the merged company.

Economies of scale are also viewed too much as a panacea, but their benefits have their limits too.

Furthermore, airlines are not investment banks or internet portals. They have strong compnay cultures that do not necessarily always work well together.


User currently offlineCubsrule From United States of America, joined May 2004, 22726 posts, RR: 20
Reply 16, posted (4 years 11 months 1 week 4 days 6 hours ago) and read 3108 times:



Quoting Tharanga (Reply 2):
We've seen clear cases of overexpansion and poorly managed/ill-thought out expansion, like Braniff and PeopleExpress. But their troubles weren't due to their inherent size, but the way they went about reaching their size.

 checkmark  I wonder whether any airline has ever had as many ASMs as DL has today. We certainly don't talk about DL being "too big."



I can't decide whether I miss the tulip or the bowling shoe more
User currently offlineJbernie From Australia, joined Jan 2007, 880 posts, RR: 0
Reply 17, posted (4 years 11 months 1 week 2 days 6 hours ago) and read 2804 times:



Quoting AndyGarrett (Reply 14):
Does anyone know if unit costs really decline when airlines get bigger like the DL/NW merger?

I understand in theory, they should, but this is the Airline industry we are talking about.

Or is the undoing the usual fault of mismanagement?

I think the answer might be that they should decline over time... but the question would be whether or not that decline is meaningful enough to offset other costs incurred by doing a merger in the first place. If they are saving $0.01c per item then they need an awful lot of them to make any meaningful saving when you probably have a lot of costs related to reduction of staff, reduction of service duplication, cancellation of any leases on buildings which help duplicate services, fleet commonality etc etc. Staff reductions are generally a one off & get written off fast. Aligning fleet can take a lot longer and be a lot more expensive.

If WN bought another 737 only carrier they could probably make it work quicker & cheaper, but with their bid for F9 the staff levels looked to stay the same but the fleet was going to be needed to changed, Republic(?) on the other hand from what I saw appeared to only have RJ type aircraft so picking up the Airbus fleet from F9 would not have caused as many issues as it was a more natural fleet expansion.


User currently offlineDocLightning From United States of America, joined Nov 2005, 19411 posts, RR: 58
Reply 18, posted (4 years 11 months 1 week 1 day 9 hours ago) and read 2537 times:



Quoting Jbernie (Reply 8):

Here in the USA I don't think any one airline is too big, at least at the moment I'm sure a few carriers would celebrate quite heartily if a major carrier like UA, CO, AA or DL actually went completely out of business.

I believe you are too big when a government bail-out is necessary to save you. The argument is that if an airline like, say, UA goes belly-up, it will leave all these people unemployed and unable to travel anywhere blah-blah-blah. So they get bailed out. Especially because of what a UA's BK would do to the West Coast.

So that's where I get worried about DL and what would happen if they suddenly decided to lose the plot.


User currently offlineCubsrule From United States of America, joined May 2004, 22726 posts, RR: 20
Reply 19, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2528 times:



Quoting DocLightning (Reply 18):
I believe you are too big when a government bail-out is necessary to save you.

When was the last time the government bailed out an airline? Certainly, they didn't bail out AQ or TZ or PA or EA.



I can't decide whether I miss the tulip or the bowling shoe more
User currently offlineOzarkD9S From United States of America, joined Oct 2001, 5008 posts, RR: 21
Reply 20, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2493 times:



Quoting Cubsrule (Reply 19):


When was the last time the government bailed out an airline? Certainly, they didn't bail out AQ or TZ or PA or EA.

October 1, 1980. While not a bailout, the failing Seaboard World was allowed to merge with Flting Tigers, fast tracked by the CAB in it's waning days. The last carrier to be absorbed through the "Gentleman's Route" to keep a faltering airline from collapsing.



Next Up: STL-LGA-RIC-ATL-STL
User currently offlineCubsrule From United States of America, joined May 2004, 22726 posts, RR: 20
Reply 21, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2493 times:



Quoting OzarkD9S (Reply 20):
October 1, 1980.

 checkmark 

...and this wasn't, AFAIK (and please correct me if I'm wrong), a "too big to fail" type situation.



I can't decide whether I miss the tulip or the bowling shoe more
User currently offlineOzarkD9S From United States of America, joined Oct 2001, 5008 posts, RR: 21
Reply 22, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2476 times:



Quoting Cubsrule (Reply 21):


...and this wasn't, AFAIK (and please correct me if I'm wrong), a "too big to fail" type situation.

Far from it. There were however, international route authorites that might have been "lost" had Seaboard failed. Not having to renegotiate those authorities was a big factor in the deal, at least in the government's eyes.



Next Up: STL-LGA-RIC-ATL-STL
User currently offlineDocLightning From United States of America, joined Nov 2005, 19411 posts, RR: 58
Reply 23, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2476 times:

Never mind this post...

(filler)

[Edited 2009-08-25 13:37:42]

User currently offlineCubsrule From United States of America, joined May 2004, 22726 posts, RR: 20
Reply 24, posted (4 years 11 months 1 week 1 day 8 hours ago) and read 2469 times:



Quoting DocLightning (Reply 23):
Were there not a bunch of things done during this last cycle?

For whom?



I can't decide whether I miss the tulip or the bowling shoe more
25 DocLightning : Basically, here's my point: When unions try to strike against a company like UA, the company keeps braying and threatening economic devastation and t
26 Cubsrule : The loss of pretty much any carrier is going to devastate individual cities, but DL isn't so dominant in any region that there is a problem. DTW comp
27 Tharanga : They pretty much all (in the US) received government help after 9/11. I think it took the form of loan guarantees. The word 'bailout' is rather inexa
28 Brilondon : I don't think that there are mergers that make anything too big. It is just that some mergers make more sense then others and would work well no matte
29 UAL747DEN : Exactly! A big problem with mergers these days is for some reason companies find it necessary to try to save as many jobs as possible. This to me is
30 Jbernie : I really don't think there is an airline in the USA that needs a Govt bailout to save it... assuming of course that one of the airlines actually got
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