QUESTIONS AND ANSWERS
1. Evaluate the internal and external environment and analyze major obstacles to making this merger successful.
To answer satisfactorily this question, students must prepare, at a minimum, the weaknesses (internal) and threats (external) parts of a SWOT analysis. Students, based on their educational and professional background, may create many obstacles, but the major strategic issues are outlined below:
a) Culture--Started in 1983, America West Airlines (AWA) is a much newer airline and is the only post-deregulation startup to survive. It is known as a lower fare, full-service airline that has achieved profitability as recently as 1Q and 2Q of FY05.
In contrast, US Airways (USA) is larger and a legacy carrier and has been in existence since 1939. It has not been profitable, on a fiscal year basis, since 1999. The company has been in bankruptcy twice since 2002.
In evaluating each company's history and its current standing within the industry, a clash of employee cultures must be considered. The merged airline will be headed by existing AWA senior management. However, a smaller, younger, more fluid, and profitable carrier merging with a larger, unprofitable, legacy carrier has the potential for two organizational problems. First, the merged company has elected to utilize the US Airways name, a perceived stronger brand image than AWA, and this decision could cause disgruntlement with the employees of AWA, stakeholders in the more profitable company. Second, because AWA is a younger company, some employees may have lower seniority than their USA counterparts.
b) Seniority--USA has managed to obtain major wage concessions from its employees during its two Chapter 11 bankruptcies, and its wage rates are generally comparable to that of AWA. While wage issues seem to be a minor area of concern, the issue of seniority looms large. AWA employees, who helped to build a profitable airline and therefore helped create the opportunity for this merger to happen, now could find themselves at a disadvantage in the merged company's union seniority lists. This situation provides the potential impetus for poor morale or other work-related problems as management attempts to integrate the very different workforces.
c) Costs--According to the Bureau of Transportation Statistics (BTS), AWA has one of the lowest cost structures versus U.S. based major airlines. In fact, in 2004, its cost per available seat mile (CASM) was the lowest of any U.S. hub and spoke airline. However, its costs are still higher than Southwest.
d) Branding--As mentioned earlier, the combined companies have elected to use the US Airways brand for its perceived brand equity, even though the unprofitable legacy carrier has had two bankruptcies since 2002. Management is gambling that USA's current consumer perception, based on today's industry environment, can be repositioned as a vibrant, progressive low-cost airline. Should the merged airline have considered using the possibly geographically limiting yet profitable America West brand? Should the merged airline attempt to create a new brand in the manner used by ValuJet? In May 1996, ValuJet suffered a brand destroying crash in the Florida Everglades. In October 1997, ValuJet management merged the carrier successfully with Atlanta based AirTran, adopted its name, and has experienced profitability in every fiscal year since 1999.
e)Duplication--The merger brings obstacles, such as duplication of efforts in management, staff, personnel, facilities, and competitive routes. AWA management has stated in public merger-related documents that it expects $600 million in synergy savings. Of the $600M, route restructuring will save $150-$200M; reductions in IT, facilities, and administrative overhead are to equal $250-$300M; and increased revenue synergies of $150-$200M are projected. Are these savings estimates realistic based on the industry's history...
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