1 s2gf h

Topics: IATA members, Star Alliance, Airline Pages: 10 (8885 words) Published: April 26, 2015
Transportation Research Part E 48 (2012) 853–862

Contents lists available at SciVerse ScienceDirect

Transportation Research Part E
journal homepage: www.elsevier.com/locate/tre

Mergers and acquisitions in aviation – Management and economic perspectives on the size of airlines
Rico Merkert a,⇑, Peter S. Morrell b

Institute of Transport and Logistics Studies, The University of Sydney, NSW 2006 Sydney, Australia Department of Air Transport, Cranfield University, Cranfield, MK43 0AL Bedfordshire, UK

a r t i c l e

i n f o

Article history:
Received 31 July 2011
Received in revised form 14 December 2011
Accepted 7 February 2012

Mergers and acquisitions
Size of firms
Data envelopment analysis

a b s t r a c t
This paper reviews literature and management perspectives on airline mergers and acquisitions. We find that M&A/consolidation is seen as a ‘‘game-changer’’ and mandatory to survive in aviation markets. We, therefore, apply DEA models to 66 airlines to evaluate whether big is indeed always beautiful. Our results suggest that the optimal airline size is between 34 and 52 bn available seat kilometre capacity and that airlines with more than 200 bn ASK are definitely too large to operate efficiently. This also applies when revenues are included in the DEA models, which is central as yield management and ancillary revenues are increasingly important. Ó 2012 Elsevier Ltd. All rights reserved.

1. Introduction
A key outcome of the deregulation of the US and European aviation markets is that it has become possible for airline companies to grow much faster than just generically by merging acquiring each other, often even across borders. In general, consolidation in the form of mergers and acquisitions (M&A) is often seen as a very effective way of surviving in the competitive environments of many aviation markets. For example, Willie Walsh, CEO of the recently formed International Airlines Group (IAG = BA/Iberia), sees M&A as a ‘‘game-changer’’ for the aviation industry and has already a number of further airlines on his shopping list (such as TAP Portugal). More generally, airlines use these transactions for a number of reasons. First, their home markets are often experiencing slower growth or even stagnating, and growth outside the home country will be limited by Air Services Agreements. For example, US carriers are often unsuccessful in obtaining the limited designations available to serve faster growing markets such as China. Sometimes the rationale is simply to get access/slots to key airports (such as Lufthansa/bmi and now IAG/bmi at Heathrow), in other cases airlines hope to leverage synergies and to extend their networks (e.g., BA/Iberia or Air France/KLM). In the US a number of airlines were saved from financial default by the takeover of another airline, so even antitrust authorities sometimes agree to mergers although in almost all cases they result in less competition in some markets. However, a number of unsuccessful mergers as a result of, for example, poor due diligence, clashing company cultures or union resistance have highlighted the fact that this is no universal panacea for improved performance. In addition, particularly where private equity firms were involved, cross-border airline M&A activities have often also prompted feelings of national angst.

In this paper we are particularly interested in the growth that many airlines see as mandatory to survive in aviation markets. While it may make sense to grow and benefit from economies of scale, which is easiest and fastest through mergers and

⇑ Corresponding author. Tel.: +61 2 9351 0175; fax: +61 2 9351 0088. E-mail address: rico.merkert@sydney.edu.au (R. Merkert).
1366-5545/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.tre.2012.02.002


R. Merkert, P.S. Morrell / Transportation Research Part E 48 (2012) 853–862

acquisitions, at some point airlines may...

References: Assaf, A.G., 2010. Bootstrapped scale efficiency measures of UK airports. Journal of Air Transport Management 16, 42–44.
Assaf, A.G., 2011. Portuguese tour operators: a fight for survival. Journal of Air Transport Management 17, 155–157.
Banker, R.D., Charnes, A., Cooper, W.W., 1984. Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management
Science 30, 1078–1092.
Barros, C.P., Peypoch, N., 2009. An evaluation of European airlines’ operational performance. International Journal of Production Economics 122, 525–533.
Charnes, A., Cooper, W.W., Rhodes, E.L., 1978. Measuring the efficiency of decision making units. European Journal of Operational Research 2, 429–444.
Coelli, T.J., Rao, P.D.S., O’Donnell, C.J., Battese, G.E., 2005. An Introduction to Efficiency and Productivity Analysis, second ed. Springer, New York.
Färe, R., Grosskopf, S., Lovell, C.A.K., 1985. The Measurement of Efficiency of Production. Kluwer Nijhoff Publishing, Boston.
Fisher, A.A., Lande, R.H., 1983. Efficiency considerations in merger enforcement. California Law Review 71, 1580–1692.
Helvoigt, T.L., Adams, D.M., 2008. Data envelopment analysis of technical efficiency and productivity growth in the US Pacific Northwest sawmill industry.
Canadian Journal of Forest Research 38, 2553–2565.
Hong, S., Zhang, A., 2010. An efficiency study of airlines and air cargo/passenger divisions: a DEA approach. World Review of Intermodal Transportation
Research 3, 137–149.
Iatrou, K., Oretti, M., 2007. Airline Choices for the Future – from Alliances to Mergers. Ashgate, Burlington.
Maruna, M., Morrell, P.S., 2010. After the Honeymoon. Airline Business, August.
Merkert, R., Hensher, D.A., 2011. The impact of strategic management and fleet planning on airline efficiency – a random effects Tobit model based on DEA
efficiency scores
Merkert, R., Smith, A.S.J., Nash, C.A., 2010. Benchmarking of train operating firms – a transaction cost efficiency analysis. Journal of Transportation Planning
and Technology 33, 35–53.
Morrell, P.S., 2007. Airline Finance, third ed. Ashgate, Aldershot.
Morrell, P.S., 2010. The Planned British Airways/Iberia Merger: A Viewpoint. AirNeth Column, November (assessed 28.12.10).
Schefczyk, M., 1993. Operational performance of airlines: an extension of traditional measurement paradigms. Strategic Management Journal 14, 301–317.
Simar, L., Wilson, P.W., 1998. Sensitivity analysis of efficiency scores: how to bootstrap in nonparametric frontier models. Management Science 44, 49–61.
Simar, L., Wilson, P.W., 2000. A general methodology for bootstrapping in non-parametric frontier models. Journal of Applied Statistics 27, 779–802.
Simar, L., Wilson, P.W., 2002. Non-parametric tests of returns to scale. European Journal of Operational Research 139, 115–132.
Simar, L., Wilson, P.W., 2007. Estimation and inference in two-stage, semi-parametric models of production processes. Journal of Econometrics 136, 31–64.
Simar, L., Wilson, P.W., 2008. Statistical inference in nonparametric frontier models: recent developments and perspectives. In: Fried, H.O., Lovell, C.A.K.,
Schmidt, S.S
Thanassoulis, E., Portela, M.C.S., Despic´, O., 2008. Data envelopment analysis: the mathematical programming approach to efficiency analysis. In: Fried, H.O.,
Lovell, C.A.K., Schmidt, S.S
Tofallis, C., 1997. Input efficiency profiling: an application to airlines. Computers and Operations Research 24, 253–258.
Vasigh, B., Tacker, T., Fleming, K., 2008. Introduction to Air Transport Economics: from Theory to Applications. Ashgate, Aldershot.
Wilson, P.W., 2010. Package ‘FEAR’ – Frontier Efficiency Analysis with R. Clemson, Department of Economics, Clemson University.
Zou, L., Oum, T.H., Chunyan Yu, C., 2011. Assessing the price effects of airline alliances on complementary routes. Transportation Research Part E: Logistics
and Transportation Review 47, 315–332.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • H S 306 1 Essay
  • Essay about H&SC UNIT 1
  • Project 1 H M Taewook Kang Essay
  • Essay about Chapter 1 H
  • unit 1 h s Essay
  • Assignment 1 Becoming an effective Leader Essay
  • Chemistry Lab Report 1 Nicole H Essay
  • H&Sc L2 Unit 1

Become a StudyMode Member

Sign Up - It's Free