Merge to Survive?

Wednesday, July 30th, 2008

One of the latest developments on the European economic front – during what are otherwise these dog days of a European summer, when most everyone is off on vacation – is the recent announcement that British Airways and the Spanish carrier Iberia have begun discussions about an eventual merger. Featured in that FT piece was this quote from BA chief executive Willie Walsh: “The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment.” “Synergies”; “network fit”: I guess one doesn’t get to be CEO of a major international airline like BA without being able to tick the necessary B-school jargon boxes, but what is all that really supposed to mean?

That is what Patrick Anspach, writing in the Belgian paper L’Echo, would also like to know (Do the Air-Mergers Make Any Sense?). We can know what Walsh means when he says “in the current economic environment,” at least: that mainly refers to the ever-climbing (until recently) price for jet fuel that is turning profit-making routes into loss-makers for airlines the world over. And a merger does seem to be a popular thing to do these days, as in the US Delta and Northwest as well as Continental and United have taken recent steps towards union or at least greater cooperation.

But does the latter strategy really produce a solution to the former problem? Or, as Anspach puts it, “is it really useful to throw yourself in to the arms of your neighbor when you are in free-fall?” He thinks not; greater size is not the answer to the current ailments seriously afflicting the airlines. Those “synergies”? They don’t add up to much when two airlines merge, other than getting rid of redundancies where the two companies were engaged in doing the same thing. For the already-announced Delta-Northwest merger, for example, that adds up to savings of only $1 billion, when the two airlines’ combined turnover amounts to some $35 billion. Is that enough of a savings to make the move worthwhile, i.e. to ensure that the combined company will have a greater chance of survival in Walsh’s “current economic environment”?

No, according to Anspach the way to endure rather lies in a company remaining flexible enough to adapt and change the way it has to change to succeed under the new conditions. After all, he reminds us, it wasn’t the dinosaurs that survived back in pre-history.

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