What is a Merger ?
The definition of merger can be explained as two companies combine to form a single company. It is similar to an acquisition or takeover, but it also mean that stockholders from both companies retain a shared interest in the new corporation (McGuigan, 2010 1). This also shown that two companies must have a percentage of market share in between. There are few reasons for two companies to negotiate their shares to a merger.
1) It is a way of combining a very profitable company with a losing company in order to use the losses as a tax write off to offset the profits while expanding the corporation.
2) To increase one’s market share. By merging with other major competitors in the industry, the firm can come to dominate the market where they compete with each other, which giving them a more flexible decision when pricing and buyer incentives. However, this may also cause problems of monopoly.
3) Some companies with complementary products will consider merger to have a better control over the supply chain in order to smoothen and reduce the firm’s operational costs.
Mergers in Aviation
Many airlines have merged with other airlines to generate more profits while trying to decrease the operational cost. Airlines that have merged with other airlines will code share everything to form a bigger company. An example of this would be maintenance services (MRO), staff allocation, aircrafts and airport parking slots. With respect to operational performance such as the liberalisation of the internal European market and the spread of Open Skies bilateral air service agreements between different areas and countries, airlines tend to look for a foreign carrier which operates in different regions of the world. (Although Airline Alliance has similar characteristics as a merger, it does not count towards to become a merger. It is because any airlines can join or leave the alliance at anytime. In which, either parties will lose or gain any market shares due to there is no strategic issuance or sale of stock.)
Examples below are going to be explained the three reasons of merger in the aviation industry.
- A very profitable company with a losing company
Boeing have merged with McDonnell Douglas in 1997 due to McDonnell Douglas could not sustain the competition with Boeing in the 20th century. It is also known that MD has a $13 billion of stock swap in order to create the Boeing Company. (Wikipedia, 2010 2)
- To increase one's market share
Air France- KLM/British Airways- Iberia / Cathay Pacific-DragonAir/ Delta- NorthWest
Airlines above are examples which illustrated the merger with other strong competitors within the specific region. Such as Air France and KLM, British and Iberia are all European flag carriers which are all under the pressure of the Open Skies agreement, where Cathay Pacific and DragonAir represent Hong Kong and Mainland China and Delta and NorthWest are both operating similar domestic U.S. and international routes. The other reasons of forming as one big corporation to reduce its competitiveness while against the other carriers.
- Better control over the supply chain
China Southern Airlines has a joint corporation with Guangzhou Aircraft Maintenance & Engineering Co Ltd( GAMECO) , which is the largest aircraft maintenance hanger in Asia and via its MTU Maintenance Zhuhai Co., Ltd. with the highest level in maintenance in mainland China (China Southern Airlines, 2010 3). The airline has built a strong correlation with its aircraft maintenance which also been awarded for its System Operations Control Centre and its Engine Performance Monitoring System.