International Airlines Group Rationale for Proposing Mergers

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Table of Contents

Description of companies: Deutsche Lufthansa AG and International Airlines Group
Business rationale for the takeover
Long-term/ short-term success or failure on shareholders’ wealth
Conclusion
References

Description of companies: Deutsche Lufthansa AG and International Airlines Group

Deutsche Lufthansa airline Group is one of the world’s groups involved in the provision of airline services. As an airline service provider, it is among the leading competitors of the largest world’s airlines. Deutsche Lufthansa AG as a global organization has its central operations carried out from Europe, whereby it offers a range of air travel and cargo transportation services. The Deutsche Lufthansa AG’s main activities and air services which they provide are categorized into five segments.

These include IT service category, logistics, catering, maintenance & repair overhaul and passenger airline group segment, which is famed as the largest and leading passenger airline within the Europe’s airlines. The organization has operated through a network of about four hundred subsidiary branches together with its affiliates. The organization provides its services through a fleet of seven hundred plus aircrafts. The seven hundred plus fleet serves a hundred plus countries/ states with summative passenger destinations of more than 280. The organization’s passenger destinations provide passenger services to a hundred million plus passengers at international business realm.

The Deutsche Lufthansa AG is known to lead in the provision of international cargo transportation/ airfreight services. A part from the above mentioned activities, the organization involves in numerous other activities either directly or indirectly, and through all these activities, the Deutsche Lufthansa AG had a workforce estimate of one hundred and seventeen thousand workers by end of December, 2010. In the same year, the organization had realized operating revenue totaling to almost 27 billion Euros.

On the side of International Airlines Group, it is also one of the largest global group airlines found within Europe, whose main administrative and managerial tasks are carried out at their headquarters located in London. The airline was founded in the year 2011 following a dual agreement between leading Spanish and United Kingdom’s airlines, Iberia and British Airways, respectively.

As a major world’s airline, it has a fleet of about three hundred and fifty aircrafts purposely for the provision of passenger transportation services to about two hundred destinations. The International Airlines Group’s fleet provides passenger service to fifty million plus passenger destined to the various organizations’ terminus in different states/ countries. International Airlines Group is rank third in size among airline groups in Europe, while it occupies the sixth position in the world ranking on the basis of revenue generation, especially through stock exchange trade.

Business rationale for the takeover

The main aim and purpose of any business venture by an individual or group of individuals is to generate profits. On the basis of organizations, similar objectivity of making profits holds, while at the same time the firm intends to create wealth for the shareholder. From a business perspective, growth and expansions of a firm is intended to make/increase profits and shareholders’ wealth is attained either by the introduction of new products and/ or services. An organization may achieve this through expansion of its current business operations, but it can also seek an alternative method of growth and expansion without concentrating on the existing operations or products.

As evidenced from many business operations, a firm’s internal growth and expansions are attained by the strategies of introducing firm’s new products. For external growth and expansion, acquisition strategies are employed as the only ways of growth. In general view, acquisition is a significant strategy not only in the expansion of firm’s products/ services portfolio, but it also have several other advantages including market entry, acquisition of new technologies, researches and new developments, as well as increased accessibility to resources which enhances the firm’s competitiveness at their regional or global markets.

Acquisitions are therefore seen as methods of firm consolidation aimed at reaping economic and managerial benefits by the merging organizations (Pike and Neale1996, p 45). This statement implies that the purpose of acquisition is for these organizations to obtain benefits by deriving out certain advantages for the organizations and its affiliated parties, including the organizations’ clients and shareholders.

Although acquisitions strategies are aimed to generate benefits to all individuals of the consolidating companies, shareholders’ benefits are always given a priority. The acquisitions of Deutsche Lufthansa AG and International Airlines Group are therefore aimed at creating a new wave within markets of global airline service provision. However the overall idea of consolidation is enhance shareholders’ benefits especially the benefit of maximum wealth. On considering cquisitions at an in-depth level, several reasons arise for the proposed consolidation to take place. One of the major reasons for the proposal of the consolidation of these organizations is that British Midland International airline has been operating at loss.

With the acquisition taking place between these two organizations, it implies that there will be expected change on its performances, which will yield better results and bring benefits for both Deutsche Lufthansa and International Airlines Group (McLaney 2005, p 464). If so, it means that Deutsche Lufthansa AG will be relieved from operating at loss through this particular line of service provision while International Airlines group gains profits from its business operation on this specific service line. Unless the two organizations perceive such kind of business benefits, the proposed takeover will be of no use.

In short, the organizations’ acquisition are grounded on the facts that there will growth and expansion of their businesses, and this will end up bringing in better performances that will be measured under the basis of the organization’s profitability and shareholders’ wealth generation. These are generally well understood on two basic types of rationales: efficiency gain rationale and the strategic rationale. When the organizations come together, they will pool together the efficiencies from two companies, which will make them to enjoy benefits of economies of large scale and scope. This will be achieved through different levels of synergy.

Through the synergy formed by these companies, it is very obvious that these two organizations will be pooling together their professional expertise and resources so that they will better their performance (Watson and Head 2003, p 68). The Deutsche Lufthansa which is famed in the provision of IT services, maintenance & repair overhauls will be used to boost the IT services for the International Airlines Group managerial redundancies and inefficiencies. Similarly, the Deutsche Lufthansa which lacks the necessary expertise in the financial matters will obtained such knowledge and experience from the side of International Airlines Group which is depicted to have an excellent performance on stock exchange markets.

Based on strategic rationale, it is expected that through the acquisition takeover of the two organizations, there will be a change in organization structure resulting from this takeover that will boost the organization profitability. In this particular case, the Deutsche Lufthansa’s workforce engaged in the management and carrying out tasks of British Midland International Airline will be replaced by another team from the International Airlines Group, which is expected to operate it profitably as per their competency and dominancy of the region.

Long-term/ short-term success or failure on shareholders’ wealth

Based on the takeover of the two companies, this may result into positive or negative long and/ or short impacts on shareholders’ wealth. In order to establish these impacts on shareholders’ wealth on the proposed takeover by the companies, we need to focus on specific aspects and factors which have effects and are core determinants of the wealth of shareholders. By merging the two companies, it definitely implies that there will be growth of the organizations, whereby the International Airline Group will acquire more facilities that had been owned by BMI of the Deutsche Lufthansa. However, the AIG’s growth by gaining the control of BMI may not be said to have direct benefits on shareholders’ wealth.

One thing which is clear to most of the expertise of acquisition is that the actual benefit on shareholders will be realized depending on the management of the larger formed entity. For the AIG getting involved in the acquisition of BMI from Deutsche Lufthansa, which has many segments of business activities, it means that it can diversify quite easily than before. The phenomenon of diversification is also possible with Deutsche Lufthansa in the field of stock market.

The fact is that under practice of diversification of the organizations’ venture, the shareholders get shielded from many risks associated with venture into a single business line. The consolidation of the business operations through the proposed takeover process of these companies, it would be possible therefore for them to have their risks spread across sectors (Drury 2007, p 478). The end result is that there will be an influence of the companies’ value which subsequently shareholders value.

It can also be said that the two organizations proposed takeover in form of an acquisition will have a major strategic rationale coming from the regional market share. Though the two organizations has wide gap in their fleet size, it is clear that AIG is dominating in Europe market. This makes it easy for AIG to penetrate the Europe’s airline markets than it’s with Deutsche Lufthansa AG. AIG will thus be able to control all the fleets within the region at a lesser costs than having both organizations operating separately. On the other hand, Deutsche Lufthansa has the opportunity of offering their technical support on both passenger jets and cargo jets within the region. For this reason, it is expected there will be reduction on cost of operations due to increased efficiencies in area of operation.

Due to almost monopolized state created by the dominance of IAG in region, it is likely that profit margin will go up as result of high priced services of the organization. An increase in profit margins will have a positive impact on the side of shareholder, especially on the prosperity of business operations in the present and time to come. On the other side, there is possibility of deterioration of the quality of services which the AIG offers to its clients in the future due to monopolization conditions, which lead less innovativeness for better services. This will definitely lead lose of clients and reduction in profit margins, hence affecting shareholders wealth negatively as it was reported from the consolidation between Air Sahara and Jet Airways. However, this may not be the case when considering the consolidation of Deutsche Lufthansa and Star Alliance which has seen the company increase its profit expectation by more than 100 million.

Conclusion

In conclusion, it can be said that airline service provider organizations will show positive results on their performances as they are depicted from their profitability outcomes. There also evidences from the airline service providers such as those of Jet Airways which lucidly depicts that negative profitability results are quite possible for corporations offering air transportation service. Therefore, based on the focus of acquisitions, there may be an increased or decreased return on the capital invested. Due to the fluctuation of the returns on capital, one can thus say that it is unpredictable of acquisition effects on the shareholder wealth.

References

Drury, C 2007, Management and Cost Accounting, New Delhi, Cengage Learning.

McLaney, E 2005, Business Finance: Theory and Practice, London, Financial Times.

Pike, R & Neale, B 1996, Corporate Finance and Investment, New Jersey, Prentice-Hall.

Watson, D & Head, A 2003, Corporate Finance: Principles and Practice, London, Financial Times.

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