“Merger mania to be expected in
the airline industry?”
A STUDY ON THE INFLUENCE OF INTERNAL AND EXTERNAL FACTORS ON COOPERATION STRATEGIES IN THE AIRLINE INDUSTRY
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“Merger mania to be expected in
the airline industry?”
A STUDY ON THE INFLUENCE OF INTERNAL AND EXTERNAL FACTORS ON COOPERATION STRATEGIES IN THE AIRLINE INDUSTRY
Thesis by Jelle Boomsma Student at the University of Groningen Faculty of Management & Organization Specialization: International Business & Management
First supervisor: dr. Bram Neuijen Co-supervisor: dr. Bartjan W. Pennink
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Abstract
The airline business is very important in our daily life, however it is also one of the least profitable businesses in the world. It experiences strong consolidation pressures and over the decades many alliances have been formed and mergers & acquisitions have taken place. Some researchers say that alliances in the airline business are only second best solutions. Mergers would be a better form of cooperation, but due to restrictions in external factors mergers are not always possible. After an airliner has decided to cooperate with another, which criteria shape the choice between these two forms? In this research the focus is on internal and external factors that determine this process and how these determine the choice for a form of cooperation.
The results of this study do not support theory that argues that alliances are just second best solutions for situations where external factors prohibit a merger or acquisition. Assumptions and hypotheses that indicate that internal factors favor alliances over acquisitions, and external factors favoring mergers over alliances are not supported. Interactions are diverse and therefore conflicts are not recognizable. It can not be concluded that alliances are just second best solutions.
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Content
Chapter 1 Introduction... 6
Research background... 6
Research objective... 13
Research question and sub questions ... 13
Chapter 2 Description of the airline industry... 14
From highly regulated and restricted towards open skies... 17
Chapter 3 Theoretical Framework ... 22
Defining mergers, acquisitions and strategic alliances... 22
Internal factors ... 25
Financial situation ... 25
Experience in mergers and alliances ... 26
Expected synergies ... 26
Motives for collaboration... 26
External factors ... 29
Political and legal ... 29
Economical... 30
Social ... 31
Technological ... 32
Theoretical model... 32
Chapter 4 Methodology ... 34
Testing hypotheses and data collection ... 34
Case selection... 36
Chapter 5 Results ... 38
KLM ... 38
Alliances ... 38
Mergers and acquisitions ... 39
Air France ... 41
Alliances ... 41
Mergers and acquisitions ... 42
United Airlines ... 44
Alliances ... 44
American Airlines ... 46
Alliances ... 46
Mergers & Acquisitions... 47
Summarizing results ... 48
Chapter 6 Conclusion and discussion... 51
Internal factors ... 51
External factors ... 51
Conclusion ... 52
Limitations and further research ... 52
Bibliography ... 54
Appendix 1 Summary of the convention on International Civil Aviation ...……...55
Appendix 2 Summary of open skies treaty ..………...57
Appendix 3 Cases. ……….. 59
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List of tables and figures
Figures
Figure 1 The Strategy Making Pyramid ... 8
Figure 2 Factors shaping the choice of company strategy ... 1
Tables Table 1 Market Size ... 14
Table 2 Global Airline Alliances ... 15
Table 3 Key characteristics of traditional ASA's ... 18
Table 4 characteristics of USA open market bilaterals ... 19
Table 5 Traditional and open market European bilateral agreements... 20
Table 7 Example of table with outcomes per case... 35
Table 8 Airline selection... 36
Table 9 KLM Alliances ... 39
Table 10 KLM Mergers & Acquisitions ... 40
Table 11 Air France Alliances ... 42
Table 12 Air France M&A's ... 43
Table 13 United Airlines Alliances... 45
Table 14American Airlines alliances ... 46
Table 15 American Airlines M&A's ... 47
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Chapter 1 Introduction
Research background
Mergers & acquisitions (M&A) and strategic alliances (SA) are widely discussed topics in economics and business literature. Although there is no consensus among researchers on success rates, it is clear that many mergers and alliances fail (Dyer, Kale, & Singh, 2004). As these failures can be costly the importance of choosing the right form of collaboration is evident.
The airline industry is an interesting industry to apply collaboration strategy research to. In the late nineties a wave of alliances shook up the airline industry, but large international mergers rarely occurred. Other industries, for example steel, experienced many mergers and acquisitions and less alliances. What can be an explanation for this?
In the 1990’s three major alliances arose in the airline industry. Most of the larger airlines, the so called flag carriers, have joined one of these alliances. It seems that there were forces that drove the airliners towards cooperation. In addition to the “life cycle hypothesis” (rapid growth, early maturity, saturation, and decline) Thompson and Strickland (2003) use the concept of Driving Forces to identify the cause of the changing competitive structure and business environment. ”Industry and competitive forces change because forces are in motion that creates incentives or pressures for change (Porter, 1980, p. 60)”. The most dominant forces are called driving forces, but which forces can lead to consolidation pressures in the airline industry? Thompson and Strickland (2003) present an extensive list of possible forces, however they also recognize that “no more than three or four driving forces are the major determinants of why and how the industry is changing”.
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Driving forces for change in the competitive structure in the airline industry
The internet surely has created e-commerce opportunities for airliners. Travel agents can now use a computer reservation system (CRS) in which all airliners can offer their services. By forming alliances airliners can increase the number of destinations they offer and the number of times that their flight is mentioned in CRS which increases their turnover.
Another driving force is the globalization of the industry. The privatization, deregulation and importance of scale of economies in the airline industry have led to further globalization of the industry.
Finally low industry growth can also be a driving force in the change of the competitive landscape. The growth of an industry is linked to the industry lifecycle.
The airline industry is a mature industry as it experiences relative low growth rates (from negative growth to an average of 5%, see Table 1 Market Size) and the three most important markets (US, Europe and Japan) consist mainly of replacement sales to existing users. The growth rate more or less equals the growth of the economy as a whole. The nature of a matured industry is that it can lead to consolidation. Low growth in buyer demand generates more fierce competition for market share; price cutting and lower margins are the result. To increase market share and economies of scale consolidation can help. Consumers demand more service and switch easier of supplier, by offering more destinations via code sharing an airliner can improve its service. International competition increases and industry leadership will belong to those airlines that have strong positions in the major important geographical areas. Since autonomous growth in foreign countries is very difficult, this can also lead to consolidation. Industry profitability is low due to increased competition and overcapacity in the market, the weaker companies will suffer the hardest. Concluding, the stiff competition should lead to mergers and acquisitions among former competitors and to consolidation in general.
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and the industry lifecycle characteristics the emergence of e-commerce, privatization, deregulation, globalization, low growth factor and the mature phase of the industry lifecycle led to these pressures.
At which level do airliners cope with these consolidation pressures?
Both Thompson and Strickland (2003) and Ellis and Williams (1995) recognize several levels strategy in companies; corporate strategy, business strategy, functional strategy, and operating strategy. Corporate strategy concerns diversified companies that have a diversified product portfolio, functional strategy concerns R&D, human resources, finance, etc and operating strategy concerns departments within functional areas.
In comparison to corporate strategy, business strategy only deals with one product market instead of a diversified portfolio. In this research the focus is on companies that focus on one product: airline tickets.
Figure 1 The Strategy Making Pyramid
Source: Thompson and Strickland 2003, page 52.
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penetration, Product extension, Product development, and Geographical expansion. In this research the focus is on market penetration and geographical expansion. As will become clear in the industry description, and what was also mentioned in the causes for change in the competitive landscape, these two strategic options are responses to the consolidation pressures. Thompson and Strickland (2003) have a slightly more extensive idea on what business strategy encompasses.
The main goal of business strategy is that is has to create or develop a long-term competitive advantage. To reach this business strategy is concerned with (1) responding to external changes, (2) creating competitive moves and market approaches, (3) building valuable capabilities, (4) using strategic initiatives of the functional departments, and (5) addressing strategic issues facing the company’s business. In this research the focus will be on the first two items; responding to external factors and creating competitive moves. These two are linked to the changing competitive landscape and the consolidation pressures in the airline industry.
Conclusion: (International) Business strategy is the level that deals with market penetration, geographical expansion, and changes in the competitive landscape.
What are possible reactions to consolidation pressures?
To identify how companies can cope with consolidation pressures from the industry we use cooperative strategy. Thompson and Strickland (2003) distinguish two forms of cooperation; “alliances and merger & acquisitions. As discussed above globalization, technology enhancements, new market opportunities, deregulation and privatization have created the need of cooperation” (Thompson & Strickland, 2003). The global race to build market presence in every (geographical) market and to create competitive advantages based on internal capabilities can not be won alone (Thompson & Strickland, 2003).
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forms of cooperation (Thompson & Strickland, 2003). A more elaborate analysis of mergers and alliances is given in the Industry description further on.
Conclusion: Business (level) strategy deals with changing competitive structures such as consolidation pressures and the two most used responses to consolidation pressures are alliances and mergers & acquisitions.
Which factors create business strategy?
The final step is to determine what factors make that an alliance or acquisition is the best business strategy. Ellis and Williams (1995) distinguish approaches to international business strategy.
1. The external context; this approach focuses on the best fit between a company and its external environment following Porter (1980).
2. The resource based approach; an internal firm based perspective, competitive advantage is created trough internal capabilities following Hamel and Prahalad (1994).
3. The process view; following Mintzberg and Walters (1985) this view focuses on internal processes and interactions between people in the organization.
Ellis and Williams (1995) conclude that in order to form the best business strategy a holistic view is needed in which all approaches are taken into consideration. They emphasize that processes, internal and external factors are not mutually exclusive but intertwined in each other.
Thompson and Strickland (2003) also emphasize that business strategy is formed by a combination and interaction of internal and external factors.
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What are these factors that determine the preference for either form of cooperation and how do these relate?
Thompson and Strickland (2003) distinguish three categories of internal and external factors.
Source: Thompson and Strickland 2003, page 60.
This mix of considerations is the input for strategic choices on business strategy, and therefore on cooperation strategy. These considerations determine the preference for an acquisition or alliance. To give a small example: suppose that the executives of a company like to expand their company (empire building), the company has excessive cash, and there is a cheap prized rival company, you can imagine that these circumstances lead to a preference for an acquisition.
Opportunities and threats to company well-being Competitive conditions and overall industry attractiveness Shared values and company culture Personal ambitions, business philosophies and ethics of executives Company resource strengths, weaknesses, competencies and competitive capabilities Political, economical, societal, and regulatory considerations
The mix of considerations that determines a company’s strategic situation
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But what happens when these factors conflict with each other? What happens when, for example, the external factors indicate a preference for an alliance, but internal factors favor a merger or acquisition? There are indications that in the airline industry there can be a conflict between internal and external factors what results in a not optimal form of cooperation. To be more specific, the highly regulated nature of the airline industry is said to have such an influence on cooperation strategy of airliners that they are forced into cooperation strategies that are just “second-best solutions”. The next two examples clarify this potential problem.
Vander Kraats (2000) recognizes that: “If true economic advantages are to be gained through the joining of resources by two or more airlines, it will most likely come from the creation of a single controlling entity which unifies all aspects of the business under a central authority devoid of the divergent interests which currently exists in today’s alliances.” (Vander Kraats, 2000, page 62). He emphasizes on the restrictions of external factors that prevent airlines to reach “true economic advantages”.
However, a conclusion from the article “On the choice between strategic alliance and merger in the airline sector: the role of strategic effects” (Barla & Constantos, 2006) is that “the recent surge of strategic alliance formation in the airline industry may have been fuelled by strategic considerations, rather than simply having been the second best solution dictated by airline mergers limitations.” These researchers do not recognize a conflict between internal (strategic considerations) and external (airline merger limitations) factors.
In the light of market liberalization, changing regulations, and consolidation pressures (changing competitive structure) I expect that airliners will review their collaboration strategies and this research can contribute to that process. The findings in this research can be useful in both the academic world as well as for strategic considerations in airliner policies.
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(2003). The factors that influence the choice on the form of cooperation are identified, further analyzed and processed into hypotheses in the theoretical framework.
Research objective
The objective of this research is to gain insight in the interaction of internal and external factors that shape the choice of cooperation strategy.
Research question and sub questions
In this paragraph the main research question and a number of sub questions are developed. The theoretical framework deals with these questions. Based on the answers on these questions hypotheses are developed.
Research question
How do internal and external factors influence cooperative strategy in the airline industry, and what consequences do conflicts between these factors have on the choice of cooperation strategy by management?
To come to an answer to this question a number of sub questions are developed.
1. What are the internal factors in the airline industry that shape the cooperation strategy?
2. What are the external factors in the airline industry that shape the cooperation strategy?
3. How do these factors interact with each other in the process of crafting a cooperation strategy?
In the next chapter a description of the airline industry is given. In the theoretical framework the terms mergers, acquisitions and alliances are explained and the factors that shape cooperation strategy are identified. When identified, hypotheses are formed on how these factors influence the preference for an alliance or acquisition. These hypotheses are applied on a
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Chapter 2 Description of the airline industry
Now the research objective is set, it is useful to give some more insight in the airline industry. Earlier already some characteristics of the industry were mentioned, in this section the airline industry is further described. In the industry analysis the concept of Thompson and Strickland (2003) is followed.
Market size
The table below illustrates the global market size of the airline industry.
Table 1 Market Size
Global Commercial Aviation Industry 2003 2004 2005 2006 2007 F 2008 F
REVENUES, US$ billion 322 379 413 449 473 496
Passenger revenue 249 294 325 358 380 401 Cargo revenue 40 47 50 54 56 58 Traffic volume growth%:
Passenger, tonne kilometers performed 1.5 13.9 7.3 5.2 5.3 5.4 Cargo, tonne kilometers performed 4.3 11.9 2.7 4.0 4.0 6.0
NET PROFIT, US$ billion -7.6 -5.6 -4.1 -0.5 5.1 9.6
% margin -2.3 -1.5 -1.0 -0.1 1.1 1.9
Source: Industry Financial Forecast Table (IATA Economics), www.iata.org. Years 2007 and 2008 are forecasts.
The airline industry as a whole is both cyclical in nature and very marginal in terms of profit. The cyclical pattern of three or four years of losses followed by five or six years of profits can be seen in data from the last 25 years.
(Doganis, 2006). After the bad period from 9/11 (WTC attacks), SARS and the wars in Afghanistan and Iraq the aviation industry has experienced some good years since 2006. After years of losses 2006 was the turning point and all airlines together started making profits.
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Global alliances
Almost all developed countries have, or used to have, their own flag carrier. These types of airlines are the larger and internationally operating airlines. The national government usually has, or used to have, a big percentage of the shares. In this research the focus is on these large international operating flag carriers. Most of these airlines joined a global alliance. There are three global alliances, Star Alliance, Oneworld and Skyteam. In total 40 airliners are members of these alliances.
Table 2 Global Airline Alliances
Star Alliance oneworld SkyTeam
Passengers per
year 413 million 319.7 million 372.9 million
Destinations 855 692 728
Market share 25.1% 14.9% 20.8%
Participants Adria Airways (JP) Air Canada (AC) Air New Zealand (NZ) ANA (NH)
Asiana Airlines (OZ) Austrian Airlines (OS) Blue1 (KF)
bmi (BD)
Croatia Airlines (OU) LOT Polish Airlines (LO) Lufthansa (LH) SAS (SK)
Singapore Airlines (SQ) South African Airways (SA) Spanair (JK)
Swiss International Air Lines (LX) TAP Portugal (TP)
Thai Airways International (TG) United (UA)
US Airways (US)
American Airlines (AA) British Airways (BA) Cathay Pacific (CX) Finnair (AY) Iberia (IB) Japan Airlines (JL) LAN (LA) Malév (MA) Qantas (QF) Royal Jordanian (RJ) Aeroflot (SU) Aeroméxico (AM) Air France (AF) Alitalia (AZ) Continental (CO) Czech Airlines (OK) Delta (DL) KLM (KL) Korean Air (KE) Northwest (NW)
Network strengths North America (AC, UA, US) Central America (AC, UA, US) Caribbean (AC, US)
Europe (BD, LH, TP, JK, LO, LX, OS, SK, KF, LO, JP, OU) Middle East (LH, OS) Africa (LH, SA)
Asia (SQ, TG, NH, OZ, UA)
US & Canada (AA) Mexico & Central America (AA, IB) Caribbean (AA, LA) South America (LA, IB) Europe (BA, AY, IB, MA) Middle East (RJ) Asia (CX, JL)
US & Canada (DL, CO, NW) Mexico & Central America (AM, CO, DL)
Caribbean (DL, CO)
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New Zealand (NZ) Pacific Islands (NZ)
Australia & New Zealand (QF)
Pacific Islands (QF, LA)
Asia (KE, NW) Africa (AF) Pacific Islands (CO)
Network weaknesses
South America Africa South America³ (Copa) Australia & New Zealand
Source: Wikipedia (http://en.wikipedia.org/wiki/Airline_alliance)
The industry is fragmented into many competitors, some of them have bundled their powers in the alliances mentioned above. As can be seen in the table above, the three global alliances are dominant in the sky in terms of market share. The degree of cooperation in an alliance differs. Some carriers hardly compete with each other, while others compete fiercely. One example of possible cooperation in an alliance is the combined offering of flights in Computer Reservation Systems (CRS). Travel agents book flights via CRS, when two, or more, airlines apply code sharing on their flights this flight is mentioned multiple times in CRS, plus connecting flights are more visible in the computer screen (Oum, Park, & Zhang, 2000).
Economies of scale are very important. It is a matter of life and death for airliners to be able to offer many destinations, few transfer, and to operate aircrafts with the highest possible occupancy. Because of the over-capacity in recent years the airliners have to fight hard to fill their aircrafts. This has lead to bigger market power for consumers, low prices, and low profitability for airliners (Doganis, 2006).
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Many distribution channels have been used to sell tickets, but nowadays the internet is the most important medium. The differences in the “product” that airliners offer mostly consists of the degree of comfort. The traditional flag carriers were used to offer classes like economy, first class and business class. But with the no thrill competitors (Easy Jet, Ryan Air, etc) there is a “new product” in the market. Although some new, mostly no thrill, airliners have entered the airline industry, it is an industry with high entry barriers. Especially the enormous costs associated with the purchase or lease of aircrafts prevent new possible entrants to enter.
Conclusion: The airline industry is a marginal and cyclical industry linked to growth of the world economy. This research focuses on the larger flag carriers. Most of these airlines have joined one of three global alliances that are created due to horizontal integration. Economies of scale are important and entry barriers are high, however in the last decade some new no-thrill carriers have entered the industry.
From highly regulated and restricted towards open skies
The airline industry looks as one of the most internationalized industries, however in terms of ownership it actually is strongly national. It was also an industry that was strictly regulated on many aspects, such as economic, technologic, and safety.
Bilateral air service agreements (ASA)
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Table 3 Key characteristics of traditional ASA's
Traditional Air Service Agreements (ASA’s
Market access • Only specified and limited number of points/routes to be operated by each airline
• Few 5th freedoms granted Designation • Single designation
• Substantial ownership and effective control of nationals of designating state
Capacity Capacity to be agreed upon between states, or 50/50 split
Tariffs • Tariffs related to cost plus profit
• Approval of both governments needed
• Airlines should use IATA procedures IATA is International Air Transport Association
The so-called freedom rights concern:
1. First freedom: the right to fly over another country without landing.
2. Second freedom: the right to make a landing for technical reasons (refueling) in another country without picking up/setting down passengers/freight.
3. Third freedom: the right to carry revenue traffic from your own country (A) to the country of your treaty partner (B).
4. Fourth freedom: the right to carry traffic back from country (B) to your own country (A).
5. Fifth freedom: the tight of an airline from country A to carry revenue traffic between country B and other countries such as C and D on services starting or ending in its home country.
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Non-scheduled charter flights and non IATA airline members created public pressure to allow more competition on international routes. These pressures pushed for liberalization and two stages of liberalization developed. The “open-market” phase up to 1992, and the open-skies phase from 1992. However, despite liberalization, in 2005 the majority of bilateral agreements were still of the traditional type, as described in table 3.
Open markets USA
In 1978 the USA signed a new more liberal ASA with the Netherlands, this was the first liberalized ASA. Soon other countries as Germany and Belgium followed, but the United Kingdom and Japan for example did not sign a new ASA. The new “open-market” bilateral were more attractive for the USA than for the European countries. American airlines could fly from any point in the USA and benefit from the multiple designation (European countries had only one international airline).
Table 4 characteristics of USA open market bilaterals
US Airlines Foreign airlines Any point in USA to
specified point in foreign country
Access to only limited number of USA points Market access
Extensive 5th freedom rights granted, but more for USA carriers
Unlimited charter rights included Designation • Multiple
• Airlines must be under substantial ownership and effective control of nationals of designating state
Capacity No frequency or capacity control
Tariffs Filed tariffs become operative unless both governments disapprove
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fly from any point in either country, and no capacity controls were among the most important features of this new treaty.
Table 5 Traditional and open market European bilateral agreements Traditional (before 1984)
Open market (after 1984)
Only to points specified Airlines can fly on any route between two states
Market access
Limited 5th freedom rights granted
• Single • Multiple Designation
Airlines must be under substantial ownership and effective control of nationals of designating state Capacity Shared 50/50 No capacity control Tariffs Double approval Double disapproval
Despite the many liberalizations compared to the situation of half a decade or even to the 1970’s the airline industry still was strictly regulated and had many restrictions. In the early 1990’s new public pressure to further open up and liberalize the airline industry arose. Due to meetings and conferences where aviation experts, airline executives, and government officials called for normalization of the airline industry, the fact that some countries benefitted more of the bilateral agreements than others, and maturing of the airline industry the need for a new system became clear. The industry had changed on several aspects. The US airline industry had concentrated and had manifested itself as big players in the international market, international airlines searched for concentration in the form of alliances, mergers and acquisitions, privatization of airlines led to loosening of government ties, and among the airlines the wish for further privatization and less government support gained support.
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and sign similar agreements. The most important feature of these ASA’s concerned the code-sharing possibilities. Code-sharing is when airline A adds its partner’s code on its flight, for example when a customer buys a KLM ticket Amsterdam-New York it can fly in a North West aircraft. These code-sharing agreements were granted anti-trust immunity, this means that it can’t be prosecuted for anti-competitive actions.
In Europe the so called “third package” was introduced in 1993. The three most important features of this new treaty concerned market access, pricing and ownership and control liberalization. The European Union member states agreed upon open market access; any airline from any member state can operate on any route within the EU without capacity restriction and all price controls were abandoned. In the light of this research the most important new agreement was that the ownership and control restrictions were loosened. From now on European airlines did not have to be majority owned and effectively controlled by nationals of that state, but by nationals of any EU member state. This gave room to cross-border mergers and acquisition in Europe. However, the European Commission still had tools to control mergers and acquisitions. When a merger or acquisition leads to the situation that the new airline has a dominant position on certain routes the commission can impose restrictions such as giving up slots or divesting in an airline.
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Chapter 3 Theoretical Framework
This chapter deals with the sub questions posed in the first chapter. Furthermore hypotheses are developed based on the theoretical framework. These hypotheses are applied in chapter 5. But first the concepts of merger, acquisition and alliances are elaborated upon.
Defining mergers, acquisitions and strategic alliances
The first sub question is about defining the terms merger, acquisition and strategic alliance.
What is a merger, acquisition, or strategic alliance? In what aspects do they differ and to what extent do they have similarities?
Strategic alliance
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Mergers and acquisitions (M&A’s)
“A merger is a combination and pooling of equals, with the newly created company often taking on a new name. An acquisition is when one company, the acquirer, purchases and absorbs the operations of another, the acquired. The difference between a merger and an acquisition relates more to the details of ownership, management control and financial arrangements than to strategy and competitive advantage” (Thompson and Strickland 2003, page 177). In a merger these aspects are more or less equally divided between the two companies, in an acquisition the acquirer takes on most control.
In both cases, a merger and an acquisition, two separate entities are transformed into one (new) entity.
In this paper the focus will be on horizontal M&A’s and alliances, and the terms merger, acquisitions, and M&A are used interchangeably. Horizontal cooperation refers to cooperation between rival companies that have the same position in the value chain.
Motives
Why does an airline want to collaborate with another airline, either in an alliance or merger? Major airlines have the “desire to offer a global service, increase service quality, exploit size economies, and gain market power” (Barla & Constantos, 2006). Vanderkraats (2000) recognizes that “most airlines have formed alliances to remain cost efficient, compete effectively, and further strengthen their economic potential”. Another important motive for collaboration is the reduction of competition, by combining airliners competition is reduced and the airliners increase market power at the cost of the consumers.
How do an alliance and a merger differ?
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Table 1; Short overview of characteristics of mergers and alliances.
Merger or acquisition Strategic alliance Negotiation Complex, more time needed Easier, takes less
time
Starting costs Higher Lower
Financing Cash (debt) or equity None (if non-equity)
Integration costs Higher Lower
Possible synergies
More Less
Legal One new entity No change
Control One (new) board controls new firm
No change
Exit costs Very high, if not impossible Lower
(Hitt, Ireland, & Hoskisson, 1999)
Summarizing
Strategic alliances and M&A’s are both focused on cooperation and collaboration between two or more companies. The main difference is that in an alliance the partners cooperate on one aspect and compete on another aspect, and each partner remains an individual entity. In a merger or acquisition two separate entities are transformed into one and all resources are combined.
Strategic alliances are simply the second best solution
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factors that influence the decision between an alliance and a merger this research gives a more complete view.
Internal factors
This paragraph deals with the first sub question from chapter one. The internal factors that influence the decision between a merger and a strategic alliance are discussed. By assessing these factors hypotheses are developed concerning the circumstances under which an airline company would prefer a merger or a strategic alliance.
Which internal factors influence the decision between an acquisition and an alliance? When following the model of Thompson and Strickland (2003), figure 2 chapter 1, in this research the focus will be on the company’s resources, strengths, weaknesses, capabilities and strategy.
Financial situation
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bad credit rating would prefer an alliance over an acquisition, an airline with a good credit rating would prefer an acquisition. (Hypothesis one)
Experience in mergers and alliances
Firms can be blinded by their success in previous experiences. “If the firm pulls off a successful alliance or two, it will forever insist on entering into alliances even when circumstances demand acquisitions. This might be due to “organizational barriers” that prevent companies from objectively comparing (dis) advantages of the strategies” (Dyer et al. 2004). Hypothesis two therefore is as follows: airline companies with successful experience in alliances prefer alliances, and companies with a successful M&A history prefer another merger.
Expected synergies
Dyer et al (2004) distinguish three types of synergies. The types of synergies are linked to forms of collaboration. The type of synergies that are to be expected in airline collaboration (increasing number of destinations, joint capacity setting, more market power, etc.) are reciprocal types of synergies that are best extracted in a merger or take over. Oversimplified one could conclude that in vertical collaboration alliances are advised by Dyer et al (2004), and in horizontal collaboration mergers and take over’s are advised. In this research I focus on collaboration between one airline and another (horizontal integration). Since all cases in this research are horizontal forms of cooperation in the airline industry, it is not possible to extract a hypothesis. The conclusion here is that in the light of extracting reciprocal synergies, mergers or take over’s to be preferred over alliances.
Motives for collaboration
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2006) for collaboration and which form of collaboration would be most suitable.
Competition reduction
One of the reasons for collaboration is to reduce competition. Airliners will not soon admit this motive because reduction of competition often leads to higher fare prices which is not appreciated by regulators. Regulators rather stimulate competition. Not all alliances or mergers reduce competition, competition is only reduced when the collaborating airliners have overlap in the routes they fly. On those routes they become partners instead of competitors. Then there is also a difference between mergers and alliances. When two airliners merge they become one airliner and of course all competition is lost. However, when two firms form an alliance there is still some form of competition. When alliance partners fly the same routes they often divide capacity between each other, but sell the tickets separately. This means there is still some form of competition. To conclude, because a merger would reduce competition more than an alliance, one would expect that from this viewpoint airliners would rather merge. Because this applies to all cases a hypothesis can not be developed.
Cost reduction, increasing efficiency, economies of scale
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Again, like the two previous factors, considering cost reduction, efficiency and economies of scale motives a merger would be the preferred form of collaboration.
Offer a global service, increase the number of destinations
One of the most important motives for collaboration in the airline industry is to be able to offer the passengers a global service. Why you ask: “Most consumers prefer to fly with a large airline which has an extensive international network” (Oum et al 1993). This means that an airliner offers service “from all airports to all other airports”, or at least as many airports possible. No airliner can reach this goal through autonomous growth, therefore collaboration is needed. This goal can be achieved through mergers or forming alliances. The difference between these two forms is quite small. In an alliance the partners use each others services to offer global service to passengers. For example, if company 1 flies from A to B, company 2 flies from B to C, then company 1 offers service from A to B and from A to C via B. The passenger flies from A to B with company 1, and transfers to company 2 for the flight B to C. The advantage for customers is that they only have to buy one ticket from one company, and usually these flights are matched to each other so that there are no long waiting times etc. The advantage for airline 1 is that it can offer its clients more destinations, and airline 2 receives passengers from airline 1.
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External factors
Political and legal
Private, public, and state influence
The airline industry has been, and still is, a key national industry for most countries. It has long been treated as an important national heritage by states. Most countries have, or used to have, at least one national carrier. This national carrier was owned by the state. In recent years more and more states have privatized their airlines. Some airlines are completely private, others are still partly owned by the state, the trend however, is to privatize the airliners, some countries do this at a faster pace than others.
Other than normal share ownership some countries have, or had, a system in which the state had a “golden share”. This share gives the owner, the state, a veto in certain important decisions, such as forming an alliance or merging with another carrier. This gives the state great influence in the airliner.
There is a difference in cooperation between airliners from the same country and cross border cooperation. Many states consider an airline more or less “national property”, they do not want foreign ownership of their airlines. This makes national mergers and acquisitions easier than international M&A’s. In the next section it becomes clear how states protect their airliners against foreign control. It is obvious that states don not want their national carrier(s) to be acquired by a foreign airliner. An alliance with a foreign partner is usually no problem because the ownership does not change.
On the other hand, foreign airliners often are not interested in acquiring an airliner that is under state control, this limits their control too much. Also, when the target airline’s government has a golden share this is considered a problem. Again this limits the freedom of control too much.
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a foreign airline, and private airlines are more likely to be acquired than to enter an alliance. (Hypothesis three)
Legal, restrictions to foreign ownership
In many countries there are restrictions regarding foreign ownership of airliners. In the past it was highly restricted or even forbidden for foreigners to own shares of an airline company. Over the years many countries liberalized their policy on foreign ownership of airline companies. Nowadays foreign ownership in many countries is allowed, but there are still restrictions on the maximum percentage that can be owned or restrictions on voting rights. (See the Open Skies treaty in chapter 2). Restrictions on foreign ownership make it very difficult, if not impossible, for foreign airliners to acquire an airline. These restrictions generally do not apply to alliances.
Hypothesis four: Airliners in countries with high restrictions on a majority foreign ownership are more likely to enter an alliance with a foreign airliner than to be acquired by one, and airliners in a country with no restrictions on foreign ownership are more likely to be acquired.
Economical
World economyThe airline industry is a highly cyclical and, in terms of profitability, marginal business. And it appears to be closely linked to the world economic climate (Doganis 2006). In unstable markets and in economic downturn periods airliners apply cost cutting and enter strategic alliances to protect revenues (Datamonitor 2003).
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In times of low growth or shrinking economy alliances are preferred over M&A’s, and in times of high economic growth M&A’s are preferred over alliances (Hypothesis five).
Oil prices
The oil price is very important to the airline industry, it mirrors the price of jet fuel (Doganis, 2006). Especially in recent years where the oil price has more then doubled in two years, from $28 per barrel in 2003 to $64 per barrel in 2005 and even close $80 per barrel in mid 2007. But also in the early and late 1970’s the oil price fluctuated a lot. To underline the significance of the oil price, in the early 1980s it represented one third of total operating costs of airlines (Doganis 2006). The oil price has a great influence on profitability of airliners. In times of high (uncertainty on) oil prices, one would expect airliners to favor an alliance over an acquisition, and when the oil price is low merger are to be preferred. (Hypothesis six).
Social
As described before the airline industry is an industry with high national importance. National airliners, flag carriers, represent the country. The people of this country and employees of a flag carrier often have a bond with “their own national carrier”. In this light it is easy to understand what reactions a take over by a foreign airliner might cause. Combining cultures and nationalities via a merger can be very difficult and risky operation (Oum, Park, & Zhang, 2000). So, an alliance might be a solution to this. In an alliance the airliners will remain separate entities with their own nationalities. This of course only applies to cases of cooperation with two airlines from different nationalities. In domestic cooperation nationality is not a factor.
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Technological
Although there are some technological factors that have contributed to the consolidation pressures (see chapter one and two), there are no technological factors that influence cooperation strategy in the airline industry. The most technological aspects in the airline industry concern the aircrafts and the IT applications for selling tickets and boarding. Although these factors might be a reason for cooperation, they do not influence the decision between an acquisition and alliance.
Theoretical model
Now the internal and external factors are identified and discussed a theoretical model can be drawn. The internal factors can be divided in two parts, variable factors and unchangeable factors. The financial situation and previous experience differ per airliner and per case and can be tested with the hypotheses. But the expected synergies, and competition and cost reduction motives apply to all cases, in all cases these factors indicate that a merger or acquisition would be the best form of cooperation.
The external factors are all variable factors and indicate per case a preference for an alliance or merger. In the model all factors are summarized and per factor is shown how the choice for an alliance or merger is determined.
6 Theoretical Model
Merger / acquisition Alliance
Internal factors
1. Credit rating Good Bad
2. Previous experience Successful mergers Successful alliances Expected synergies,
competition and cost reduction motives
No variables, always preference for a merger or acquisition Global service Not variable, therefore
not applicable (N/A)
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External factors
3. State ownership Less than 25% state ownership
More than 25% state ownership 4. Foreign ownership restrictions No restriction to foreign majority ownership Foreign ownership restricted to less than 50%
5. Economic growth Higher than 2,4% Lower than 2,5%
6. Oil price Low High
7. Nationality Domestic International
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Chapter 4 Methodology
In chapter one the research question and sub question are identified, chapter two has given a description of the airline industry, and in the previous chapter the theoretical framework for this research has been build. Now that the hypotheses are embedded in theory the hypotheses need to be answered. In this chapter the methods to measure the hypotheses are explained. Per hypothesis an explanation is given on how the criteria are determined and measured.
In the second part of this chapter the focus is on the selection of the airliners and cases.
Testing hypotheses and data collection
In this section methods for data gathering and criteria for interpreting the data are discussed per hypothesis. For detailed analysis of all the cases see appendix 3.
Hypothesis one; A company with a bad credit rating would prefer an alliance over an acquisition.
To asses the creditability of an airline the credit ratings of Moody’s are used. A rating of A, AA, or AAA is considered to be a good rating, and ratings lower than A, such as B, BB etc, are considered a bad rating. See also appendix 4. The data is extracted from reports of Lehman Brothers, due to restrictions on the use of these data the original reports can not be included in the appendix. Hypothesis two: Airline companies with successful experience in alliances prefer alliances, and companies with a successful M&A history prefer another merger.
The success of an alliance or merger can be measured by many criteria; share price, profits, occupancy of aircraft etc. In this research cooperation is claimed to be successful when the directors or executives of an airliner say it is a success. This will be determined based on annual reports and interviews in the press. In appendix 3 an interpretation of the success is given per case. Hypothesis three: airlines in which the state has control are more likely to enter an alliance with foreign partners than to be taken over by a foreign airline, and private airlines are more likely to be acquired than to enter an alliance.
State ownership is measured by the percentage of share ownership of the state in an airline. A share ownership of more than 25% is considered to have substantial influence in the airline. Data on share ownership is collected from annual reports and articles in various press.
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than to be acquired by one, and airliners in a country with no restrictions on foreign ownership are more likely to be acquired.
Countries that restrict foreign airliners to have a majority share (more than 50,0%) in an airline are considered to have high restrictions. Data on foreign ownership restrictions is extracted from the various treaties (appendix 1 and 2) and is already discussed in chapter 2.
Hypothesis five: In times of low growth or shrinking economy alliances are preferred over M&A’s, and in times of high economic growth M&A’s are preferred over alliances
Economic growth is measured by change in gross domestic product, these data are extracted from the International Monetary Fund, World Economic Outlook. A growth in world gross domestic product of more than 2,9% is considered to be high, and a growth of 2,9% or less is considered to be low. To determine economic growth the year in which the deal is made and the previous year are taken into account, an average of these two years is taken. See appendix 4 for detailed information on economic growth.
Hypothesis six: In times of high (uncertainty on) oil prices, one would expect airliners to favor an alliance over an acquisition, and when the oil price is low merger are to be preferred.
It is difficult to determine when the price of oil is high. In this research the oil price is considerd to be high when it is more than 10% higher than the average of the two previous years. Data on the oil price is extracted from the International Monetary Fund, World Economic Outlook. See appendix 4 for detailed information on oil prices.
Hypothesis seven: In international cooperation an alliance is preferred over an acquisition. In domestic cooperation a merger or acquisition is preferred. The nationality of the majority of the owners of an airline determines the nationality of an airline. Data on ownership nationality is extracted from annual reports, press articles or regulations on foreign ownership.
The answers to the questions posed above are given per case and summarized in tables. Below you see an example of how the results are summarized and should be interpreted.
Table 7 Example of table with outcomes per case
Northwest Eurowings Alitalia
Internal factors
1. Credit rating - + + 2. Previous experience N/A + + Expected synergies, competition
and cost reduction motives - - - Global service +/- +/- +/-
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3. State ownership - - + 4. Foreign ownership restrictions
+ - -
5. Economic growth + - - 6. Oil price - - - 7. Nationality + + +
This table is a copy of the KLM Alliances results. There are four possible outcomes per hypothesis; +, +/-, -, and N/A. A + means that the result is in line with the expected outcome. Looking at the table above at the credit ratings; The first hypothesis is that when the company has a bad credit rating, an alliance would be preferred over a merger. At the moment of the alliances with Eurowings and Alitalia KLM had bad credit ratings, so this is in line with the expected outcome (an alliance). For this reason a + is ticked in the box. A – sign indicates the chosen form of cooperation is not in line with the expected outcome. Although KLM had a good credit rating, KLM and Northwest chose an alliance, this is not in line with the expected outcome so a – sign is ticked. Of course N/A means not applicable, and a +/- sign indicated that the result is neither in line, or contrast to the expected outcome.
A + sign indicates that the result is in line with the expected outcome, and a – sign indicates that the result is opposite from the expected outcome.
In the next chapter not all results are discussed, for detailed information of the cases please see appendix 3.
Case selection
To test the hypotheses four airliners are selected, per airliner a number of cases (alliances and/or mergers) are selected to apply the hypotheses. The airliners are selected on these criteria:
1. Size of the domestic home market. The size of the domestic market can be of great importance since this influences the possibilities of domestic alliances and mergers. Because of the difference in domestic and foreign ownership this is an important criterion.
2. European and American market. These two markets are the most important geographical markets in the airline business, therefore two airlines of each continent are included in the sample.
Table 8 Airline selection
KLM Air France United Airlines American Airlines Size domestic market
Small Medium Large Large
European / US
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In selecting the airlines the importance of balancing similarity and diversity was considered. To ensure research validity it is important to have a both diverse and similar sample.
The two criteria for the selection of the airliners are chosen because the size of the home market can have a big impact on whether or not domestic cooperation is an option. Europe and US are the largest and most important airline markets, therefore two airlines of each market are selected.
Cooperation cases are selected per airline from the period 1992-2007. This period of 15 years starts in 1992 when the first attempts towards “open skies” were enforced. Before 1992 international forms of cooperation were rare, but since the KLM – Northwest alliance (1992) international cooperation has increased. Not all the mergers, acquisitions and alliances of the four selected airliners are discussed. Per airliners three to five cases are selected, the hypotheses are applied on these cases. Because of time and other resource constraints it is not possible to discuss al cooperation’s in this 15 year period. If possible two alliances and two M&A’s are selected.
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Chapter 5 Results
In the previous chapter four airlines are selected, from each of these airlines a number of cooperation cases are selected. These are cases from the period 1992-2007. Not all the alliances or acquisitions are discussed, but per airline 3-5 cases are selected.
The hypotheses developed in chapter 3 and discussed in the methodology are applied to the selected cases. The results are presented in tables, the background information is enclosed in the appendix. Only the results are shown here. Per airline two tables are shown, one for the alliances and one for the mergers that the airline has engaged in. A guideline on how to interpret the tables is given in the next section.
The airlines that are used in this research are KLM, Air France, United Airlines and American Airlines.
KLM
These are the selected cases for KLM:
• Alliances: ’92 Northwest, ’95 Eurowings, ’98 Alitalia.
• Mergers/Acquisitions: ’93 Air Uk, ’03 Air France
In this section the hypotheses from chapter three are applied on a number of alliances and mergers/acquisition in which KLM was involved. Three alliances and two mergers or acquisitions are selected; alliances with Northwest in 1992, Eurowings in 1995, Alitalia in 1998, the acquisition of Air Uk in 1993 and of course the merger with Air France in 2003. Per case a short
introduction is given.
Alliances
Northwest
In 1992 Northwest and KLM created the first transatlantic alliance. “Not only was the Northwest/KLM alliance the first airline alliance in the world, ours is the most deeply integrated. The Northwest/KLM alliance coordinates
schedules, prices and capacity under an Open Skies agreement between the United States and The Netherlands.” (From
http://www.nwa.com/corpinfo/upclose/).
Eurowings
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annually transfer to either KLM or Northwest for long-haul flights.” (Eurowings aligns with KLM, 1998)
Alitalia
“The KLM/Alitalia deal is the most comprehensive alliance yet. The two companies have taken unprecedented steps toward truly melding each
company's service offerings into one transparent network. . Network planning, sales, marketing, and revenue management will be interwoven. A joint
alliance board will oversee the integrated management of passenger and cargo operations. Each airline maintains autonomous control of capacity and crews. However, decisions pertaining to the shared fleet of aircraft will be made jointly, and profits will be split 50/50. “ (KLM/Alitalia take joint operations to higher plane., 1999).
Table 9 KLM Alliances
Northwest Eurowings Alitalia
Internal factors
1. Credit rating - + + 2. Previous experience N/A + + Expected synergies, competition
and cost reduction motives - - - Global service +/- +/- +/-
External factors
3. State ownership - - + 4. Foreign ownership restrictions
+ - -
5. Economic growth + - - 6. Oil price - - - 7. Nationality + + +
In this table a summary of the tests of the hypotheses is shown. Per KLM alliance (Northwest, Eurowings, and Alitalia) the seven hypotheses are applied.
The three signs in the table, the “+”, “-“, and “+/-“ explain the outcome of the testing of the hypothesis. A plus, “+”, means that the chosen form of
cooperation is in line with the hypothesis, a minus “-“ means that this form of cooperation is not what the hypothesis predicts, and a “+/-“ means that the hypothesis does not indicate a preference for either an alliance or merger. “N/A” is not applicable.
Mergers and acquisitions
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Air UK was a wholly privately owned, Independent regional British airline formed in 1980 as a result of a merger involving four rival UK-based regional airlines. In 1995, KLM increased its minority stake in Air UK to 45%. In 1999 KLM became Air UK's sole shareholder when it bought out British Air
Transport Holdings. The following year Air UK was renamed KLMuk. (http://en.wikipedia.org/wiki/Air_UK)
Air France
“The tie-up between KLM and Air France creates one of the largest and most powerful airlines in Europe. The ground-breaking deal — which effectively sees Air France acquire its smaller rival for £545.5 million — creates a carrier with more than 100,000 employees, two large hubs, two complementary networks, aggregated revenues of £13.3 billion and 226 destinations. Both airlines will retain, for at least five years, their national identities, logos and brands. KLM shareholders will own 19% of the company, the French state 44% and existing Air France shareholders 37%. Similar deals could become more common if talks between the European Union and US to liberalize transatlantic routes are successful.” (from: Travel Weekly, 2003)
The Air France – KLM deal was announced in 2003 and effectively closed in 2004. The decision to prefer a merger, or acquisition by Air France, was made in 2003, therefore 2003 is the year that is used in the testing of hypotheses. Table 10 KLM Mergers & Acquisitions
Air Uk Air France
Internal factors
1. Credit rating - + 2. Previous experience - +/- Expected synergies, competition and cost
reduction motives + + Global service +/- +/-
External factors
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Air France
These are the selected cases for Air France:
• Alliances: ’99 Delta Airlines, 2003 Alitalia.
• Mergers/Acquisitions: ’97 Air Inter, 2000 Regional Airlines, 2003 KLM In this section the hypotheses from chapter three are applied on a number of alliances and mergers/acquisition in which Air France was involved. Two alliances and three mergers or acquisitions are selected; alliances with Delta Airlines in 1999, and Alitalia in 2003. The acquisition of Air Inter in 1997, the acquisition of Regional Airlines in 2000, and of course the merger with KLM in 2003. Per case a short introduction is given.
Alliances
Delta Airlines
“Air France and Delta Air Lines announced Tuesday the creation of a new partnership that analysts said was designed to carve up passenger and cargo traffic across the Atlantic and pave the way to a third global air alliance. Analysts said that Groupe Air France, which was partly privatized earlier this year, was seeking to bolster its 5 percent share of trans-Atlantic traffic and compete against its main European rivals, British Airways PLC and Lufthansa AG, which have significantly higher shares in that market through rival
alliances. At the same time, the new deal will give Delta Air Lines Inc.
immediate access to hundreds of European destinations through Air France's hub at Charles de Gaulle airport near Paris. Delta has long complained about being excluded from trans-Atlantic traffic by American Airlines' preferential access to Heathrow airport near London through its partnership with British Airways in the Oneworld alliance.“ (International Herald Tribune, June 23 1999).
Alitalia
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Table 11 Air France Alliances
Delta Alitalia
Internal factors
1. Credit rating - - 2. Previous experience + + Expected synergies, competition and cost
reduction motives - - Global service +/- +/-
External factors
3. State ownership - + 4. Foreign ownership restrictions + - 5. Economic growth - - 6. Oil price + - 7. Nationality + +
Mergers and acquisitions
Air Inter
As part of the ongoing reorganization of Air France by its president Christian Blanc, officials have revealed that the company -- which until now has concentrated on the domestic market -- is going European. Under the new plan, Air France "Europe" will merge its operations with Air Inter, the other carrier owned by Air France. The merger is scheduled to take effect on January 1, 1997.
The two airlines, which jointly employ 16,000 workers, experienced a deficit in 1993 totaling $454 million and are facing an intensified competition coming to the European market with the arrival of Euroconcept, a similar European merger of British Airways and Lufthansa.
Regional Airlines
“Regional Airlines is being acquired by Air France Finance for around $62.5 million. Following approval by various competition authorities, Air France will hold 70% of Regional's capital. Jean-Paul Dubreuil, whose family founded the carrier, will remain chairman.
The acquisition will enable Air France to complete its network of partnerships with various third-level airlines. As part of that effort, Regional will provide aircraft for thin Air France routes and connecting traffic to hubs at Charles de Gaulle and Lyon. Air France also will gain access to markets it does not now serve. Regional, which operates 250 daily flights to 160 destinations
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Brasilias and ERJ-135s/145s and posted revenues of $176 million.” (Air Transport World, Mar2000)
KLM
“The merger between KLM and Air France, ratified in mid-October, created the biggest airline in the world in terms of turnover. Under the all-stock deal Air France valued the Dutch airline at €785m. The agreement was signed after KLM gave job security guarantees to its workforce. The merger between the two national flag carriers will create a holding company Air France-KLM with an annual revenue of €19.2bn. KLM shareholders will have 19% and the French, including their government, the rest.
Dominic Edridge, transport analysts with Commerzbank in London said that a combination of factors was behind the deal. "Obviously there was the financial pressure in the aviation industry in the EU and the US where greater size is believed to bring greater synergies and cut costs," he said.
But he said the aviation environment could also change in the near future where large airlines offering two hubs, as AF-KLM will, could be at an advantage.”( Business Travel World, nov 2003)
Table 12 Air France M&A's
Air Inter Regional KLM
Internal factors
1. Credit rating - + - 2. Previous experience + + - Expected synergies, competition
and cost reduction motives + + + Global service +/- +/- +/-
External factors
3. State ownership +/- + + 4. Foreign ownership restrictions
+ + +
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United Airlines
These are the selected cases for United Airlines:
• Alliances: ’94 Lufthansa, 1998 Delta Airlines, 2000 US Air.
• Mergers/Acquisitions: None.
In this section the hypotheses from chapter three are applied on a number of alliances in which United Airlines was involved. In the period 1992-2007 United Airlines did not acquire or merge with any airline of importance. Some routes of the bankrupt Pan Am airline were bought and an attempt was made to acquire US Air. However this acquisition was prohibited by regulators, instead United and US Air created a far stretching alliance.
Alliances
Lufthansa
“The LH/UA partnership, formed on June 1, 1994, is a commercial alliance without equity investment. As of December 1994, LH codeshared on UA flights serving 25 U.S. cities beyond UA hubs, while UA codeshared on LH flights serving 30 European and Middle Eastern cities beyond LH hub. They also code shared on their flights between their hubs. Each partner offered the same number of flights on the non-stop routes as before the alliance. For example, each partner provided 31 flights between Washington, D.C. and Frankfurt in July 1993 (pre-alliance) and July 1994 (post-alliance). Due to the code sharing, both partners offered 62 flights because each put its flight codes on the other’s flights”. (Review of Industrial Organization, June 2000)
Delta Airlines
In 1998, Delta Air Lines and United introduced a marketing partnership that included a reciprocal redemption agreement between SkyMiles and Mileage Plus programs and shared lounges. This scheme allowed members of either frequent flier program to earn miles on both carriers and utilize both carriers' lounges.Delta and United attempted to form an even cozier code share relationship, but this was prevented by regulators. (http://en.wikipedia.org/wiki/United_Airlines)
US Air
In May 2000, United announced plans to acquire competitor US Airways in a complex deal valued at $11.6 billion. The offer drew immediate scorn from consumer groups and employees of both airlines. By the following year, regulatory sentiment was against the deal, and United withdrew the offer just before the Department of Justice barred the merger on antitrust
