Background
The case is based upon the merger of US Airways with American Airlines, which created the largest airline in the US. With facing serious financial losses in the prior years and even witnessing the bankruptcy since 2011, American Airlines has convinced US Airways to help it emerge from the bankruptcy. However, it is unclear whether the deal was equally profitable and does not pose risks for US Airways as well.
The management of both airlines believed that the two global carriers would join hands to be better equipped to tackle the larger industry with substantial global competition. The management also believed that synergy would be created to enhance the value of shareholders and financial strength and flexibility would be achieved while maintaining the current services and hubs to all existing destinations. The new ownership structure gave the shareholder AMR of 72% stake and US Airways about 28% of the stake. The deal was based on all stock transactions. The employees and customers, unions and teams of both airlines agreed to the merger. About $1.2 billion of transition-related expenses were to be incurred in a three-year period and would include the integration of the aircraft interiors, clubs, airports, their standardizations, and IT platform integrations. Synergy was forecasted at $1.05 billion, driven by the Cost and Network Revenue Synergies. For the management, the CEO of US Airways would continue working as a CEO and of American Airlines acting as Chairman.
Key Issues
The case builds upon raising concerns over the success of the merger of the two airlines when American Airlines has been witnessing subsequent financial losses and has the equity stake of 72 percent while being valued at $11 billion. The case raises questions about the quality of the service provided by the merged airlines and in the best interest of the creditors and shareholders of American Airlines. It also raises concerns that if the value was priced at the right amount as with no synergies, US Airways could take on the risks of the transaction as well.
Risks
The risks include that was the valuation of the American Airlines accurate enough or was it overpriced? Was the transaction considerate of the interests of the US Airways shareholders? Can the merger be successful in light of the size of both airlines and the industry and its number of competitive airlines? Are the US Airways shareholders witnessing some risks which are evident from the structure of the equity stake? Would US Airways be able to overcome the challenges and reap benefits from this deal?
Recommendations
It is true that the valuation of the American airline does not equal near to $11 billion, and thus it can be said that it was an overpriced deal. However, if the challenges are tackled effectively, given the benefits of synergy, US Airways and American can do so much better.
The American airline and the US Airways shareholders are the real winners in this deal. They stood to lose everything, and the newly merged carrier combines to reap a billion in one year in synergies, and with improving the economy, the rise in stock would raise the profits for both American and US Airways shareholders (Harty & Sloan, 2013).
The American Airline can take advantage of the US Airways route network domestically to earn and redeem their miles more profitable than before. The American Airlines Airplanes are the better ones in comparison to the old US Airways fleet. It can take advantage of this as well. The US Airways Dividend and the Advantage program of American Airlines are combined to give benefit to elites. The US Airways elites could be given the benefits of American Airline programs. The Saber based IT system of American Airlines would be better to implement as it also includes the choice fares platform (TPG.com, 2013).
References
Harty, J., & Sloan, C. (2013, Februrary). The American Airlines-US Airways Merger Will Unite 2 Companies With Tumultuous Pasts. Retrieved from https://www.businessinsider.com/questions-about-the-american-us-airways-merger-2013-2
TPG.com. (2013, November 13). The American Airlines / US Airways Merger: Winners and Losers. Retrieved from https://thepointsguy.com/2013/11/the-american-airlines-us-airways-merger-winners-and-losers/
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