Saturday, February 16, 2008

3M - mega merger mania

The radio waves in the US and the rest of the world are buzzing with talk of merger mania. It's turning into a soap opera. Who is talking to who? Who's courting who? If those two airlines over there merge, who gets to keep their brand? Where will a merged carrier's base be located? These are all the same questions people ask when a couple are getting married. I guess it's no wonder that mergers are referred to as marriages.

The latest word on the street is:
  • United and Continental are eying each other from across the room
  • Northwest and Delta have been having intimate discussions behind closed doors
  • Continental may even be having thoughts about American
The buzz in the back allies is:
  • Somebody should play matchmaker with Frontier and JetBlue
  • Southwest may even be on the lookout for a partner
Merger talks come and go; it seems as if every time the industry is coming off a peak the chatter about who is talking to who picks up. The last merger the US industry has seen was American West merging with US Airways, with the former brand being relegated to the history books. The problem with mergers is that they seem great in theory, but concluding them successfully is another story. As soon as the honeymoon filled with analysts, consultants, and bankers is over and the daily routine sets in employees become distraught. It's as if their expectations are never fulfilled. One thing must always be remembered about mergers that make it different from a marriage ( least most): mergers always have a winner and a loser. With a merger it is impossible to keep everybody happy, and since this is a service industry that relies heavily on human input a merger usually results in unhappy employees and unhappy customers. Many executives forget that the road to happy customers is paved with happy employees. Mergers require enormous amounts of effort and skill. How is the fleet to be integrated? Dissimilar fleets is a greater problem than most analysts will admit. If an Airbus fleet is introduced into a Boeing fleet where are the cost savings going to come from? You still require some Airbus mechanics and some Boeing mechanics, so you can't just fire one employee group. There should be limited network overlap. Northwest brings a strong Asian presence to Delta's network, and vice versa. However, what happens at the regional level? There are a lot of regional carriers that supply those two carriers and there is level of overlap down in the trenches where most executives and analysts forget to look. Process integration in itself is an enormous undertaking. Airlines are highly complex service companies that have created their own in-house processes throughout their history. This isn't just a puzzle where a consultant can optimize one process because any changes can be felt throughout the entire airline. This is an integrated system. This is Chinese pressure points: massage the big toe and you may cause a headache. Finally, what about the employee groups? Unions play an important role in this industry and they are not always content with mergers. Remember, there is always a loser in this partnership. The most visible ones are the front line staff: flight, cabin, and ground crew. This is the face of the airline; the humanization of the firm; the people who take the (few) daily compliments and (tons of) abuse from customers. If these people aren't happy then the customers aren't happy, and what makes these people unhappy? If anyone, anyone at all, even thinks about touching their seniority number. You can take a pilot's wife, house, and child, but you better not take that seniority number. US Airways and America West pilots have not found a solution yet, Sterling and Maersk pilots have not found a satisfying integration yet, what will the pilots at Continental and United do? Even an acquisition has an implication of some justified solution; America West acquired US Airways, therefore America West employee groups should be placed ahead of US Airways employee groups. Theoretically, this may appear fair, but explain that to a 20 year US Airways veteran who is placed junior to a 2 year America West rookie. In theory fair, in practice unjust. There's always a loser. So, when you read about all the benefits of mergers, especially to the consumer, remember to cast a thought to the employees and don't be surprised if you fly with a sour Northwest crew in the future...they may just be the losers in the marriage.

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