The difficult tale of airline mergers — here’s the challenges of Indian civil aviation and Air India’s too

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Mergers and acquisitions are a key element of free markets. The represent an opportunity for firms to make strategic choices and in many cases amplify growth prospects for companies, help integrate supply chains or offer a chance at changing the industry dynamics.

In other cases, mergers and acquisitions may help with talent acquisition, technology acquisition or even survival of the firm itself. In all cases, the goal is greater economic benefit as measured by returns on capital. Yet, all mergers and acquisitions are not value accretive. Indeed, in many cases they can be extremely messy and often lead to eroded values and permanent loss of capital. And when it comes to airlines, majority of mergers and acquisitions fall in the latter category. 

A not so straightforward equation

Airlines are a fairly unique business. With high capital costs, constant regulatory mechanisms and labour-intensive processes, the margins are thin, returns on capital tepid and profitability (if at all) is measured at the lower end of the spectrum. After years of losses, for some airlines a merger or acquisition is the only hope for survival.

By the numbers, a merger or acquisition is a fairly straightforward equation. Take two companies with two revenue streams and two cost bases. Combining the companies means you add the revenue streams and the cost bases where you initially add the costs but then subtract the synergies. At the end of it you have a linear growth of revenues for the two firms but not a linear growth of costs. And therein lies the initial value. As the firm grows, this value accretion can become stronger based on a greater market share, better purchasing power and profitability prospects.

Overall, the merger or acquisition looks very good on paper. But what the numbers often miss is the institutional capability and the integration of cultures. And as far as airlines go, this constitutes the greatest challenge. And managing the culture and integrating cultures is a task that humbles even the most seasoned of managers. 

Over the years, airlines have evolved into two distinct classifications and consequently cultures. Namely, the full-service carrier and the low-cost carrier. The difference in names highlights a difference in philosophy and in culture. A full-service airline, aims at providing a full-suite of services for the traveller but at a higher price point. On the other hand, a low-cost carrier aims at only providing the basics that is getting a passenger from an origin to a destination in the lowest cost possible.

But combining these two classifications is inherently in conflict as it combines two different cultures — two different ways of thinking; two different ways of being; and two different ways of operating. The numbers simply cannot capture this. And this is where most airlines face the most turbulence. 

Emotion leads, logic may or may not follow

With regards to cultural integration of airlines, emotions lead the way. This is because of the intense nature of airlines. Consider a check-in agent who interacts with 1 passenger every 3 to 5 minutes. In a 10 hour shift even adjusting for breaks, this person would have had close to 100 interactions. Over a year, adjusting for time off, these would amount to well in excess of 22,000 plus interactions. That is with one cohort alone.

Add to those,  interactions with security staff, colleagues, competitors and regulators and each airline employee is consistently reinforcing the airlines identity as a part of his/her own. This is repeated for various functions in airlines — day after day. Over time this becomes inseparable with the employee’s own identity. Any violation of this identity is an extremely emotional event. 

Airlines also, for some mysterious reason, evoke a sense of pride. As summed up by Leonardo Da Vinci in his famous quote, “When once you have tasted flight, you will forever walk the earth with your eyes turned skyward. For there you have been, and there you will always long to return” this often holds true for airline roles as well.

Ask most airline employees about their challenges and a lengthy list will pour out; ask how long they have worked in the industry and it is usually measured in decades. Within airlines, this phenomena is often referred to as “golden handcuffs” and it is indeed a reality that most folks once they join the industry simply do not leave. 

Thus as merger and acquisitions decisions are taken, despite best intensions and well-reasoned and understandable arguments including the survival of the airline itself — these are not received in the same manner. Emotion simply takes over. This is often witnessed in ways that are visible and other ways that are not-so-visible. And it is a pattern that has been repeated the world over with mergers and acquisitions of airlines —  big and small, strong and weak, and successful and unsuccessful. 

Contrarian approaches are often required; the end goal must be clear

For airlines, the ability to control costs is critical. Because in most markets and for most passengers price is a key determinant. And the lack of a competitive cost base means either the airline loses out on margin or on profitability. A merger or acquisition helps with economies of scale and economies of scope. By combining systems, procurement and passenger flows, a reduction in the cost base is almost always a certainty. 

But the caveat is that after getting to a competitive cost base, revenues must consistently cover those costs. And given the nature of travel demand which is cyclical and inconsistent, each flight contributes to success or the lack thereof. And the flights must operate on a consistent basis. In industry terms “schedule integrity” must be maintained. Because, most airlines make positive net contributions during peak seasons and in lean seasons they dent a significant portion of that very contribution. So every dollar counts. 

For any merger and acquisition the end goal must be clear. And it must be ingrained. The playbook for doing that is different depending on the nature of the airline(s). And often contrarian indicators are key. Much can be gleamed by noticing who is not joining leadership ranks rather than who is; what is not being addressed rather than what is; and where expectations are not being recalibrated rather than where they are. There is no easy solution. There is no framework that can be force-fit. And ironically, in an industry driven by checklists, there is no checklist to achieve this. 

The philosopher Karl Popper famously wrote in his seminal paper that clouds are intended to represent physical systems which, like gases, are highly irregular, disorderly, and more or less unpredictable…, and on the other extreme [we have] … a precision clock, intended to represent physical systems which are regular, orderly, and highly predictable in their behaviour. Combining both is messy at the very least and borders on the impossible. But most airline mergers try to do just that. 

—The author, Satyendra Pandey, is Managing Partner of the aviation services firm AT-TV. The views expressed are personal. 

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow