Mergers and acquisitions in the EU low cost carrier market. A Product and Organisation Architecture (POA) approach to identify potential merger partners

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Abstract

As the EU low cost airline sector matures, consolidation is expected. This paper details a three-stage methodology to examine LCCs mergers and acquisition activity. A series of depth interviews with aviation experts concludes that the motives for LCCs to enter mergers and acquisitions are largely similar to those of full service carriers. A key success factor for merging partners is to have similar business models and culture. An analysis of full service and low cost carrier mergers and acquisition activity events shows that the size ratio and degree of network overlap between merging airlines are also independent of airline type. Braxton and BCG analyses of EU LCCs show Ryanair and easyJet to be the only LCCs in the market with strong strategic positions across the markets they serve. Finally, an application of the Product and Organisation Architecture analytical approach was used to compare seven EU LCCs. easyJet and Vueling were found to have the most similar business models and were therefore considered the best strategic fit for a potential merger.

Introduction

Since the 1980s, two important aviation trends have dominated air transport research: airline market consolidation and the growth of low-cost carriers. However, very little research has considered the merger and acquisition activity of low cost airlines. This paper sets out to address merger and acquisition activity within the LCC sector with a focus on the EU market.

The liberalisation of the intra-EU air services market provided the legislative framework in which low cost carriers (LCCs) could develop. The ‘Third Package’ of aviation measures came into force in January 1993, with full cabotage following in 1997. This market liberalisation allowed airlines to operate between any points in the European Union (EU). These new regulations have had a similar effect to the deregulation of the US domestic market some twenty years earlier. US deregulation saw the establishment and growth of Southwest Airlines, the archetypal low cost carrier.

Ryanair was the first EU airline to take advantage of the new European regulatory environment. The company based its strategy on the successful Southwest model, which quickly proved to work perfectly well in Europe. Soon after, start-ups like easyJet and Debonair also launched low-cost services. Many legacy carriers reacted to the threat of low-fare airlines by establishing their own LCC subsidiaries (including BA's Go and KLM's Buzz), yet, most did not succeed (Francis et al., 2006). After a few years, the market went through an initial wave of consolidation. Market leaders Ryanair and easyJet both acquired smaller competitors, Buzz and Go respectively, whilst many other small carriers collapsed (Danklefsen, 2007). By 2011, one hundred and ten low cost carriers had entered the EU market but only thirty-two survived (Mason et al., 2013). The rest had either gone out of business, been acquired or had merged with a competitor.

Mergers and acquisitions (M&A) are means of rapidly achieving external corporate expansion and growth (Gaughan, 2011; Tickle, 1987). As companies merge, their resources are conjoined to increase the value in the combined business. The sources of added value are synergies found either on the revenue or cost side of the business. Revenue enhancements can be achieved in a merged company through the growth in scale of the business (Dobson and Piga, 2009), increased market power, increased product attractiveness, or access to scarce resources. Sources for cost synergies include removal of overlapping areas, efficiency gains (economies of scale, scope, density and learning), and tax benefits (Maruna, 2008, Merkert and Morrell, 2012).

Historically, global M&A activity has tended to follow patterns of “waves”, with periods of increased M&A activity, followed by periods of relative steadiness or declines (Sudarsanam, 2003). Wang (2012) found airline merger activity tended to be cyclical and one significantly large merger may trigger a number of others in a region. The consensus view of a number of airline experts was that only two or three large low cost carriers will dominate the European market by 2015 (Mason and Alamdari, 2007). The consolidation trend towards a limited number of big LCC was also highlighted by Danklefsen (2007) in a study for the European Parliament and by Graham and Shaw (2008).

Whilst mergers offer opportunities to raise revenue and reduce costs, such opportunities are not automatically realised. Post-merger integration is the most crucial phase in the airlines' merger, considering strategic fit, revenue and cost synergies and cultural fit as the more important parameters for a successful merger (Maruna, 2008). Hanson et al. (2002) highlighted a number of reasons for failure of airline mergers including poor planning and execution, complexities caused by the labour component of the merger, and lack of familiarization with the business model of acquired company.

Over the past three decades analysis of airline consolidation as a function of deregulation and liberalisation, and the expansion of LCC sector, have developed parallel to one another. However, as the LCC sector is maturing, consolidation among this group of airlines is expected. There is lack of the systematic research on mergers of low cost carriers. Here we consider whether LCC mergers differ in any substantive way from the merger of full service carriers and to look at the likelihood of merger activity in the EU market and which carriers are most likely to be involved in such activity.

Section snippets

Methodology

To investigate mergers and acquisition impacts a multi-stage methodology is employed.

A panel of ten aviation experts were interviewed between May and July 2012 to gather opinions from a variety of aviation professionals with experience in LCC mergers. These included three managing directors of aviation consultancies, three directors of LCCs, and four senior managers at LCCs. There was a focus to interview respondents who were involved in one of the following mergers: Ryanair/Buzz, easyJet/Go or

Expert interviews on LCCs and M&A activity

Ten experts in LCC M&A activity were interviewed to explore some key areas of low-cost carriers mergers. Asked the principal reasons an LCC may seek to merge with a potential partner or acquire a competitor, the respondents indicated that network growth, to remove competition, gain access to new markets, and relieve economic pressure were the main drivers. The responses were un-prompted and the table shows the number of respondents who mentioned each item. Only items that were mentioned by

Conclusion

This paper has looked at LCC M&A activity to examine whether they are fundamentally different from mergers between full services carriers. The in-depth interviews with industry experts confirmed that the reasons for mergers of LCCs and that the challenges such events pose are largely the same as mergers between full service carriers. The analysis of the previous M&A events has also shown that there are no real differences in the relative position of target to its acquirer. Whilst merger and

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