Practise analysing internal and external stakeholder interests, pressure groups, and trade-offs arising from business decisions and growth for IB Business Management HL.
Mergers in the airline industry
Recently, British Airways merged with Iberia, and Air France merged with KLM. Both mergers resulted in some significant benefits.
Ryanair plans a £ 560 million takeover of the Irish airline, Aer Lingus, which has failed to deliver shareholder dividends. One shareholder, the Irish government, owns 25 % of the shares of Aer Lingus.
Ryanair's chief executive officer (CEO) said that the proposed takeover could:
- create revenue and a positive return for the Irish government by selling its shares
- create a strong Irish airline capable of competing with major European airlines.
This form of external growth is also occurring in the United States (US). American Airlines and US Airways will merge, forming the nation's biggest airline, to be called American.
Airline analysts argue that mergers are necessary to reduce financial uncertainty and restore stability to a business that lost about $60 billion in 10 years. Large airlines with big networks can invest in new airplanes, new routes and better facilities, and provide passengers with more travel options. Mergers are likely to increase operational and financial efficiencies and create economies of scale. Airline analysts, favouring airline mergers, emphasize that each merger must be approved by appropriate national and international regulatory agencies to ensure that the competitive nature of the industry is maintained.
Other analysts, however, argue that:
- large airlines make it difficult for smaller rivals to compete, and in the long run reduce competition. This situation may lead to higher fares and a poorer service.
- being larger may not make airlines globally competitive. Some national governments restrict operation of foreign airlines within their countries, which allows a local airline monopoly* to exist.
- strategic decisions are difficult to implement as companies grow in size.
- larger is not always better. http://www.guardian.co.uk; http://www.nytimes.com]
* monopoly: an industry where there may be only one seller/producer of a particular good or service
With reference to one internal stakeholder and one external stakeholder, discuss the statement that "larger is not always better" from the perspective of the airline industry.
Candidates should look at the issue from two perspectives: Internal, such as from the employees / managers, or any relevant internal stakeholders' point of view. They should also look at the issues from an external stakeholders' point of view such as passengers / customers (see below).
From the customers / passengers point of view:
On the positive side, as indicated in the stimulus, a larger company like American can experience different economies of scale that can benefit the passengers:
- financial economies of scale - a larger airline could raise more finance cheaply to buy new and more comfortable aircraft(s)
- technical economies of scale will enable a larger airline to become more efficient by reducing operating costs per flight, hence the price of a ticket can be reduced.
Analysts suggest that a merger in order to grow will enable the new airline to rationalize and create a possible small monopoly/domination on some routes as well as create some economies of scales, such as operation and purchasing. The new airline is likely to be more cost efficient which is a significant argument especially in the short run given the amount of current losses.
Consequently, customers may experience some price reduction as well as a more comfortable and possibly safer aircraft.
However, given the large size and the larger market share (combined) and the suggested small monopoly/domination, it is unlikely that the prices will be reduced, especially if the bargaining power of the airline is likely to increase. Customers may end up with less choice, a poorer service and higher prices imposed by a large airline that monopolizes the market. The stimulus makes a reference to such a possibility.
Other possible internal stakeholders:
Larger airlines such as the newly created American, is likely to be more cost efficient which is a significant benefit for the operation manager/employees as well as the finance manager. Efficiency due to size with subsequent lower costs and increased profit can significantly increase the motivation of managers and employees. Moreover, a rewards system might be based on such performance.
Managers' objectives for increased power / self-satisfaction of managing a large number of employees may also increase.
On the other hand, one may argue that working for a large airline like the creation of American, the US biggest airline, will reduce employees' motivation given some possible lack of contact with managers and from feeling like a small and insignificant part of a very large group of employees. Customer service, which is an extremely significant issue in a service industry (people, process) might be negatively affected.
Communication barriers may be erected in a large organization which may affect each and every employee negatively.
Internal diseconomies of scale may be created due to the large size which can negatively affect all employees and managers' morale and competencies.
External stakeholders such as competitors and or regulatory bodies.
Competitors:
Being a large airline might be seen by the organization strategists as a necessary action to an increase in global competitiveness of other airline groups like AIG, KLM / Air France etc and many others yet to be faced in the growing global market place.
However, being large might not be sufficient / appropriate to create customer values and global competitiveness which is currently the main problem of the large airlines. Cost efficiency will not solve these deficiencies, hence, a larger airline is unlikely to be successful especially if competitors follow suit. It will become increasingly difficult to create a USP apart from perhaps location or destinations. There is evidence from the stimulus that there are a number of mergers / takeovers.
Regulatory bodies:
Also larger airlines are more likely to catch the attention of the American MMC or any national regulatory body. A reference to such a possibility is also mentioned in the stimulus. These bodies are likely to put some restrictions on the operation of the newly created large airline or any other established large airline. Restrictions may be put on the top management team and decision making in terms of routes, landing slots, pricing etc. Management freedom may be reduced. Moreover, finance managers may spend a large sum of money on legal battles / procedures.
Accept any other relevant and applicable argument for or against the notion of being large is not always better from the perspective of any relevant internal or external stakeholder.
In conclusion, one should not undermine the benefits of being a large airline and the possibilities of reducing costs, increasing prices and hence increasing profit and cash flow. The profit can potentially be invested in improving customer service in the medium to longer term, done from a stronger financial position. However, management at large airlines should be aware of possible inefficiencies in the extra 3Ps as well as other diseconomies of scale and the inevitable interest which being large will develop from competitors. Nevertheless, it appears that merger and acquisitions are the prevailing trend in the airline industry and many airlines use these strategy even as a defensive measure. The evidence in the stimulus clearly demonstrate this point whereas the notion that larger may not always be better perhaps more theoretical / suggested by analysts and hence of lesser weight.
However, one cannot accept the notion that larger is not always better.
Candidates are expected to use the airline industry as an example and to comment on the merit or otherwise of their arguments. Other stakeholders could be considered.
Accept any substantiated discussion.
N.B. It is not expected that the candidate incorporates all of the above points/issues.
A balanced response is one that covers at least two issues for and at least two issues against.
In this case, as discussion in relation to two stakeholders is expected, one argument for and one argument against for each stakeholder is sufficient. Candidates can provide a balance response comparing and contrasting the effects on different stakeholders, eg, positive effects on customers but negative effects on employees, but at least two arguments for and two arguments against for balance.
If there is no classification of the stakeholders in term of internal / external award up to a maximum of [7].
For one relevant issue that is one-sided, award up to [3]. If the response is a one-sided relevant approach with no discussion award a maximum of [4].
Award a maximum of [5] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment / conclusion, or the there is only reference to either one internal stakeholder (balanced analysis) or one external stakeholders (balanced analysis with a judgment).
Candidates cannot reach the [5-7] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
Marks should be allocated according to the markbands on page 4.