M&A Activity Benefits Investors

On February 14, US Airways and American Airlines announced a merger that would result in the creation of the world’s largest airline. Although there are still a number of steps to take before the $11 billion merger is approved, analysts agree that these will be a mere formality as previous M&A deals in the airline industry set precedents that this latest deal can use to its advantage. In 2008, the Justice Department gave the go-ahead for Delta and Northwest Airlines to merge, and in 2010, United Airlines joined forces with Continental, while in 2011, Southwest was permitted to buy AirTran.

Mergers and acquisitions almost always result in staff cut-backs, which is of serious concern in today’s tough economic conditions with high rates of unemployment. But executives at American Airlines and US Airways noted that of the 900 routes being served by the two airlines, only 12 routes overlapped, meaning fewer job losses. Moreover, they have given the assurance that all existing hubs will remain in operation. However, the announcement that the merger would result in annual operating costs savings of $1 billion raises the question of where the savings would come from, as generally in M&A deals the quickest way to save is to cut jobs.

Analysts have also raised the concern that the airline industry in the United States will only have three major players – Delta Airlines, United Airlines and the newly formed New American Airlines – which may lead to hikes in airfares and may even lead to collusion on pricing, even if only tacitly, which would impact on consumers. However, larger airlines have more buying power ensuring their fleets include the latest green technology and safety features for the benefit of their passengers.