Impact Of Mergers Acquisitions On Aviation Labour Relations Commerce Essay

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This essay deals with the topic of mergers and acquisitions in the aviation industry. In this particular case, the situation of Air France and KLM and British Airways and Iberia will be examined. The individual airlines and its unions will be presented in a comparative analysis. After a part where the meaning of mergers and acquisitions is explained, the motivations for the particular airline to get into the process of a merger or an acquisition are demonstrated. In the end, there is a conclusion where all major decisions are summarized and a little rsum of the benefits up to now will be shown. The major focus in this analysis lies on employment relationships and the overall wealth of the companies.

Air France is the French flag carrier and one of the world's largest airlines. They are headquartered near Paris. The airline's global hub is at Paris Charles de Gaulle Airport. Air France was founded on 7 October 1933 from a merger of four of the leading transport companies. On June 26, 1945, French civil aviation was nationalized and at the end of World War II., the whole French air transport network was committed to Air France, the new flag carrier. 1974, Air France moved to Paris-Charles de Gaulle and this lead into a new level. The newly built airport was capable to operate wide-body aircraft, such as A300 and B747, which democratized air travel certainly. In 1992, the Air France Group was born. Air France and Union de Transports Ariens (UTA) merged. The group became one of the largest air transport groups in the world. In April 1996, the connecting hub strategy for Paris-Charles de Gaulle airport was implemented by Air France. 1999, Air France went on the stock exchange and the public offering was a huge success. On June 22nd 2000, Air France created a global alliance called Sky Team with Aeromexico, Delta and Korean Air to join forces and extending their network. Air France launched the A380 on 20 November 2009 with service to New York's JFK Airport. At the end of the year 2009, Air France and its subsidiaries employed around 75,000 people. (Air France history)

(Air France at a glance)

2.1 The Unions

The Confdration Gnrale du Travail - Force Ouvrire is one of the five major union federations in France. FO is a member of the European Trade Union Confederation. FO was founded in 1948 and has round about 300,000 members.

The Confdration Gnrale du Travail, CGT is the largest in terms of votes and second largest in terms of membership numbers with 720,000 members today. CGT is a national trade union center and was founded in 1895. The political direction of the CGT is slowly developing, according to the historian M. Dreyfus since the 1990s. They cut all links with the French Communist Party (PCF) to a more reasonable position and concentrated its attention on general strikes in private sectors. (Prsntation)

The Confdration franaise dmocratique du travail, CFDT is the largest French trade union confederation by number of members (875,000) but the CGT has more voting results for representative bodies. The CFDT was founded in 1964 and is headquartered in Paris. (Nos valeurs)

3. KLM

KLM Royal Dutch Airlines is a worldwide airline company based in the Netherlands which was founded on October 7, 1919. KLM's headquarters are in Amstelveen near its hub at Amsterdam Airport Schiphol. KLM operates worldwide scheduled passenger and cargo services to more than 90 destinations. It is the oldest airline in the world still operating under its original name. KLM employs 36,000 people of different nationalities. Around 31,000 of these work in the Netherlands and the remainder abroad. In 2008, KLM transported 23.4 million passengers and 657,022 tons of cargo. (KLM history)


(KLM profile)

3.1 The Unions

The Federatie Nederlandse Vakbeweging is an organization of unions that represents the interests of employees and social benefit claimants. It is by far the largest and strongest confederation in the Netherlands. Major points of the FNV are employment and income. Income may be derived from work, but also from social benefits. Values, like equality, solidarity, freedom of speech, justice and sustainability are the FNVs core principles. Approximately 1.9 million employees in the Netherlands are a member of a trade union. This means that 27 % are organized in unions. The FNV has fourteen allied trade unions representing over 1.2 million members: 63 % of all trade union members. (Over de FNV)

4. British Airways

British Airways (BA) is the flag carrier of the United Kingdom which is based and headquartered in Waterside, near its main hub at London Heathrow Airport. BA is the largest airline in the UK based on fleet size, international flights and international destinations. BA was founded in 1974, but has its origin after First World War, when Imperial Airways Limited was created in 1924 in order to serve the British Empire with air transport services. Privatization took place in 1987 and BA expanded through several acquisitions, such as British Caledonian and Dan-Air, i.e. British Airways carried 31.8 million passengers in 2010. Besides its hub at London Heathrow, where they own 40% of total slots, BA has also a mentionable presence at Gatwick Airport and Manchester Airport. (Explore our past)

British Airways

4.1 The Unions

Employees of BA are represented by 3 major trade unions:

* BALPA, representing the pilots

* BASSA, representing the cabin crew

* Unite the Union, for other employees

The British Air Line Pilots Association represents over 75% of all aircraft and helicopter pilots based in the UK. The Association has about 10,000 professional flight crew members, working in large and small companies. BALPA has over 120 working pilots who work as Representatives for the association. They work on matters within their airline. The matters they deal with are actually divided into two parts: Professional Affairs and Flight Safety. BALPA works with the Civil Aviation Authority, the Department for Transport, the Department of Trade and Industry and many other bodies dealing with issues concerning BALPA. To maintain and secure the terms and conditions of the members, BALPA is closely working with 20 airlines. In Europe, BALPA was a founding member of ECA, the European Cockpit Association. (About BALPA)

The British Airlines Stewards and Stewardesses Association is a branch of the Transport & General Worker's Union (T&GWU) exclusively for British Airways cabin crews with a membership of over 10,000. BASSA is a dynamic and progressive union, which is wholly staffed by elected representatives, who work as BA cabin crew. They are involved in all cabin crew matters, like scheduling, accommodation, salaries, working agreements and conditions. BASSA is located at Harlington, Middlesex. (About us)

Unite The Union is Britain's biggest union with two million members in every type of workplace. Unite was formed by a merger between two of Britain's' leading unions, the T&G and Amicus. Unite is a democratic and campaigning union which want to achieve equality for all employees. Civil aviation plays a major part in the UK economy and therefore Unite members can be found in every area of the industry - from engineering and cabin crew to check-in and administration. (About us)

5. Iberia

Iberia is Spains largest carrier and the fourth-largest in Europe. Furthermore, it is also the leading airline on routes between Europe and Latin America, with the most flights and destinations. Based in Madrid, it operates an international network from its main bases at Madrid-Barajas Airport and Barcelona El Prat Airport. Iberia is a private company and Iberia is also a member of oneworld, the alliance of airlines, which together serves round about 700 destinations. Iberia, Compaa Area de Transportes was incorporated on 28 June 1927 and first flight operations took place on December, 14th of the same year. The airline was nationalized on 30 September 1944 and was the first airline to fly between Europe and South America after World War II. In 1981, the Boeing 747 carried over 10 million passengers in a year which was a milestone for Iberia airlines. During 2001 Iberia was privatized and shares were listed on stock exchanges. On 12 November 2009, Iberia Airlines confirmed that it had reached an agreement to merge with British Airways. On 25 April 2010, both airlines had agreed to a merger, forming the International Airlines Group, although each airline is still operating under its existing brand. (History)


(Who we are)

5.1 The Unions

The situation at Iberia is very complex. There are several trade unions which are represented by the company:

* General Workers' Confederation (UGT)

* Trade Union Confederation of Workers' Commissions (CC.OO)

* Independent Union of Passenger Cabin Crew Members (SITCPLA)

* SEPLA, union among pilots

* ESTABLA Cabin Crew Union

* Spanish Union of Aeronautical Maintenance Technicians (ASETMA)

The UGT and the CC.OO are the two major trade unions in Spain which have numerous amounts of Iberian employees.

The UGT is a major Spanish trade union, which is located in Madrid and has approximately 1,000,000 members. It was founded in 1888 and is affiliated with the Spanish Socialist Workers Party. The UGT is considered to be an institution of productive workers, organized along lines of trades and liberal professions. Soma of the core values are: Respecting freedom of thought and reaching social justice, equality and solidarity. (Nuestra historia)

The CC.OO is the largest trade union in Spain. It has even more than 1,000,000 members and is also located in Madrid. They compete with the UGT, but are claiming to be the most successful union in labour elections even though they only exist since 1976. (Quienes somos)

6. Introduction to Merger & Acquisition

A merger is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. In a merger, the acquiring company assumes the assets and liabilities of the merged company. (Patrick Gaughan)

In order to understand why a merger between two airlines is realized, it is very important to explain the motivations which induced the carriers to merge. There are quite a lot of points to discuss to get the answer to this question. Main reasons why airlines merge are: Increasing the competitive advantage, increasing connectivity and presence, creating additional revenues and assets, improving operating efficiencies and in some cases they are strategic acquisitions to achieve a better market position or to weaken competitors. By the use of mergers or acquisitions airlines are able to combine their assets. The most expensive assets are the aircraft, followed by the workforce (human factor) and the traffic rights. The competitive advantage in this particular is the increasing connectivity, which might lead to additional revenue in most cases. Generally speaking, it is an improvement for both airlines in operational efficiencies. Companies have to face some challenges before the merger is actually realized. For instance, in case of an airline merger, the different IT systems, different fleet types, labour integration issues and cultural discrepancy (assuming that the two companies are headquartered in two different countries) must be considered.

Labour is still the key element in determining successful integration of merging companies. The individual labour laws need to be understood and applied across borders. The main labour issues which have to be considered are: Work rules, pay scales, seniority lists and corporate cultures. Pilots are a valuable asset for the airlines, because they are highly skilled and that is one point why labour integration is so important for airline consolidations. Furthermore, labour costs are a large portion of expenses to have a major impact on cost structure. Besides that, labour issues can often lengthen consolidation timeline and financially weaken the merged company.

7. The merger of Air France and KLM

The merger between Air France and Netherlands-based KLM Royal Dutch Airlines became reality on 5 May 2004. From that time on the carrier is known as Air France KLM. 81% of the new firms shares were owned by former Air France shareholders and 19% by former KLM shareholders. The European airline holding company is incorporated under French law with its headquarters at Paris-Charles-de-Gaulle Airport. Air France-KLM became the largest airline in terms of operating revenues and Europes largest in terms of passenger kilometers. Although owned by a single company, Air France and KLM continued to fly under their own brand names and remained part of the SkyTeam alliance. Air France and KLM are represented on a 50/50 basis in a strategic management committee. Given the fact that both carriers are based in two separate countries, Air France-KLM has to deal with French law and Dutch law. The works council under French law delivers information at the latest moment, whereas works councils under Dutch law have a continuous exchange of information. The trade unions at Air France-KLM have arranged that they focus and concentrate on job security and career perspective. This is valid for ground staff unions and pilot unions. After the announcement of the merger, the unions discussed labour agreements with the following topics amongst others:

* Guarantee for next 5 years employment

* Commitment to reduce cost by 10%

* Center of excellence

Furthermore it is very important to consider a different mentality amongst the employees from two different countries. Air France-KLM set up corporate rules in order to bridge the gaps. It was necessary to choose a company language which is spoken by every employee in order to avoid misunderstandings. The company language at Air France-KLM is English, but the employees have the possibility to learn French or Dutch. (Air France and KLM to merge)

8. The merger of British Airways and Iberia

The agreement between British Airways and Spanish carrier Iberia was confirmed on 8 April 2010. Both oneworld alliance partners joined forces in an all-stock transaction while retaining their separate brands, like Air France and KLM. The operational headquarters are in London but the corporate headquarters are in Madrid. Board meetings take place in Madrid due to the fact that the company is being incorporated according to Spanish law as an "anonymous society", and the holding company for both carriers are paying taxes in Spain. The new airline group is Europe's third-largest and the sixth-largest in the world by revenues (more than 14,000 million euro), with approximately 55 million passengers in 2010. British Airways previously owned a 13.5% stake in Iberia but received ownership of 55% of the new combined International Airlines Group, whereas Iberia's shareholders receiving the remaining 45% of the company. The airlines expect annual synergies worth about 400 million euro starting the fifth year following the merger. Approximately 60% of these synergies will arise from cost savings, and 40% from larger revenues due to the new operations. The IAG board is made up of 14 members, seven from each airline. Airline employees will benefit, since the alliance will make the airlines stronger and better positioned in economic terms. The firm is able to compete and to offer employees more stability, long-term job security, and possibilities of professional advancement. Shareholders of the airlines will also benefit from the agreement, since the increase in income and of competitiveness will add to companies value. Nevertheless, the process of a merger is complex and takes quite a long time to achieve results which are accepted by both parties. Since the EU deregulation of fares and routes in 1993 and the privatization of the former state-owned airlines, numerous smaller European airlines have gone bankrupt or been taken over. Thousands of jobs have been lost, and there has been a huge offensive on working conditions, provoking numerous strikes throughout Europe. BA - the first state-owned airline to be privatised in 1987 - has outsourced key services. Feeder routes are franchised to low-cost carriers who charter their planes and use cheaper non-union crews. Cabin crews are no longer from the home country, but are recruited from bases around the world. Forced to compete with the low-cost carriers, BA turned to direct sales via the Internet to eliminate the discount given to the travel agents, and to call centres operating in low-wage English-speaking countries such as India. The introduction of new working practices aimed at slashing costs led to a strike among ground staff in summer 2003.

After having agreed to merge, Iberia could have walked away from this agreement due to the fact that BAs total pension deficit was 3.7bn at the end of 2010. Iberia had three months to get to a decision on BA's plan to solve its pension deficit. The plan maintained BA's annual contributions at the level of around 330m, plus agreed annual increases according with inflation expectations averaging 3%. The contributions will continue until 2026 for the New Airways Pension Scheme (NAPS) in order to satisfy the employees. After having consulted the major unions, British Airways submitted the recovery plan to the UK Pensions Regulator. (EU clears British Airways ,Iberia merger) "This agreement is a significant and positive step forward for British Airways and the pension scheme members," said BA's chief financial officer, Keith Williams. "The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes, gives NAPS members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme. (A conversation with Keith Williams)

Unite, the union representing BA cabin crew arranged three major strikes and locked both parties in a bitter fight which started as a dispute over staffing levels on flights. BA is urging the union to accept the negotiated deal already on the table, guaranteeing two further years of pay rises and the best conditions for existing crews in the UK industry. The union must now give notice seven days in advance of any strike action planned.

9. Conclusion

Analysts and airline industry experts have stated that merger deals in the airline sector are unavoidable nowadays. The industry is facing numerous challenges, such as hard competition and rising operational expenses, especially the rising jet fuel costs. Industry consolidation would help airlines face these challenges by combining resources, cutting costs, and reducing competition. The costs of fuel have a major impact on the potential success or failure of mergers. If the price of oil rises too high, it can limit the cost benefits provided by the merger. And if the price of oil falls tremendously, it underbids the need for costly merger transactions. With high operating expenses and stiff competition, airlines have considerable motivation for merging.

Consolidation is not the only option for struggling airlines, of course. A lot of carriers have announced cost cutting measures, such as retiring aircraft, cancelling routes and raising ticket prices.

The merger of Air France and KLM was a reaction to deregulation, the economic recession, global overcapacity and the entrance of the low-cost airlines like Ryanair and EasyJet. Air France/KLM has become Europeans largest airline and the worlds largest airline, if you only consider sales income. Air France and KLM increased profits from $450 million to $550 million after five years as a result of cost savings, rescheduling of routes and a better fleet utilization. Experts even foresee another rapid growth in the next years.

BA and Iberia signed a merger deal in order to compete more effectively in the fast-consolidating industry and to offer a larger network. The fusion will create Europe's second-biggest airline by market value, combining Iberia's strong position in Latin America with BA's presence in Africa, Asia and North America. The merger is seen as an opportunity for the two airlines to cut costs following very tough years for the airline industry.

The airlines are heavily affected by mergers and acquisitions. In the last few years airline M&As have been a growing trend in several countries worldwide. However mergers and acquisitions in the aviation industry are highly strategic and are definitely changing the aviation industry to a battlefield of a few mega players.