Consolidation
Mergers and the Merger Process
Airline Industry Council Meeting
Washington, DC June 16, 2005
Why Do Airlines Merge?
Three Major Reasons:
 Additional revenue/assets
 Increased connectivity and presence (size) lead to
additional revenue – additional value from:
 Larger carriers achieve a disproportionate share of
revenue (S-Curve)
 Better schedule optimization
 Less pricing competition
 Improved operating efficiencies
 Strategic Acquisition
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Examples of Areas of Potential Cost
Synergies From a Merger
 Rental Expense (other than aircraft)
 Combining space, ground equipment, etc.
 General and Administrative Expenses
 Combining office space, joint purchasing of
supplies, etc.
 Labor costs for aircraft & traffic handling
 Combining of redundant staff
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Key Merger Considerations
Mergers involve four fundamental challenges
 Different systems
 Different fleet types
 Workforce integration issues
 Cultural differences
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Merger/Fragmentation Models
• Two Structural Merger Models
– The full operational integration model with employees
merged
– No operational integration. A holding company with
operational entities (the double breasting model)
• Fragmentation Models involving the sale of part
of an airline
– A transaction between two carriers involving assets
only
– A transaction between carriers involving assets and
people
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US Consolidation Since
Deregulation
• In the 1980’s numerous mergers and at least two
examples of fragmentation transactions
• In the 1990’s no mergers - numerous
fragmentation transactions
• In 2000’s one earlier merger (TWA/American) and
one recent fragmentation transaction
• Pending US Airways/America West merger may
be the tip of the iceberg
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European Union
• In the 2000’s there have been four recent
mergers
– Air France/KLM & Lufthansa/Swiss
– Austrian/Lauda & SAS/Brathens
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The Labor Element
 Labor is the key element in determining successful
integration of merging companies
 Labor laws need to be understood and applied across
borders for this to happen
 Merging companies have to include labor in the
process
 As a participant, with input into the process, not as an
observer
 Without labor as a player, consolidation will not
succeed
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The Labor Element
 Labor issues to consider:
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Pay Scales
Work Rules
Seniority Lists
Corporate Cultures
 Consolidating Pay Scales and Work Rules
 In most cases labor costs differ between merging
companies
 Large labor cost differences can be significant hurdle
 Differing work rules and productivity levels also need to be
addressed
 Companies may attempt to keep operations separate or run one
company as “subsidiary”
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The Labor Element
 Why is Labor Integration So Important To Airline
Consolidations?
 Airline labor, especially pilots, are highly skilled and
long training cycles make labor a valuable asset
 Airline labor unions often deal directly with the
customer
 Labor costs are a large enough portion of expenses to
have a major impact on cost structure
 Labor issues can often lengthen consolidation timeline
and financially weaken the merged company
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The Labor Element
 Merging Seniority Lists and collective agreements
 Difficult and sensitive process
 ALPA has a “Merger Policy” that is intended
to:
 Preserve jobs
 Avoid windfalls to either group
 Maintain or improve pre-merger working conditions
 Minimize detrimental changes to career expectations
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The Merger Process
Phase 1 – Announcement of Transaction to
Closing
 Need to review legal framework to protect pilots
interests
 Engage in bi-lateral negotiations with
management, as necessary
 Meet and Develop Protocol of Cooperation
between pilot groups
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Basic Objectives of Protocol
 To establish an ongoing exchange of information related to
the __/__ transaction between the signatory Unions;
– To share our knowledge and experience in the airline
industry, including details of our collective bargaining
agreements, national laws and regulations;
– To share other information important to protect and
enhance our professional interests;
– To avoid any action that could reduce the leverage
available for the __ or __ pilot groups;
– To develop common bargaining positions to be pursued
with each management concerning a fair distribution of
growth/job opportunities;
– To prepare for the further development of the corporate
combination of __ and __;
– To work together to ensure that in the event of an
operational merger of __ and __, the __ and __ pilots 13
will be treated in a fair and equitable manner.
The Merger Process
Phase 2 – From Transaction Closing to
Integration
 Develop Transition Agreement covering the
following terms:
 Status of Pilot Signatory Unions and Collective
Agreements at _____ and _____ during this Agreement
 Separation of Aircraft and Personnel during this
Agreement
 See Attachment A
 No Layoff of Pilots during Term of this Agreement
 New Hires during Term of this Agreement
 New Aircraft during the Term of this Agreement
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Transition Agreement
 Seniority Integration Process and Procedure
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Designation of Merger Representatives
Preparation of Employment Data
Exchange of Employment Data
Negotiations/Mediation/Arbitration
 Relative Position on Pre-Merger Lists Maintained
 Preservation of Rights
 Reimbursement of Merger-Related Expenses
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Transition Agreement
 Company Acceptance and Implementation of the
Seniority List
 Process to Negotiate Combined Collective
Agreement for the Combined Companies
 Resolution of Disputes arising under this
Agreement
 Enforcement of Arbitration Decisions under this
Agreement
 Mutual assistance during this Agreement
 Duration of this Agreement
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Transition Agreement
ATTACHMENT A
• List of Aircraft Operated by ____ on Date of this
Agreement (identified by manufacturer, type and tail
designation)
• List of Aircraft on Order by ___ on Effective Date of this
Agreement (including manufacturer, type, anticipated
delivery date)
• List of Aircraft Operated by ___ on Effective Date of this
Agreement (identified by manufacturer, type and tail
designation)
• List of Aircraft on order by __ on Effective Date of this
Agreement (including manufacturer, type, anticipated
delivery date)
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Phase 3: Post Integration
 Implementation of final integrated seniority list
 Implementation of combined working agreement
 Establishment of an appropriate Union structure
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Some Labor Relations Considerations to
Address in Mergers and Fragmentations of
Airlines
A process to maintain proportionality during the
transition period
A seniority integration process with real timeline
A timely contract amalgamation process
Addressing Union representation issues
The adverse impact of job abolishment or
dislocation of employees
Different corporate cultures adversely affecting
labor relations and the handling of human resource
issues
Consult on process
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Communicate with rank and file
QUESTIONS