Background Information
AirTran Airways was a former low-cost American airline with headquarters in Orlando Florida and operated hundreds of flights in Eastern and Midwestern United States. Currently however, the airline is a subsidiary of Southwest Airlines having completed a merger in March 1st 2012 (Surhone 104).
Southwest on the other hand an older rival with more established business and headquartered in Texas. The company has been in business for over four decades and has established itself as a major domestic air transport company in the United States (Surhone 104).
Southwest Airlines-Airtran Merger
The merger between the two companies is more less an acquisition whose full transformation will take place gradually. When analyzed in detail, the Southwest-Airtran merger is a form of horizontal merger where one firm aims at eliminating competition through unification of the two to increase concentration in the said market effectively creating substantial market power.
In the merger, Southwest Airlines acquired AirTran holdings for $1.4 billion. The total value of the transaction according to the Wall Street journal was worth $ 3.4 billion including a $ 670 million cash payout by Southwest and assumption of slightly over $2 billion of AirTran debt. It is expected that by 2015, Southwest Airlines would have completely absorbed Airtran with a complete rebranding of the Airtran aircraft to Southwest colours.
Market definitions
Consumer substitutes
Consumer Substitutes are goods available to consumers in the market and that can be alternative choices for consumers or instance Southwest airlines and AirTran airlines services
Producer substitutes
Producer substitutes on the other hand are goods that offer alternative choices for producers and whose production is possible using similar resources for instance Boeing and Airbus aircrafts (Sherman, 66).
NAICS
NAICS stands for the North American Industrial Classification. It is a system of classification that authorities and businesses entities use to determine the particular economic sector of a business. According to NAICS for instance, the industry focused on in this paper is transport and warehousing.
S & P industry survey/data monitor
S&P industry surveys/data monitor are tools registered under the Standards and Poor’s trademark purposely to supply business information. The data-monitor publishes industry reports on all levels including country-specific, regional and global market information, segmentation, as well as forecasts. The S&P industry surveys are mainly US-centric and provide information on business trends, statistics and industry leaders (Sanghoee 89).
Geographical
This is the use of geographical segmentation in business to divide the market to different areas for a targeted reach of clientele. Specific products are tailor-made and targeted at geographic units such as countries, regions and cities. It includes localizing products according to the demographic and business dynamics of the areas involved.
Type of merger
As said earlier, the type of merger between Aitran and Southwest was a horizontal merger that was more or less of an acquisition on the part of Southwest Airlines. Ireland defines a horizontal merger as the joining together of two companies competing in the same market (73).
In this case, Southwest and Airtran were large airline companies, at least domestically, competing for the same market. Their joining together therefore represented a horizontal merger. However, considering Southwest Airlines acquired all the shares of Airtran and a complete re-branding of Airtran is part of the agreement, it is fair to conclude that the transaction was an acquisition.
Merger Motives stated by companies
Various management motives influenced the move by the two companies.
First, Southwest Airlines management reckoned that acquiring AirTran will soften competition while seeking to dominate the Eastern region. It is safe to conclude that some of the aims of Southwest Airlines were motivated by the desire to make use of their geographical advantage (Surhone 110).
Secondly, Southwest’s move enables it to consolidate and expand its presence in new higher-yield markets including Atlanta, D.C., Boston, Baltimore and New York. As a result, the merger will no doubt help Southwest Airlines in gaining access to more traffic and revenue which in the long-term translates to increased earnings (Surhone 115).
Third, Southwest sought to gain the capacity that with additional resources from AirTran, is able to plunge into international air travel business especially to the Caribbean and South America. The other benefit for Southwest is that the merger puts the company in a strong position financially which will easily cushion it from rising oil prices besides having enough cash for short-term investments.
Analysis of merger motives
Critical Analysis of Stated Motives
The above-mentioned motives suit Southwest Airlines in its quest to delve into international flights. It is important to note that the above motives can qualify as management benefits especially considering the change of administration that will take place in AirTran till a complete integration of the two companies take place.
There s consensus among scholars that any business decision corporations make is a risky gamble that may or may not pay off. In terms of competition acquisition of AirTran reduces the competition in a region Southwest has dominated for decades. However, there is need for the new company to concentrate on diversification of products to counter competition.
Additionally, Southwest management can now easily move to consolidate the both old and new markets to increase their market share, a crucial factor to long-term profitability in the company. The management is banking on the act that the airline services that both companies offer fall within the range of both consumer and airline substitute’s category.
Merger motive number one: Market valuation of firms
Some business analysts contend that considering the total asset base of AirTran, the price paid by Southwest was too low and it could have been influenced by the low valuation of the company’s stock (Ireland 78). However, the above assertion is not correct since AirTran’s stocks were correctly priced and reflected the true value of the company.
Merger motive number 2: How company management benefit from merger
One of the most important roles of mergers is to save poor performing companies from collapse through injection of fresh capital. Management also benefits from mainly through change of the personnel that run a company effectively putting in place new vision for the company. Mergers also help management in expanding companies hence they become better suited to counter competition from more established firms.
Market impact
Normally, the aims motivating mergers drastically alter the market dynamics of the concerned industry. In this case for instance, Southwest’s management estimates that the company will have almost slightly above 60% of the market in the Baltimore-Washington and 40% of the Orlando in the post merger market (Ireland 89). Additionally, in some of markets where airports are paired, the merger will result to a concentration that may be interpreted as a monopoly. According to the management of both companies, the merger will also affect price discounting and network structure of the industry especially on the routes where the two airlines operate.
Works Cited
Ireland, Duane. Understanding Business Strategy: Concepts Plus, New York: Springer, 2011. Print.
Sanghoee, Sanjay. Merger, New York: McGraw Hill, 2006. Print.
Sherman, Andrew. Mergers and Acquisitions from A to Z, New York: Taylor & Francis, 2010. Print.
Surhone, Lambert et al. Southwest Airlines – Airtran Airways Merger, New York: Routledge, 2011. Print.