Must-know: Merger synergies in the US airline industry
Estimated synergies in past airline mergers
The two categories of synergies expected from an airline merger include network synergy and cost synergy. While network synergies arise from expanding routes and destinations and efficient scheduling of round trips, cost synergies arise out of increased operational efficiencies, savings in integrating information systems, better utilization of gate space, and other facilities.
Delta Airlines (DAL) revised its initially estimated synergy from $1 billion to $2 billion in 2008 with a 70% network synergy. United Continental (UAL) estimated $1 billion to $1.2 billion with up to 80% network synergy. U.S. Airways and American West estimated $600 million with up to 60% network synergy, Southwest (LUV) estimated more than $ 400 million, up to $680 million, and the recent merger between American (AAL) and U.S. Airways is estimated to have synergy benefits to the extent of $650 million to $1.05 billion with up to 85% network synergy. However, Jet Blue (JBLU) hasn’t had any recent mergers.
Network synergies versus cost synergies
Network synergies accounted for almost 50%–85% of the total synergy benefits in the past airline mergers. According to the American Antitrust Institute (or AAI), the higher percentage of estimated network synergy as against cost synergy could be for two reasons—because of the already efficient operations of standalone airlines or because network synergies are difficult to verify by the Department of Justice (or DOJ) and can get approval easily.
With regard to cost synergies, according to the AAI, most of the reductions estimated are for fixed costs. It takes a longer time to reach consumers in the form of lower fares compared to marginal cost reductions that can be passed on to consumers immediately. Another concern is that the integration costs are generally high and may negate the estimated cost synergies. Details regarding integration costs of past mergers will be covered in the next section in this series.
Break-up of American Airlines’ synergy estimate
American Airlines Group estimates a $1 billion synergy benefit to be derived from network and cost synergies.
- Network synergy is estimated to be $900 million, 85% of the total, from improved schedules and routes, increased passenger loyalty through the expanded frequent flyer program, and fleet restructuring to better align supply with demand.
- Cost synergy of $550 million is expected from overlapping facilities and airport services, less expensive contracts through improved purchasing power, and efficient use of information technology.
- Costs related to combining employees of the two airline is expected to reduce the benefits to the extent of $400 million.
According to the AAI, it should be noted that American is said to have stated to the DOJ that synergy benefits include network benefits of $500 million and cost benefits of $150 million totaling to $650 million. This is almost 60% less than the $1 billion reported in the company presentation.