In past mergers, integration costs exceed expectations
We spoke about the past airline merger synergy benefits in the previous section. A comparison of costs with benefits will reveal the actual value generated from the merger. The following table compares predicted integration costs of previous mergers in the airline industry with actual integration costs reported to date. Integration costs include costs of integrating information systems, payroll reconciliations, standardizing aircraft interiors, obtaining a single operating certificate, combining frequent flying programs, and labor integration. The actual integration costs for the three previous mergers have been higher in almost all cases. Also, the time frame for the integration also has exceeding the three-year standard in many cases.
Delta Airlines’ (DAL) actual integration cost was 200% higher at $1.5 billion. United’s (UAL) was 33% higher as of 3Q13 and expected to increase as integration still isn’t complete. Southwest (LUV) had a 22% higher integration cost as of 3Q13 and it’s expected to be higher.
Integration issues have commonly extended for a few years after the merger. For example, United Continental haven’t resolved labor integration issues yet. It has had flight delays due to failure of integration of information systems. U.S. Airways and America West couldn’t decide on pilot seniority even eight years after the merger. Jet Blue (JBLU) is one of the few airlines that hasn’t been involved in mergers recently. As a result, it will be fair to assume that the integration costs of American (AAL) and U.S. Airways might exceed the expected $1.2 billion in the next few years.