Discuss the management decision to retain the fleet, staff, and destinations.
Wombat and Koala Airlines have decided to merge their businesses. Wombat is a full service airline while Koala is a low cost carrier (LCC). It has been decided by the management that the existing staff, fleet will be retained by the combined entity. Further, it has been decided that Wombat will adopt the reservation system of Koala as the reservation system of Wombat is outdated. It has also been decided that the combined entity will operate as a premium based low cost carrier. The third decision by management is to remove face to face customer support and charge 15% premium for booking tickets through agents, tour operators and third party websites. We will discuss in this report how the decisions taken by the management fit into the scheme of things and whether they are the appropriate decisions.
The airline industry is very competitive and there is very less room to extract profit. The operating costs are very high in the airlines industry. One of the main reasons to merge is that the airlines believe that they can’t give out consistent profits alone.(Hewitt, n.d.) An airline can’t operate on all the profitable routes. They simply don’t have the resources to do that, so they best way out to cover all the routes is to merge.(Wang, 2012)
The Low Costs Carriers have occupied the most lucrative and profitable routes. Full time carriers are not able to cover costs with their big fleets flying to all big and small destinations.
The senior carriers have a senior and expensive labour force to pay for. Their hub and spoke system is losing sheen as airport congestion transforms every connection into an opportunity to miss a flight. The market share of hub and spoke airlines have fallen from 85 % to 57% in the last fifteen years.(NYT, 2010)
As airlines merge, consolidating the market, it gives pricing power to the airlines.(Hüschelrath & Müller) As the number of airlines becomes less, the number of routes and flights flown also reduce. Thus, cutting down the number of seats available. Hence, it enables the airline to charge high rates.(Nocera, 2013)
Integrating two airlines is a mammoth task, one that has been misjudged by many airlines in the past. They bought the airline and underestimated the differences between the two entities and played down the complexities of integration which led to unintended effects (PricewaterhouseCoopers, 2014)nowadays, the sizes of airlines have increased dramatically, the financial pressure is greater, and system integration is much more complex. (Hansson, Neilson, & Belin, 2001)
The tactical issue involved in an airline merger is humongous.( Carlton, Landes, & Posner) A study conducted by Booz Allen Hamilton states that two third of mergers don’t meet the stated objectives due to execution related issues. Only 32% attributed failure to strategic reasons such as poor fit or overly ambitious project. The main hurdles to merger integration are:
The merger integration should follow a phased integration approach. The integration should be divided into phases such as the first 100 days or so.(Benkard, Bodoh-Creed, & Lazarev, 2010) This strategy yields best possible revenue and cost synergies in the early phase while maintaining safety and facilitating operation integration. Given below is a framework for the first 100 days.
a. Airlines to be merged (Transition Phase)
b. Connected Airlines
c. One Airline: Integrating the two
d. One Airline- Similar and single face
At first, the senior management team needs to be designated instantly. One of the greatest obstacles in merger integration is of composing a suitable team comprising the best of both the organisations.(Hansson, Neilson, & Belin, 2001)
The integration of gate operations is a major starting point. It is not only a visible stand point of the merger but also affects the customer experience. It is also a source of cost saving as you exit gate areas; your rental expenditure goes down. Other such quick cost saving strategies is selective sourcing of maintenance procedures.
The maximum revenue synergies come from amalgamation of IT systems; it should be a topmost priority. Integration of customer systems enables the customer to feel that one-airline theme, although, two airlines exist behind the scenes. The work load depends on the partnership and compatibility of these two airlines’ IS and IT infrastructure. One has to analyse the convenience trade-offs and costs of transitioning into an interim customer system or to one of the airlines system. Employee training costs also are needed to be kept in mind while making this decision.
Designating the management team and managing the airport integration will consume much of the integration team’s attention in the first 100 days. Full operational integration will take much longer, and will depend on a lot of issues like fleet and operational system compatibility.
System issues are one of the primary drivers of the entire process and influence various aspects of the merger process. Systems touch the customer throughout, which ranges from process such as tallying frequent flyer points till creating and pricing connecting itineraries to prompting an agent to provide an upgrade. These many touch points assign too much importance to systems because proper functioning ensures a smooth customer experience. (Borenstein)
The main questions to ponder are: Are you investing in strong interim systems for improving customer experience during the process of transition or is your focus only on the integration and developing the experience afterwards meanwhile using communication to bring down customer expectation. Do you expand the capacity of the existing system or design entirely new systems? (Harlan, 2015)
The employee systems should not be overlooked because this can send strong and sublime signals to the workforce. As we all know the importance of workforce in merger integration.
Till now we have discussed how integration should be carried out. We have discussed what factors need to be kept in mind. We have three management decisions we need to discuss. We will start with the first decision.
The management decided that the combined company will retain the fleet, staff and destinations. Additionally, Wombat’s ageing systems will be merged with Koala’s system. As we know that the fleet of both the airlines consists of the same aircraft so retention of fleet is a good decision as this would not lead to high maintenance costs because the aircraft is of the same company. This would give the new merged entity more resources at their disposal. One major expense would be rebranding of the aircrafts but the synergy coming from this would be outweighing the costs. Retaining the destinations would also give higher coverage to the combined entity but overlapping and multiple flights should be removed. Keeping the staff of both the airlines is also a smart decision subject to that high increase employee costs could be outdone by the increase in revenue. (Kochan, n.d.) Keeping the staff also boosts the morale of the employees and prevents labour unrests which we have listed before as a major problem in merger integration of airlines. Wombat is dependent on agents and tour operators for reservations. Its information systems are outdated (Martin, 2015).
As we have stated before that system integration is one of the major drivers of merger integration. So this decision to migrate Wombat’s information system to Koala’s needs to be properly evaluated. The technology used in information systems of Koala Airlines is up to date and merging Wombat’s information systems with Koala’s is a good decision. Although, it involves employee training costs, which must be less than the synergy benefits coming from this decision.(Newman, 2008)
Coming to the second management decision of operating the combined airlines as a premium based low cost carrier. It is an intelligent decision, keeping in mind that Wombat is a full service airline and Koala is a low cost carrier. Customers of Wombat are used to a certain level of service. This premium based low cost service would be able to provide the required level of service to Wombat’s customers and also keep the low cost customer base of Koala. We should also keep in mind the aircraft configuration of both the airlines is same (both accommodate 300 passengers); this should also enable us to implement this premium based low cost carrier strategy. This new type of product should be properly communicated to the customers. The premium customers should not feel that there has been a degradation of service due to this merger and the customers of Koala also should not feel that they are paying more for the same service. (The Motley Fool, n.d.)
Third decision by the management is to charge a service charge of 15% on tickets booked by agents, tour operators and third party websites, provide 24X7 online and telephonic customer supports and remove face to face customer support. The decision to charge such high service charges by the management on booking done by third parties needs to be looked into. It might lead to devaluation of the brand value of the combined entity. The service charge should be abolished or it should be kept at a minimum. The decision to remove face to face customer support may also be detrimental. As Wombat is a full service carrier, it will have many high profile customers who would prefer to have face to face customer support to resolve their issues. It is a very important decision to have face to face customer interaction because these interactions provide a lot of insights about customers and also it is an important customer touch point.
Conclusion
As discussed above the management decision to retain the fleet, staff, and destinations and migrate Wombat’s information systems to Koala’s system is a good decision and would result in high amount of synergies. The second decision to operate as a premium based low cost carrier is also a good decision as booth the merging carriers have different clientele and this type of offering would satisfy both segments of clients. The third decision to charge high service charge when tickets are booked through third party and removing face to face customer support needs to be reconsidered. This decision could lead to alienation of the customers. As many customers of Wombat would be high profile persons, it would be best to have physical customer touch points.
References
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