Business Agility And The Odds Of A Successful American Airlines and USAir Merger

Another blockbuster airline merger is upon us. It is hard to imagine this will benefit the flying public - fewer direct flights,  higher prices, more crowded planes –if that is possible- are a likely outcome. But the stock market likes the move: more pricing power + economies of scale – how can you not like this?  The Airline industry in aggregate has lost over 50 billion dollars in the last decade. Life time it is in the red. Southwest is the only airline to consistently make money. Warren Buffet, before eliminating airlines from his portfolio, has been quoted as saying “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Cynicism and ugly facts aside, the success of this merger will depend on how prepared the combined airlines are in dealing with change in their markets and ecosystem.  Dominant companies with few competitors tend to think they are immune to change.  So they don’t try to increase their awareness of changes, and other than cost, don’t try to improve their execution of change strategies.  They become less agile as companies – when new competition starts to pick them off, they will be left with the least differentiating and least profitable parts of their business. 

Forrester is putting significant effort into Business Agility – what it is, how it relates to the success of companies within industries, and what foundations business agility is built on.  We’ve identified 10 dimensions that underlay business agility – and even developed a quick assessment methodology.

Looking at what agility foundations the combined AMR+USAir  should have, several of these dimensions jump out:

  • They must invest to excel at Market Responsiveness – understanding what’s going on in their markets and shifting their strategies and resources to respond.  This is a major upgrade from their too-common focus of viewing customers as someone they can sell a seat upgrade to.
  • They must become excellent at organization Change Management. Change management enables this ‘mash-up’ of two airlines to stay focused on customer experience, implement new processes and encourage positive behavior and attitudes. High performing enterprises embed change management skills directly in the business because they are optimistic about a changing future.  Our recent study of agility and performance found that high-performing companies also had high competence on  change management
  • They must think about how they design, change and support business processes – which we call the Process Architecture dimension. As their customers and competition changes, business processes must change –to continue to improve the mobile experience, for example. AMR+USAir must embrace business architecture and leading business process management (BPM) methods such as target operating models.  They must excellently leverage Business Process Management Suites (BPMS) and Business Rules that add flexibility to core systems  such as aging Global Reservation Systems and other proprietary systems of record. 

We define Business Agility as “the qualities that enable an enterprise to embrace market and operational changes as a matter of routine.” This is the attribute that allows companies to thrive amidst the waves of change – changes that make business executives anxious. But our agility methodology can quantify the dimensions of that anxiety and provide insight on how to fight back.

Comments

Craig, As Forrester's former

Craig,

As Forrester's former airline and travel analyst, I feel I should weigh in here.

I'm not disputing the need for business agility.

I would, however, like to help you understand the reality of what's involved with a merger like this.

- Airlines are already responsive to the market. We may not like what we're seeing when we fly on many airlines, but it is the industry's response to our behavior as consumers. Airlines have tried with amenities like increased flight attendant staffing, better/more food, and extra legroom (in the early 2000s, in fact, AA offered "More Legroom Throughout Coach." The airline lost a fortune). None of it worked; the traveler would change airlines 9sometimes even airports) to save $1. Yet we have also said we value more "single airline" flights to more places, and airlines have obliged with mainline and regional service on new routes to more places. New fares are filed as often as six times a day, and airline pricing and revenue management systems are some of the most sophisticated in any industry, able to dynamically adjust inventory and fares in real time.

- Airlines are massively complex beasts. There are government regulations, different airline maintenance and safety training procedures, maintenance records, reservations, loyalty programs, unions, and airport and aircraft leases to contend with. The airlines use different reservations systems and other IT. Organizations including the FAA and Department of Homeland Security get involved with reviewing training, security, and other details. US will need to transition out of the Star alliance, which it currently belongs to, and move to AA's alliance, oneworld. That will happen in Q1 2014.

- The two airlines haven't been playing tiddlywinks. AA and US have actually been working on the merger for several months. The new exec leadership and upper levels of management have been announced. Work groups have been created for many functions, and planning efforts initiated. But there's only so much they can do until the merger itself is approved (after all, technically AA and US were competitors until they secured DoJ approval for the merger). Unfortunately, some of the planning work had to stop after the DoJ ruled against the merger in August. That's now back underway.

- Some changes will be easier to make than others. Adjustments to the domestic route network and schedules, for example, can be done relatively easily. However, there are planning issues to be considered: Aircraft maintenance needs, hangar space, crew availability, gate availability (and the type of aircraft that the gate can accommodate), etc. And there are hundreds of thousands of details - from the loyalty programs to revenue management strategies to the types of beverages offered on board.

- Airplanes fly fast; airline mergers take time. The FAA is the lead Federal agency that is involved with airline mergers. Details on crew training, safety procedures, maintenance procedures -- and the records associated with all this -- have to be run past the FAA for its approval. Of course, the commercial and general business issues must also be addressed. If all goes well, it should take AA and US no more than 18 months to arrive at the point where the airline will receive its SOC - single operating certificate - from the FAA. I've been through these mergers before. It's possible that the airlines may be able to shrink this by several months, given the merger planning work done to date.

"Agility" is relative. AA has already announced that "customer day one" will be January 7, when US Dividend Miles members and American's AAdvantage members will start to enjoy reciprocal benefits, such as earning mileage when flying on either airline, award travel, and seat upgrades. I think that's pretty good.

You're right -- 100% right -- when you call for businesses to be agile, and everything in the Business Agility strategy makes sense. It just has to be tempered to the industry.

Thanks for letting me post.

Henry

Henry, Thanks for weighing

Henry, Thanks for weighing in. Great insight in how the merger is being approached. Mostly sounds positive with teams working furiously in the background with government involvement - a major factor. I will try to be optimistic and cut them some slack. A challenge for someone who has experienced consistent service decline. Although to be fair I have made my living flying around and am still here. Best.