Avoiding the Merger Blues: American Airlines Integrates TWA

question 21

Essay

Avoiding the Merger Blues: American Airlines Integrates TWA

Trans World Airlines (TWA) had been tottering on the brink of bankruptcy for several years, jeopardizing a number of jobs and the communities in which they are located. Despite concerns about increased concentration, regulators approved American’s proposed buyout of TWA in 2000 largely on the basis of the “failing company doctrine.” This doctrine suggested that two companies should be allowed to merge despite an increase in market concentration if one of the firms can be saved from liquidation.

American, now the world’s largest airline, has struggled to assimilate such smaller acquisitions as AirCal in 1987 and Reno Air in 1998. Now, in trying to meld together two major carriers with very different and deeply ingrained cultures, a combined workforce of 113,000 and 900 jets serving 300 cities, American faced even bigger challenges. For example, because switches and circuit breakers are in different locations in TWA’s cockpits than in American’s, the combined airlines must spend millions of dollars to rearrange cockpit gear and to train pilots how to adjust to the differences. TWA’s planes also are on different maintenance schedules than American’s jets. For American to see any savings from combining maintenance operations, it gradually had to synchronize those schedules. Moreover, TWA’s workers had to be educated in American’s business methods, and the carrier’s reservations had to be transferred to American’s computer systems. Planes had to be repainted, and seats had to be rearranged (McCartney, 2001).

Combining airline operations always has proved to be a huge task. American has studied the problems that plagued other airline mergers, such as Northwest, which moved too quickly to integrate Republic Airlines in 1986. This integration proved to be one of the most turbulent in history. The computers failed on the first day of merged operations. Angry workers vandalized ground equipment. For 6 months, flights were delayed and crews did not know where to find their planes. Passenger suitcases were misrouted. Former Republic pilots complained that they were being demoted in favor of Northwest pilots. Friction between the two groups of pilots continued for years. In contrast, American adopted a more moderately paced approach as a result of the enormity and complexity of the tasks involved in putting the two airlines together. The model they followed was Delta Airline’s acquisition of Western Airlines in 1986. Delta succeeded by methodically addressing every issue, although the mergers were far less complex because they involved merging far fewer computerized systems.

Even Delta had its problems, however. In 1991, Delta purchased Pan American World Airways’ European operations. Pan Am’s international staff had little in common with Delta’s largely domestic-minded workforce, creating a tremendous cultural divide in terms of how the combined operations should be managed. In response to the 1991–1992 recession, Delta scaled back some routes, cut thousands of jobs, and reduced pay and benefits for workers who remained..

Before closing, American had set up an integration management team of 12 managers, six each from American and TWA. An operations czar, who was to become the vice chair of the board of the new company, directed the team. The group met daily by phone for as long as 2 hours, coordinating all merger-related initiatives. American set aside a special server to log the team’s decisions. The team concluded that the two lynchpins to a successful integration process were successfully resolving labor problems and meshing the different computer systems. To ease the transition, William Compton, TWA’s CEO, agreed to stay on with the new company through the transition period as president of the TWA operations.

The day after closing the team empowered 40 department managers at each airline to get involved. Their tasks included replacing TWA’s long-term airport leases with short-term ones, combining some cargo operations, changing over the automatic deposits of TWA employees’ paychecks, and implementing American’s environmental response program at TWA in case of fuel spills. Work teams, consisting of both American and TWA managers, identified more than 10,000 projects that must be undertaken before the two airlines can be fully integrated.

Some immediate cost savings were realized as American was able to negotiate new lease rates on TWA jets that are $200 million a year less than what TWA was paying. These savings were a result of the increased credit rating of the combined companies. However, other cost savings were expected to be modest during the 12 months following closing as the two airlines were operated separately. TWA’s union workers, who would have lost their jobs had TWA shut down, have been largely supportive of the merger. American has won an agreement from its own pilots’ union on a plan to integrate the carriers’ cockpit crews. Seniority issues proved to be a major hurdle. Getting the mechanics’ and flight attendants’ unions on board required substantial effort. All of TWA’s licenses had to be switched to American. These ranged from the Federal Aviation Administration operating certificate to TWA’s liquor license in all the states.
-In your opinion, what are the advantages and disadvantages of moving to integrate operations
quickly? What are the advantages and disadvantages of moving more slowly and deliberately?

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