A new beast to manage?

Airneth column
May 2011
By Sveinn Gudmundsson

A new fashionable form of mergers in European air transport is emerging, that in some ways can be seen as retaining the characteristics of inter-firm relations rather than the full control of a single firm. "Two brands under one umbrella" pioneered by the Air France-KLM merger, appeared at first sight a structure to address the restrictive nationality clauses in air services agreements with third countries. Then we had the Lufthansa-SWISS acquisition followed by the British Airways-Iberia merger, and the umbrella structure to mergers is flying around. 

There are probably a number of analysts that would argue, now, that these mergers keep in check some of the tensions associated with European cross-border mergers, on the customer, labor and the political fronts. What we don't know is how far the internal and external national bound interests will preclude full mergers as time goes by. If a full merger is not on the books and a permanent separation is seen as the best way to extract value, we can regard this form of increased cooperation as an incremental change on a continuum between a partnership and a traditional merger. Assuming this, an "umbrella" merger will be subject to tensions usually associated with partnerships. 

To cast light on this view we can employ a perspective pioneered by T. K. Das and B. S. Teng, called the internal tensions perspective, which holds that in inter-firm relations a balance must be struck between competing forces such as cooperation versus competition, rigidity versus flexibility, and short-term versus long-term orientation. Competition can be seen as pursuing one’s own interest at the expense of others and cooperation as the pursuit of mutual interests to realize common benefits. Assuming that cooperation and competition are opposing forces, an imbalance causes tensions: too much competition will see one partner seek gains at the cost of the other partner, while too much cooperation will weaken the position of the overly cooperative partner, leading to mounting dissatisfaction. In a relationship where one firm is larger or is financially superior, opportunistic self-interest is more likely to develop and competition to overtake cooperation, escalating tensions. Rigidity, on the other hand, is defined in terms of the degree of connectedness of members with each other. The greater the connectedness the more control the partners have over each other. 

A full merger implies high degree of mutual control that usually shifts towards the stronger faction over time, causing tension as the other faction competes for control to manage its risks. A structure of two separate brands with a national base represents substantial flexibility, loose coupling. Regardless, rigidity is likely to rise with time since loose coupling implies a degree of duplication that the merged entity will eventually try to eliminate. The consequence of such engagement is reduced trust and strained relations between the different factions, increased tensions. Finally, a short-term horizon of one entity and long-term horizon by the other can exist in an umbrella merger if one faction sees the merged entity as a perpetual duo, while the other does not, usually the one in a stronger position. In most traditional mergers this is an initial problem in a post-merger integration, but in European airline mergers, it is a problem that is more likely to be a constant. In other words, European umbrella airline mergers appear to be locked into a perpetual brand separation, an unusual constraint for the stronger faction. Yet, even if both factions entered an umbrella merger with similar time horizons and a strong cooperative stand, the internal dynamics are bound to increase internal competition and rigidity in decision-making, posing a management dilemma and increased tensions over time.

Umbrella mergers of the type we are observing in European air transport are subject to internal tensions to a greater extent than we would find for example in a US style airline merger where permanent identification of factions would not prevail (language and culture). The internal tensions concept is useful to underscore that European airline managers are dealing with a "new beast" that needs to be kept in shackles by complex balancing of many internal tensions. Taming the beast is all about how tensions are resolved without one of the factions being seen as overwhelmingly opportunistic, reconciliation denotes change, but the accumulation of unresolved tensions, denotes failure.
 
For further information on the internal tensions perspective tested on airline alliances, see:
 
GUDMUNDSSON, S.V. (2011). An Empirical Test of the Internal Tensions Perspective in Alliances: In: Das, T.K. Research in Strategic Alliances Series: Behavioral Perspectives on Strategic Alliances. Information Age Publishing, USA.

---