The United- Continental Airlines Merger
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A merger in business is the situation where two companies combine to form a larger company operating as a single unit. In 2010, united airlines merged with the continental airlines to form a larger airline which was named United airlines holdings(Anderson et al., 2020). The Merger would result in the new united airlines having a 21% market share in the U.S making it a leading carrier in the U.S. previously; Delta Airlines was leading with 20% market share(Anderson et al., 2020).
Both continental and united airlines decided to get into a merger because both companies were struggling to make profits due to the increase in fuel prices, increased competitions from the low-cost carriers and reduced customers due to the 2008 financial crisis which has reduced passengers travelling for leisure and business(Cohan, 2010). At the time of Merger, the airline industry had lost $9.4 billion in 2009 and predicted that the industry would lose another $2.4 billion in 2010(Cohan, 2010).
Financial statements.
- The balance sheets analysis.
Prior to the Merger, the continental airlines were operating with the total assets of $ 12.41 billion and a total liabilities of $11.389 billion in 2009. However, the ratio analysis describes a company in crisis. By calculating the current ratio,
Current Ratio= (current assets/ current liabilities)
Current Ratio= (4373 / 4382)= 0.997
Since the current ratio is less that one, it means continental airline was already a very weak company since the short-term liabilities already exceeded the short-term assets.
On the other side, united airlines had a total of $18.64 billion total assets and total current liabilities of $21.495 billion in 2009. The current ratio was at ( 5105/6473)= 078866.
As of 2009, united airlines was already operating in more liabilities than assets. The current ratio indicates the company was operating on more short-term liabilities than short-term assets.
- The income statement analysis.
An income statement allows the company to measure financial performance using ratios. The continental airlines as at 2009. The continental airline had operating revenues of $12.56 billion while the operating expenses of 12.732. The result was a deficit in operating income of $146 million(Kole and Lehn. 1997).
On the other hand, united airlines were also struggling with balancing their books of accounts. In 2009, after all the deductions, the company settled for a net income of a deficit of $651 million.
From the income statement analysis, both companies were struggling to stay in profits.
- The cash flow analysis.
The cash flow accounts on how the company raised and spent its money. The continental airlines made net cash of $362 million while the united airlines made $966million from operating activities, while spending -$76 and -$80 respectively on investing activities.
The cash flow analysis indicates both companies getting income, but the trend from previous years indicate the cash flow was becoming lesser and less.
Risks involved in the Merger.
During a merger, both companies that are involved in the Merger anticipate potential risks. In the case of united-continental airline merger, there was a potential risk of miscalculation of synergies and integration issues(Kole and Lehn. 1997). Firms regularly enter an arrangement excessively idealistic about the approaching result and think little of to what extent cooperative energies take to happen as intended. Merging workforces and operational procedures requires significant investment, and overabundance expenses can be gathered if there are unreasonable desires around when the incorporation is finished(Kole and Lehn. 1997). Also, on the off chance that a definite combination plan isn’t set up when an exchange is made, the organizations associated with the arrangement may work independently for longer than foreseen, bringing about increased expenses after some time leading to a potential risk of integration issues.
The actual risk experienced during the Merger was the united airlines’ very poor financial situation while bearing in mind the increasing oil prices and stiff competition from a low-cost airline(Audited consolidated balance sheets of Continental Airlines, Inc, 2020). This risk made the continental airlines become reluctant to make a deal with the united airlines.
Management of the human capital.
The main aim of the united-continental Merger was to create annual cost savings and boost their revenues to $1.4 billion dollars and for this to become effective, employee layoffs were inevitable(Kole and Lehn. 1997). The layoff would involve employees from both companies both in the upper and lower management, especially where people are doing the same job at each airline. The layoffs would also affect the people issuing the tickets and the luggage handlers. In addition, both companies settled at having only one budget for advertisement, one marketing budget and one flyer program; all these factors would have a direct or indirect impact on the human capital.
The soundness of the financial policy after the Merger.
After the Merger, united-continental airlines adopted nearly 2000 policies(Kimand Singal, 1993). Example of the financial policy was reducing the number of flights in order to cut costs on fuel expenses. The Merger saw the right mix of the debt and equity and having a high leverage ratio and good capital structure. The debt-equity ratio is calculated by dividing the total liabilities by total equity. (22261/-2206)= -10. Based on the debt-equity ratio, the Merger resulted in a high leverage ratio, thus an aggressive capital structure.
Conclusion.
The finding from this research indicates that both united airlines and continental were struggling to make profits and Merger was the best strategy for both companies in order to return to profitability and become competitive and cut costs. I would recommend that both companies become implement policies which ensure the company follow the financial, technological and economic trends.
References.
Anderson, A., Evers, D., Hristov, V., Hoskisson, R. E., Johnson, J., Kirst, A., … & Till, R. United Airlines, Time to Fly “Together”.
“Airline Industry.” (2020)American Economic Review 83 (3): 549-569
Audited consolidated balance sheets of Continental Airlines, Inc. (2020). Retrieved 12 February 2020, from https://www.sec.gov/Archives/edgar/data/100517/000119312510222185/dex992.htm
Cohan, P. (2010). “Watch Out for Higher Fares and Fewer Flights.” Daily Finance.
Kim. E. H. and V. Singal. (1993). “Mergers and Market Power: Evidence from theMay 3.
Kole, S. and K. Lehn. (1997). “Workforce Integration and the Dissipation of Valuein Mergers: The Case of USAir’s Acquisition of Piedmont Aviation.” WorkingPaper Series. Available at SSRN:http://ssm.com/abstract=5167.