LAN -TAM Merger - Research Paper Example

Running head: LAN-TAM merger Name: University: Course: Tutor: Date of Submission: Table of Contents Executive Summary……………………………………………………………………..3-4 1.0. Introduction …………………………………………………………………………4 1.1. Overview of LAN and TAM……………………………………………………4-5 2.0. Analysis……………………………………………………………………........5 3.0 Discussion and Findings…………………………………………………………..5 3.1 Advantages of the proposed merger………………………………………5-9 3.2. Disadvantages of the proposed merger……………………………………10 3.3. Reasons as to why the two airlines have not merged yet………………10-14 4.0. Conclusion………………………………………………………………………….14 5.0 References………………………………………………………………………......15 Executive Summary This research study present an overview of the reasons as to why the proposed LATAM merger which was announced on 13th August has not taken place. The merger which is supposed to take place between TAM Brazilian airline and LAN Chilean airline has received résistance and controversies from various groups despite the deal being of great benefit to both the airlines as well as the two countries. For years now, Chile’s LAN airlines as well as Brazil’s TAM airlines have been considered the largest and most important foreign airlines which in the recent times have been affected tremendously by global airline crises resulting to decline among air travelers especially in North America. The recession therefore has forced many of the airlines too seek alternatives especially in poor performing regions which has forced LAN and TAM to look for a solution to the problem by proposing plans to merge into one company known as LATAM. Airline consolidation today is one of the major solutions many airline companies are resulting to as away of curbing the global airline crisis. With an overview of the argument, the question which the study addressed was “why has the two airlines merged yet despite announcing their plans to merge into one consolidated company”. To find out the reasons behind the delays in the implementation of the proposed merger the study analyzed the advantages and disadvantages associated with the study. In relation to the argument the study discussed in depth the reasons as to why the two largest Latin American Airlines have not merged yet. The findings indicated that proposed merger had clear set of motivators for the two airlines and they comprised of opportunity to create synergies, improve operational efficiency, improve economies of scale and break barriers related to foreign entry in both countries. The research findings concluded that the proposed LATAM merger is an opportunity which will create value for the two airlines and the only option for the two airlines to deal with the global airline crises at hand hence need to resolve the current factors hindering the plans to take advantage of the opportunity at hand. 1.0. Introduction 1.1. Overview of LAN and TAM A merger is described as a combination of two or more companies into one big company in which all the companies except to lose their identity through absorption. The companies usually merge through consolidation in which all the companies pull their own resource together for a common purpose (Gaughan, 78-87). Primarily, the main benefits of consolidation includes better capacity to control, geographic diversity, economies of scale to cut on costs as well as a robust networks and increase in revenues. TAM is one of the largest airlines in Brazil which through its hub in Sao Paulo offers convenient scheduled services to approximately 42 destinations within Brazil and among other eighteen destinations in Europe, United States and South America (Ben &Frank, 40-50). The Sao Paulo-based TAM airline controls approximately 43% of the domestic market in Latin America. LAN on the other hand is a Chilean airline which has its operations in Chile as well as in other countries such as Peru, Argentina, Ecuador as well as cargo airline affiliates in Brazil, Colombia, Mexico and United States (Michelle, 45-67). It is one of the biggest airlines in Latin America with a strong network of international routes which on daily basis generate more revenues per passenger than the domestic flights which operate within Chile. Tam is a member of the Star Alliance airline cooperation group while LAN is a member of the Oneworld (Snyder, 20-30). The proposed merger which was announced on 13th of August by LAN airlines and TAM airlines on its plans to merge into one holding company known as LATAM Airlines group has recently risen a hot debate with several groups in Brazil opposing the move. Though, the deal was captured in the heads of main individuals as a huge scale the question which arises here is “whether the merger makes sense or not”. In order to argue out this issue the study tried to find out the advantages related to the merger as a way of finding out if the merger really makes sense to both the airlines are not. The other question which was addressed in relation to the study was “what are the real reasons that have caused the delay in the implementation of the proposed merger”. 2.0. Analysis The study analyzed various research articles in relation to the question at hand. Research materials were analyzed in relation to the topic of study and primarily the study analyzed the advantages and disadvantages of the merger. In relation to the topic at hand, the research gave a deeper analysis of the reasons related 3.0. Discussions and Findings The discussion part analyzed the advantages and disadvantages related to the proposed LATAM merger primarily as a way of establishing reasons as to why the merger between the two airlines has not taken place yet. 3.1. Advantages of the proposed merger First and foremost, under the proposed merger the two airlines will change their identity to LATAM holding company together with their own subsidiaries though the two airlines will continue to operate under their existing operation certificates of brands. In addition LAM and TAM will maintain their current headquarters in Santiago as well as in Sao Paulo. This will allow for greater cooperation in terms of flight passenger schedules, marketing and fleet buying among other things. Moreover, the two airlines operating under their own individual brands, it will create single back-office operations across the airlines (Hall, 14-30). In order to implement the merger, LAN airlines will be required to issue new shares hence the shareholders of TAM airline will be required to receive 0.9 shares in LATAM for each of the TAM share that they currently hold. Secondly, this deal is perceived to be a great opportunity for the two airlines hence it is anticipated that if the deal is accepted it will allow both carriers to keep on flying with their own brands but under the control of a holding company (Snyder, 20-30). This merger is designed in a manner that it portrays a structure of equalization which could help clear the current potential legal and political hurdles in both the countries. It is there anticipated that if the deal is finalized, the new identity will control over 17% of the passenger revenues in Latin America hence creating a largest airline in Latin America which is more competitive against other key airline competitors from United States and Europe. In addition the combination would create a new Latin American airline group which will offer seamless passenger and cargo services across the continent as well as around the world (Snyder, 20-30). Latam Airlines Group will be the largest player in the region which will lea to increased revenues of approximately US$9 billion which is three times more than that of Avianca-Taca. This is because the new group LATAM Airlines Group will include LAN and TAM airlines with all its affiliates (Snyder, 20-30). This implies that the group will be among the leading airline groups in the world in terms of size and profitability as well as market coverage. The merger will lead to high growth which will lead to new destinations as well as creation of new opportunities for employees of both the two companies as well as it will create more value for shareholders. In addition, the merger will lead to faster economic development and job creation in the home countries of the group airlines as well as the countries in which they serve (Gail & Martin ,25-67). As far as airline market is concerned the proposed merger deal is one of the greatest opportunities for the two airlines since it is expected to create a mega-airline which will have an impressive market capitalization of approximately $13.2 billion as of mid-September which exceeds the current US$6.6 market capitalization for United Airlines and Continental Air which are planning to merge as well. This is because the combined market capitalization of LAN and TAM is expected to double over that of the two United States based air giants. According to statistics recorded the South American airlines combined revenues were approximately $8.5 billion over the years which in actual sense are far much lower than the combined US$29 billion recorded by United and Continental last year hence the merger is expected to increase the South American airline revenues over the United States as well as other Continents (Gail & Martin ,25-67). In the current years both LAN and TAM combined carried approximately 45.8 million passengers hence in really sense they can be ranked as 11th in the world. The two airlines have high seating capacity hence if they are combined they currently account for almost 40% of Latin American’s capacity as well as they offer second- largest capacity on routes to the United States and Canada after the American Airlines(Michelle, 45-67). Therefore, the move by two airlines to solidify their resources into one consolidated company will allow for more coordination on routes, passenger pricing as well as increased negotiating power with the suppliers. Moreover, the merger will lead to geographic expansion for both airlines. Currently TAM does not have any domestic operations outside Brazil while LAN has strong operations in Chile, Chile, Argentina, Ecuador and Peru. With the current Brazilian laws, LAN has been unable to break through the fast growing market of Brazil due to foreign ownership restrictions hence this an opportunity for LAN to expand to other markets including Brazil as well as TAM(Michelle, 45-67). Moreover, the merger will save approximately $400 million dollars in terms of costs as it will lead to better and cost effective connections between Brazil as well as other South American countries. With the merger the two airlines companies will be forced to rationalize their individual routes like other airlines such as Avianca-Taca which in the end will result to high growth in the intra-regional air travel (Michelle, 45-67). Due to high airline network between LAN-TAM the two airlines have significant amount of cash at hand hence their merge will help them to successfully survive the fare wars in Colombia as well as build a permanent presence in these regions. This will help in connecting Brazil and Colombia more easily as well as compete effectively with Avianca-Taca's Avianca and its subsidiaries in Colombia and Brazil in the end LATAM Company may succeed in gaining high growth which easily will drive Avianca from the Brazilian market. Currently, the Brazilian airline industry is experiencing extremely competitive advantages in terms of regional market routes growth and market share. The Brazil airlines today hold approximately 19% which has a resulted from increased purchasing power as well as increased ticket sales (Michelle, 45-67). Airline industry has grown tremendously at a rate of 13% leading to a double growth rate in domestic product of Brazilian economy. The merger therefore will increase revenues given the fact that the merger is being implemented at a time when Brazil is hosting the next World Cup in 2014 as well as the Summer Olympic Games in 2016. Lastly, the merger will make the two airlines more complimentary to each other with LAN having a strong presence in South American countries such as Peru and Argentina while TAM commanding significant routes to Europe which are highly profitable. Moreover, the new identity LATAM Airlines Group will be created through all-stock transaction which is worthy $2.7 billion. This will make the two airlines more competitive globally as it will be ranked as the 11th biggest in the world in terms of passenger traffic carrying approximately 46 million passengers per year. This will allow the two airlines under the LATAM merger to compete more globally with other major airline competitors (Michelle, 45-67). In terms of management both partners have modern professional management models, advanced fleets and technologies which help LATAM in all of its new airline operations. The airlines have a lot of experience in performing partnership and alliances hence it is quiet evident that both TAM and LAN have capabilities and competencies to ease management in terms of cultural alignment and gradual construction of a common identity. 3.3. Disadvantages of the proposed merger To begin with, Brazilian foreign company regulation law forbid foreigners from holding more than 20% of the domestic airline which has risen a lot of controversies over the merger between the two airlines. This implies that the operations of LAN will be limited hence affecting at a greater extends its revenues unless the laws are changed (Michelle, 45-67). . Moreover, the only way for LAN to enter into the market is through buying the TAM shares which will greatly affect the overall market of TAM given the fact that the Brazilian’s airline’s stocks have been trading at a discount compared to those of Chilean. This implies that LAN’S shareholders will become major holders in the merger. Lastly, this merger is not an acquisition hence it is unprecedented. It is normal for Brazilian companies to buy smaller companies but less usual for larger players to join forces. The merger therefore will create dwarf size in the South American affecting the operations for smaller players such as Brazil’s Gol, Colombia’s Avianca and Argentina’s Aerolineas because TAM-LAN merger is aimed at creating high-value resource consolidation which over the recent years has been the aim of many airlines in the world (Michelle, 45-67). . This has led to complaints by these small competitors in Brazil whose market share will be affected given the fact that the merger will create strong competition between the airlines. 3.3. Reasons as to why the companies have not merged yet Despite the mere fact that the proposed merger has a lot of advantages associated with as far as the two airlines are concerned due to the global airline crises, much remains to be resolved which has led to the delay in the implementation of the merger. Controversies have risen in both countries to which Oneworld airline alliance can LATAM Airline Company belong if the two airlines continue to operate under their own individual brands given the fact that the two airlines belong to different Oneworld airline alliances(Gail & Martin ,25-67). TAM currently is a member of Star Alliance group of airlines which comprises of BMI, Lufthansa, SAS and Air China while LAN is a member of the Oneworld airline alliance which currently includes Iberia, British Airways, Qantas and JAL. The question which arises here is whether LATAM Airlines Company will belong to Oneworld or Star Alliance. It is therefore evident that the two airlines will suffer from lack of consistency if the companies continue to operate under their own individual brands identity(Gail & Martin ,25-67). Since, TAM just joined the Star Alliance in May 2010, it has not established itself fully in the Alliance hence the possibility which is there is for TAM to defect to Oneworld which is currently the alliance that LAN belongs to. Since TAM has not integrated its growth more with the alliance it will be necessary for it to defect which eventually is anticipated to create a significant gap in the Latin American alliance coverage for the Star Alliance. The leadership issue is another important factor which is hindering the two airlines from implementing their proposed merger. This is because the proposed merger terms indicate that the two airlines will operate under their individual brands something which will cause inconsistency in leadership. It is therefore important that the two airlines put in place necessary measures to solve the leadership problems. This issue has raised a hot debate hence the two airlines are currently looking for alternatives to resolve the leadership before implementing the proposed merger if it has to achieve the cost saving purpose. The proposed merger plans is a transaction which involves both parties entering into a binding definitive agreement that will ensure satisfaction of conditions including corporate shareholder approvals and actions as well as regulatory approvals. This has proved to be a difficult task which needs to be resolved over time. The Brazilian restrictions are another reason behind the delay, since the Brazilian government has implemented laws which restrict foreign ownership in a Brazilian air carrier to only 20%.This is a big hindrance as it has proved hard for foreigners to establish businesses in Brazil (Gail & Martin, 25-67). Under this law it will be very hard for LAN to play its significant role hence as way of solving this issue, the two major players are currently holding discussions with the Brazilian government to change the restriction to approximately 49%.This is affecting the implementation of the proposed merger as the new company is supposed to find ways of respecting the foreign participation laws in each of the country (Charles, 56-78). Since the companies are from different countries with different operation structures, the governments involved were forced to thoroughly scrutinize the new airline merger which has contributed to the delay in the merger implementation. Given the fact that the two airlines have great opportunities it will be necessary for them to put in place investment and airport infrastructure to deal with major events(Charles,56-78). Currently LAN has a really good network for handling traffic in Latin America as well as in the United States. On other hand TAM’s has good network connections in Europe hence combining the two networks will be a very difficult task for the two airlines which requires the airlines to implement measures that can deal with the situation. This is a factor which is taking long for the two airlines to put place as a way of dealing with the situation hence the delays in implementing the merger. The air traffic infrastructure intended for the big events is a major issue which has highlighted the need for the two airlines to put in place measures that will ensure smooth functioning of all the South America’s transportation connections with the rest of the world (Charles, 56-78). The other hindrance is related to the market share ownership as well as market size. In the merger it is quiet evident that LAN will have an upper hand in the new airline carrier over TAM. This is because the Chilean airline industry currently is well managed which has led to its excellent services and on time performance. Moreover, LAN recently bought new planes which will increase its services. In addition, the Chilean airline industry knows various strategies to make money hence it will expand more easily than TAM. With these factors, it is evident that LAN will have to command a higher market than TAM which has raised a hot debate. TAM and LAN are companies from different countries with two family origins (Charles, 56-78). This has imposed a challenge for the two airlines in terms of implementing the merger. Controversies have risen in relation to this issue in terms of how well to control the two families as well as ensure that they work together in harmony (Charles, 56-78). This is causing a dilemma between the two airlines partners on whether the new airline should be distinctively with South American flavor, Chilean or Brazilian. Interpersonal relationships between the two largest companies are an issue which needs to be considered at a larger extend. The two airlines currently are seeking on ways to achieve necessary alignment between the two families thus Amaro and Cueto as well as ways of preserving the alignment over time in the management of the new airline giant By terms of LAN’s statutes it requires that any company entering into a merger with any foreign company should seek approval of the two-thirds of the current shareholders thus from the Cueto family. Since Cueto family is the largest shareholder in the LAN Company which controls approximately 40% has proven a hard task for the two airlines companies to successful merge with the LAN receiving resistance from TAM shareholders especially from the Amaro family who holds 48% (Charles,56-78). The last factor behind the delay in proposed merger implementation is the mere fact that two airlines companies have differences relation to geography, history, institutions and culture among other which has been seen as factor contributing to the delay. 4.0. Conclusion The research findings concluded that the proposed LATAM merger is an opportunity which will create value for the two airlines and the only option for the two airlines to deal with the global airline crises at hand hence need to resolve the current factors hindering the plans to take advantage of the opportunity at hand. The integration of two airline services will integrate the services more hence helping travelers more. 5.0. References Anne Graham, Andreas Papatheodorou & Peter, Forsyth.Aviation and Tourism: Implications for Leisure Travel. Publisher: Ashgate Publishing, Ltd., 2010:34-40 Ben Derudder &Frank Witlox. International Business Travel in the Global Economy. Publisher: Ashgate Publishing, Ltd., 2010:40-50 Charles, Mark. South America and Central America Airline Industry.vol 10. Chicago: Routledge, 2011:pp.56-78 Gail Butler, F & Martin R. Keller, R. Handbook of airline strategy: public policy, regulatory issues, challenges, and solutions. New York: McGraw-Hill,2010:25-67 Gaughan, Patrick. Mergers, acquisitions, and corporate restructurings,4th ed. Publisher: John Wiley and Sons, 2007:78-87 Hall, Gaughan.Bibliographic guide to business and economics, Volume 1.New York: New York Public Library. Research Libraries, 2010:pp.14-30 Latin America monitor: Southern cone, Volume 22.Publisher: Business Monitor International Latin business article available at:http://www.latinbusinesschronicle.com/app/article.aspx?id=4730 accessed on 17th March 2011 Michelle, Grant. AN Airlines and TAM Airlines Announce Merger, vol.2, 2010:45-67 Snyder, Brett. LAN-TAM Merger: U.S. Carriers Sweat The Fate of Alliance Partners,vol 4,| 2010:20-30 Read More