In early November, the Justice Department settled its suit blocking the merger of American Airlines and US Airways and, this month, the merger was completed. The original suit claimed “airline consolidation had gone too far and the proposed merger would lead to higher fares for consumers.” In the end, having the two airlines concede to surrendering some take off and landing spots at certain airports would “foster competition and lead to low prices.” So the merger continues.
Airline mergers are nothing new in the industry; as noted in an MIT Sloan Management Review (SMR) interview with Tom Kochan, Professor of Work and Employment Research and Engineering Systems at MIT Sloan, “Airline companies may be the business everyone fantasizes the most about trying to fix.” As experts quoted in the recent article in The New York Times, “Concession in Airline Merger is Criticized,” airline mergers create “unprecedented pricing power” and are designed to cut operational costs. But, as the story notes, “merged airlines have had varied levels of success in meshing their operations and achieving the ‘synergies’ they sought.”
Part of the problem with merging airlines is that each airline has its own culture and approach to employee relations. “My experience in the airline industry is that the managers always say, ‘we’ll get to those [employee] issues in due time. But first we’ve got all these financial issues around the merger, we’ve got to get our networks in order and then we’ll get to employee relations,’” said Kochan in his interview with SMR. “The reality is they never get to them, and even when they do, by that time it’s too late.”
Employees are the “faces” of the airlines. And, it was the airline industry that invented the first loyalty programs. Mergers upset those loyalties, opening the door for consumers to select airlines based on price and customer service. So how the airline operates–-and how its employees are treated, and in turn, treat the customer–-can have a significant impact on the overall success of the merger.
Kochan has researched the airline industry for over a decade and found that the “keys to increasing productivity and service quality” are a high level of engagement and a good labor relations system. As he explains it, “This requires that workers use their discretionary effort to solve problems for us as passengers, which means they must be motivated and authorized to do so on the front lines.”
According to the J.D. Power & Associates 2013 North America Airline Satisfaction Study, (which measures passenger satisfaction with North America airline carriers based on performance in cost and fees, in-flight services, flight crew, and several other factors), both American Airlines and US Airways came in below the overall segment (traditional carriers) average, with US Airways coming in at the bottom of the segment.
Success for the merged airline may lie in its employee relations. “They have to be willing to invest in ways that build organizational capability to get high levels of productivity. They have to work with their labor force, they have to train their managers to do that,” sums up Kochan. Putting aside operational efficiencies and enormous price control of the market, the measurement of true merger success is happy employees who engender loyalty to the merged airline.
Tom Kochan is the George Maverick Bunker Professor of Management and
Professor of Work and Employment Research and Engineering Systems at MIT. He is also the Co-Director of MIT Sloan Institute for Work Employment Research. He teaches in the Strategies for Sustainable Business program.