Airline Company Acquisition

I :  Your client is a major airlines company ABC looking to acquire another airlines company XYZ. How should the client go about this?

C : Alright! I would like to know more about the two companies. Can you provide more information about the customer base, location of operations and kind of services provided by the two companies?

I : Sure! Your client is a domestic airlines company connecting flights between six tier I cities of India, while company XYZ is operating across Asia, with 70% flights between India and South East Asia. Your client is similar to Indigo with a decent market share in India. On the other hand, company XYZ provides two types of services: General airline services and Chartered Plane services to corporates.

C : That’s interesting. Moving on with my analysis, I would focus upon two areas: the Market outlook for both the companies and Company Outlook post the acquisition. To see if the acquisition would be beneficial, I would first want to know about the market size, market share and growth rates for both the markets, ie. Domestic and South East Asia.

I :  Both the markets seem lucrative and both companies enjoy a decent market share. Why don’t you focus upon the company outlook?

C : Sure! Here I would focus three major areas: i) Financial feasibility of Acquisition, ii) Operational feasibility of acquisition, iii) General Management synergies.

I : Let’s begin with the financial feasibility analysis.

C : Here, I would analyze the revenue as well as cost synergies that would emerge as a result of the acquisition. For revenue synergies, I would focus upon two things: the customer base and the services. Since we know that the companies are dealing with different markets, the customer base for both companies is very different and thus, an acquisition would lead to an increased customer base. Also, since company ABC also. provides Chartered Plan services, the overall service portfolio would widen post acquisition

I :  This seems like a fair analysis. Let’s delve down deeper into the cost synergies.

C : Sure! The overall costs can be divided into people, process and technology costs. Do you want me to focus on any specific bucket first?

I : Sure, let me know how can we optimize the employee costs post acquisition.

C : So there are two types of employees: Flight and Non-Flight. Post acquiring company ABC, we can optimize some routes to ensure that same aircrafts could be used  for both domestic and international flights. If this happens, the costs associated with flight employees (pilots & crew members) can go down.

I :  Where can we reduce the non-flight employees?

C : Non-flight employees can be divided further into upper management, middle management and lower management. Post acquisition, most upper management employees of company XYZ can be laid off. Moreover, the XYZ’s workforce employed in a number of services such as ticketing, Cargo Handling, etc would not be required as the same tasks can be managed by our client’s company only.

I : Fair enough! What all other cost synergies can be there?

C : The costs associated with operations of the airline can be further divided into Pre-Flight, During Flight and Post-Flight Costs.

I :  Pre-Flight: Here, costs associated with aircraft lease, space lease, route selection, fuel purchase, ticketing and baggage/cargo handling would be included.

C : During Flight: This will include the costs associated with in-flight services and aircraft operations (utilities, maintenance, etc.)

I : Post-Flight: This includes the costs associated with Marketing and customer support.

C : Do you want me to focus on any of these areas first?

I : Help me understand how cost synergies can be realized in fuel costs, cargo handling and in-flight services.

C : Fuel Costs: Post the acquisition, the client would be able to negotiate better with the fuel suppliers due to economies of scale.

Cargo Handling: The total number of baggage counters required on the airports would be lesser than the sum of the counters currently being handled by both the companies separately. Thus, the Baggage counter lease cost would reduce.

In-Flight Services: The food and entertainment services currently being provided by company ABC can be provided at a lower cost as the company enjoys a higher bargaining power with increased volume of purchases.

Do you want me to focus upon the Operational Feasibility and General Management Synergies as well?

I : That’s alright! We can close the case here.