IAG's Acquisition Plans a Recipe to Plug and Play

Chris Mills PIPC

Square Mile, September 2010

The news that Willie Walsh is to structure his new IAG holding company, formed to facilitate the merger of BA and Iberia, so that it is capable of ‘plugging-in’ up to 12 additional acquisitions, has sent airline analysts into a frenzy of anticipation and sparked a whole new game of spot the target.
But, away from the excitement that the announcement has generated (and who’s to say at this stage that it’s not just a tactic to distract attention from the lukewarm response given to the original BA/Iberia deal), the reality of making such a strategy work – and the sheer difficulty of integrating 12 businesses in a relatively short timeframe – creates one of the more intriguing business problems of recent years.

Let’s face it, M&A deals rarely create spectacular value. This is not the place to trot out the familiar statistics around the high percentage of failed mergers but when one considers that most airlines are barely profitable to begin with, the balance between turnaround and financial calamity is especially fine. This is complicated further by the geographic realities associated with the targets mentioned so far.

Synergies, or cost savings to you and me, are generally to be found in consolidating operations and co-locating key activities. The nature of the airline business makes this potentially much more difficult – if you acquire an airline in India or South Africa, you still need local ground crew and engineering staff, and it’s unlikely to be viable to offshore that service from Britain or Spain to the new countries.

Add to this the cultural and historic nuances, including the potential political fallout from ‘losing’ a national flag carrier, and integration takes on a new level of complexity. Why would American Airlines or Cathay Pacific willingly give up systems, procedures and management principles that they have espoused for decades? The only reason is financial. Either IAG will have to acquire them completely, putting itself in the driving seat in terms of overall control, or it will need to demonstrate that its computer systems, customer service standards and quality of management are tangibly superior. Undoubtedly, a very expensive undertaking but the alternative of a creating a loose federation of autonomous airlines with a common interest is barely different from the current alliances of which BA is a member.

Similarly, the need to maintain momentum in each of the businesses will be placed under severe strain. BA/Iberia was announced In November of last year but the deal will not be complete until the end of this year at the earliest. To multiply that set of negotiations by 12 (or even three) and reach successful conclusions on the choice of systems, operating model, management responsibilities etc is nightmarish to contemplate and risks distraction from the core business at every moment. Of course, as IAG grows and absorbs more airlines, its financial and operational clout will increase and therefore so will its influence and ability to dictate the model for future acquisitions, but the initial deals are likely to be fraught with difficulty and the risk of making the wrong compromise.

‘Plug and play’ is a concept that sounds great, but it’s rarely 100% successful with a device and a single computer. The airline equivalent is more like docking US and Russian spacecraft with the international space station. Just agreeing that they were using the same words to describe key activities took 5 years – and IAG doesn’t have anything like that much time.

Chris Mills is a Partner at PIPC, a global management consultancy responsible for some of the world’s largest post-merger integrations.