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Airline Targets Merger to Expand Globally, Saves Up to $1 Billion via Operational Synergies

Background and Challenge

Driven by record oil prices, a depressed stock price, and the threat of competitors’ consolidation efforts, a major global airline engaged L.E.K. Consulting to evaluate its strategic options within the airline industry and conduct a comprehensive synergy / transition cost analysis for potential merger considerations.

Approach and Recommendations

During the course of the engagement, the L.E.K. team worked hand-in-hand with the client’s executives and key business unit managers to:

  • Outline industry consolidation scenarios, including first-mover / second-mover dynamics, and identify the most favorable course for the carrier
  • Develop and refine models to calculate synergy potential and weigh likely transition costs across each merger scenario
  • Share analyses with potential merger candidates’ management teams to generate consensus around the synergy values and facilitate merger discussions between the carriers
  • Prepare and present material to the board of directors
  • Assist the client’s legal team in preparing arguments to defend the merger during the U.S. Department of Justice review process

L.E.K. helped the client identify another major U.S.-based global airline as its preferred merger partner. By analyzing the combined carrier's domestic and international network synergies, cost synergies (overlap stations, IT, maintenance, fuel, and S&M, among others), labor considerations, and transition costs (retraining, rebranding and integration, among others), L.E.K. also helped identify over $1 billion in potential annual revenue and cost synergies. Lastly, L.E.K. examined numerous labor scenarios to help the client gain insight into the impact of harmonizing different agreements and how they would impact the timing over which synergies would be achieved.

Results

Equipped with L.E.K.’s analysis and strategic recommendation, the client’s board of directors voted to approve a merger to create one of the world’s largest airlines.