Airline mergers are back on the agenda, but do companies pay enough attention to the human element in their due diligence? Michael Bell, who leads the global aviation practice at executive search consultants Spencer Stuart, argues they do not

It seems that the global airline industry is getting ready to consolidate and potentially at a very rapid pace. At every turn, another set of merger talks seems to appear. The business logic behind these deals is straightforward enough, allowing partners to build bigger networks and achieve lucrative economies of scale. Yet as the valuation process takes place and potential partners scour each other's books, there is one critical asset that is too often left off the due diligence list. That is leadership.

As studies by management consulting firms have repeatedly demonstrated, few mergers and acquisitions actually work in the final analysis. At least two-thirds fail to create, or even destroy, shareholder value. And the most often cited reason is the failure to properly integrate organisational cultures, both at the senior leadership ranks and down to the front line.

The airline industry is no exception. If anything, the sector's track record on consolidation is poor. The list of carriers hobbled by challenging mergers is a long one. Canadian Airlines finally succumbed to a take-over earlier this year after failing to attain profitability in the decade following its roll-up of CP Air and numerous Canadian regional airlines. Delta Air Lines suffered noticeable heartburn after taking on PanAm's transatlantic business. Even the niche acquisition of diminutive Reno Air by American Airlines brought the carrier to a grinding halt in 1999. Whether the problems have stemmed from cultural differences at leadership level or resistance by the workforce, the operative hurdle is people.

United Airlines' pitch for US Airways raises the stakes higher. United must not only integrate another major carrier into the fold, but also complete some unfinished cultural integration within US Airways itself, left over from its creation via the melding of Allegheny, Piedmont, PSA and others. Perhaps a bold move by powerful United is exactly what is required to bring the factions within US Airways to common ground, but that remains a daunting task nevertheless.

So are carriers showing any signs of paying more attention to human factors when they come to exchange vows? The good news is that certain airlines are awakening to the need for careful attention to the leadership and other human capital elements of the acquisition or merger equation. Air Canada, for example, took steps to develop a comprehensive assessment of the Canadian Airlines officer corps before launching into the integration process. Air New Zealand has embarked on a thorough and objective exercise to secure the best of both worlds among the leadership talent within its own ranks and those within the acquired Ansett Australia.

Spencer Stuart itself has recently been engaged to provide an overarching approach toward the people element of consolidation strategies. That includes due diligence on pre-merger human capital, post-merger integration, leadership talent benchmarking and succession planning.

It is conceivable that certain historical airline mergers may not have moved forward had the acquirers taken adequate stock of the human capital element and their challenges. Were KLM and Alitalia truly meant to be one, given their radically different cultures, histories, and marketplace performance? Could the divorce have been avoided through a little preparatory marriage guidance?

For those deals already in play, the due diligence process provides some measure of risk mitigation by better preparing the acquirer for the challenge ahead. Top management become armed with the answers to key questions about the true culture and real decision-makers in the target company. Also about the most talented executives and how to keep them on board.

There are some lessons to be learned from beyond the aviation industry, too. Last year, Spencer Stuart employed the techniques consultaning in the post merger integration of telecommunications giants GTE and Bell Atlantic. The exercise assessed the top management teams across both enterprises with a view to identifying the talent most suited to the core competencies sought in the merged whole. The net effect was to provide both chief executives with an informed but unbiased view on their common talent pool. A similar exercise took place at SmithKline Beecham and Glaxo Wellcome, two pharmaceutical giants in the throes of post-merger integration.

While airlines can, and certainly should, take steps to mitigate the risks associated with organisational merger and consolidation, lurking in the background is a more salient question. Is bigger necessarily better in the airline business? And, if so, is acquisition the best route to get there?

Some of the best airlines in the world in their time, demonstrated incredible discipline and focus by staying away from the acquisition game. Instead, they focused on organic growth, preserving and nurturing their special cultures along the way. Two north American Boeing 737 operators - Piedmont and Canada's Pacific Western - were consistently profitable and well regarded before becoming diluted into larger wholes that subsequently struggled to survive. With the benefit of such hindsight, the question facing today's carriers is whether it pays to buy or be bought? Part of the answer to that may well lie in the people you are buying with the company.

Source: Airline Business