Consolidation Mergers and the Merger Process Airline Industry Council Meeting

1
ConsolidationMergers and the Merger
ProcessAirline Industry Council Meeting

• Washington, DC June 16, 2005

2
Why Do Airlines Merge?Three Major Reasons

• Additional revenue/assets
• Increased connectivity and presence (size) lead
  to additional revenue additional value from
• Larger carriers achieve a disproportionate share
  of revenue (S-Curve)
• Better schedule optimization
• Less pricing competition
• Improved operating efficiencies
• Strategic Acquisition

3
Examples of Areas of Potential Cost Synergies
From a Merger

• Rental Expense (other than aircraft)
• Combining space, ground equipment, etc.
• General and Administrative Expenses
• Combining office space, joint purchasing of
  supplies, etc.
• Labor costs for aircraft traffic handling
• Combining of redundant staff

4
Key Merger Considerations

• Mergers involve four fundamental challenges
• Different systems
• Different fleet types
• Workforce integration issues
• Cultural differences

5
Merger/Fragmentation Models

• Two Structural Merger Models
• The full operational integration model with
  employees merged
• No operational integration. A holding company
  with operational entities (the double breasting
  model)
• Fragmentation Models involving the sale of part
  of an airline
• A transaction between two carriers involving
  assets only
• A transaction between carriers involving assets
  and people

6
US Consolidation Since Deregulation

• In the 1980s numerous mergers and at least two
  examples of fragmentation transactions
• In the 1990s no mergers - numerous fragmentation
  transactions
• In 2000s one earlier merger (TWA/American) and
  one recent fragmentation transaction
• Pending US Airways/America West merger may be the
  tip of the iceberg

7
European Union

• In the 2000s there have been four recent mergers
• Air France/KLM Lufthansa/Swiss
• Austrian/Lauda SAS/Brathens

8
The Labor Element

• Labor is the key element in determining
  successful integration of merging companies
• Labor laws need to be understood and applied
  across borders for this to happen
• Merging companies have to include labor in the
  process
• As a participant, with input into the process,
  not as an observer
• Without labor as a player, consolidation will not
  succeed

9
The Labor Element

• Labor issues to consider
• Pay Scales
• Work Rules
• Seniority Lists
• Corporate Cultures
• Consolidating Pay Scales and Work Rules
• In most cases labor costs differ between merging
  companies
• Large labor cost differences can be significant
  hurdle
• Differing work rules and productivity levels also
  need to be addressed
• Companies may attempt to keep operations separate
  or run one company as subsidiary

10
The Labor Element

• Why is Labor Integration So Important To Airline
  Consolidations?
• Airline labor, especially pilots, are highly
  skilled and long training cycles make labor a
  valuable asset
• Airline labor unions often deal directly with the
  customer
• Labor costs are a large enough portion of
  expenses to have a major impact on cost structure
• Labor issues can often lengthen consolidation
  timeline and financially weaken the merged company

11
The Labor Element

• Merging Seniority Lists and collective agreements
• Difficult and sensitive process
• ALPA has a Merger Policy that is intended to
• Preserve jobs
• Avoid windfalls to either group
• Maintain or improve pre-merger working conditions
• Minimize detrimental changes to career
  expectations

12
The Merger ProcessPhase 1 Announcement of
Transaction to Closing

• Need to review legal framework to protect pilots
  interests
• Engage in bi-lateral negotiations with
  management, as necessary
• Meet and Develop Protocol of Cooperation between
  pilot groups

13

• Basic Objectives of Protocol
• To establish an ongoing exchange of information
  related to the __/__ transaction between the
  signatory Unions
• To share our knowledge and experience in the
  airline industry, including details of our
  collective bargaining agreements, national laws
  and regulations
• To share other information important to protect
  and enhance our professional interests
• To avoid any action that could reduce the
  leverage available for the __ or __ pilot groups
• To develop common bargaining positions to be
  pursued with each management concerning a fair
  distribution of growth/job opportunities
• To prepare for the further development of the
  corporate combination of __ and __
• To work together to ensure that in the event of
  an operational merger of __ and __, the __ and __
  pilots will be treated in a fair and equitable
  manner.

14
The Merger ProcessPhase 2 From Transaction
Closing to Integration

• Develop Transition Agreement covering the
  following terms
• Status of Pilot Signatory Unions and Collective
  Agreements at _____ and _____ during this
  Agreement
• Separation of Aircraft and Personnel during this
  Agreement
• See Attachment A
• No Layoff of Pilots during Term of this Agreement
• New Hires during Term of this Agreement
• New Aircraft during the Term of this Agreement

15

• Transition Agreement
• Seniority Integration Process and Procedure
• Designation of Merger Representatives
• Preparation of Employment Data
• Exchange of Employment Data
• Negotiations/Mediation/Arbitration
• Relative Position on Pre-Merger Lists Maintained
• Preservation of Rights
• Reimbursement of Merger-Related Expenses

16
Transition Agreement

• Company Acceptance and Implementation of the
  Seniority List
• Process to Negotiate Combined Collective
  Agreement for the Combined Companies
• Resolution of Disputes arising under this
  Agreement
• Enforcement of Arbitration Decisions under this
  Agreement
• Mutual assistance during this Agreement
• Duration of this Agreement

17
Transition AgreementATTACHMENT A

• List of Aircraft Operated by ____ on Date of this
  Agreement (identified by manufacturer, type and
  tail designation)
• List of Aircraft on Order by ___ on Effective
  Date of this Agreement (including manufacturer,
  type, anticipated delivery date)
• List of Aircraft Operated by ___ on Effective
  Date of this Agreement (identified by
  manufacturer, type and tail designation)
• List of Aircraft on order by __ on Effective Date
  of this Agreement (including manufacturer, type,
  anticipated delivery date)

18
Phase 3 Post Integration

• Implementation of final integrated seniority list
• Implementation of combined working agreement
• Establishment of an appropriate Union structure

19
Some Labor Relations Considerations to Address
in Mergers and Fragmentations of Airlines

• A process to maintain proportionality during the
  transition period
• A seniority integration process with real
  timeline
• A timely contract amalgamation process
• Addressing Union representation issues
• The adverse impact of job abolishment or
  dislocation of employees
• Different corporate cultures adversely affecting
  labor relations and the handling of human
  resource issues
• Consult on process
• Communicate with rank and file

20
QUESTIONS