American Airlines recently announced a global alliance with Iberia and BA (Financial Times, 1/2/10). Why? The claimed benefit is hundreds of millions of cost savings in backoffice and IT. Of the three airlines, only AA is making any money, and BA recently reported a loss of over $500 million. I'm not convinced that this merger makes sense from a financial perspective. Hundreds of millions of cost savings constitutes a large percentage of the airlines' spend on IT and backoffice, and it seems odd that a significant proportion of these savings can't be achieved without merging and all the complexity that brings. However, without more information, it's difficult to assess.
American Airlines motivations are particularly difficult to unravel, as the relative competitive benefit to them may be more limited. However, there's a bigger, strategic benefit to this merger for all of the airlines, especially AA. Iberia and BA especially are already “too big to fail”. Their status as national flag carriers gives them some insulation, and the economic shock wave that would happen if they stopped flying - the sand in the gears - would be similar to a large bank failure. It's inconceivable that the British or Spanish governments would let them fail. By merging and becoming even larger this is even more the case. American Airlines alone is not too big to fail.
AA has a market share of 13.9% in the US, less than the average spare capacity, and there are plenty of other airlines which fly its international routes. If American Airlines shut up shop tomorrow there would be an impact, but it would be small and its passengers quickly absorbed elsewhere. By intimately intertwining its business processes with Iberia's and BA's though it also becomes too big to fail, because if it did then it would drag Iberia and BA down with it. Together, their weaknesses remain a weakness, but that weakness is a strength.
Further, the scope of all three airlines becomes increasingly global. Right now it probably doesn't matter much to the Americans whether or not BA fails. But if AA and BA failed that would have a significant impact on transatlantic flights. Big enough to matter to the US. The situation is similar with respect to Iberia and Spain.
Thus, by merging, BA, Iberia and AA become too big to fail, not just in their home markets, but much more globally. On the one hand, this is a depressingly conspiracy theory-like motivation to propose, and relying on future political support rather than your own business acumen seems strategically unwise. But on the other hand, no matter how accidentally achieved this strategy mostly worked for banks, and governments are especially conscious of it now. That awareness might only last a few years, but they could work to maintain it. Air transport is a rubbish business to be in, and this merger probably gives them each a valuable safety net. If I were an airline CEO, becoming too anything to fail would sound very good to me.
//Addendum:// Of course, the risk of becoming too big to fail is partial or permanent nationalisation. From the perspective of the executive this might preserve their jobs, but whether it does or doesn't, it is bad news for the shareholder. This kind of mismatch between the executives and owners is a difficult problem to address.