Abstract
Airlines have been recently debated the management of some of their non-core divisions, such as the Frequent Flyer Program (FFP). A spinoff is a form of corporate contraction that many companies have recently chosen. Through a spinoff, both the parent company and the divested subsidiary can each focus on their own activity, which translates into a better performance of both entities. This paper studies the circumstances in which a spinoff is a good strategy to pursue, along with some important issues that must be considered when reaching agreements. Spinoffs are basically a "downsizing" of the parent firm; therefore, the smaller firm must be economically more viable by itself than as a part of its parent company. The motivation for analyzing this particular topic comes from a question of current interest: Under what circumstances is it advantageous for an airline to spin off its Frequent Flyer Program, or other divisions that are not related with the airline's operation? In this paper, an extensive literature review introduces the reader to the different forms of corporate contraction and their performance under different circumstances. Three cases related to the airline industry follow: the spinoffs of TripAdvisor from the web agency Expedia, of Air Canada's FFP Aeroplan, and of American Airline's distribution system Sabre. These three cases illustrate some of the key issues that must be carefully considered when spinning off a subsidiary. The paper concludes that spinoffs are a smart strategy when the focus of the spun off division is different from that of the parent company. However, to safeguard future business relationships, the two entities must negotiate detailed agreements that are robust enough to perform successfully in all foreseeable circumstances.
Highlights
Managing the airline industry poses many challenges – intense competition, large fixed costs and strong suppliers of goods and services complicate the situation
Further studies try to explain those positive reactions in the stock price by focusing on performance improvements measured by indicators such as growth in sales, operating incomes, capital expenditures or return on assets (ROA)
These studies found that higher returns occur when the parent firm and its subsidiary operate in different industries, from which they conclude that value creation comes from “corporate focus”, meaning that managers focus only on their own business
Summary
Managing the airline industry poses many challenges – intense competition, large fixed costs and strong suppliers of goods and services complicate the situation. This hostile environment forces airlines to push the boundaries and come up with creative ideas to improve the business. M&A are front-page events in newspapers worldwide, and a large number of academic studies cover this topic. Corporate contractions such as spinoffs occur far less frequently and receive much less attention despite the fact that they unlock significantly more value for the shareholders than M&A do. The FFP business has a more benign competitive environment with low fixed costs and captive customers
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
