Major Case Study Cargo Airline Negotiations: A potential joint venture that failed to fly

Case Study Context

The background for this case study was that the airline cargo industry was seeking to recover from a pandemic outbreak and general geo-political tensions. One industry response to these challenges was to look for opportunities to rationalise and grow through alliances.

A European cargo airline was seeking to develop a position in the growing China market. At the same time, an Asian-based cargo airline was exploring how it might also get into China's market. The two CEO's met and agreed that there was potential for cooperation between the two airlines. In particular, they saw real potential for cooperation with regard to the provision of maintenance facilities. The two CEO's articulated their vision and signed a memorandum of agreement to that effect. In the agreement they committed their respective companies to setting up project teams to explore and develop the proposed joint venture.

Project Team Negotiations

Each company established project teams (from mid-ranking executives) and the team from the European company flew to Asia.

The two project teams built up the negotiation relationship slowly. They spent time on informal social gatherings and in more formal meetings they discussed the possibilities offered by cooperation, though only in broad terms. This approach had (as was the intention) two positive outcomes, one relating to the process, the other to the issue. Firstly, the negotiators established good working relationships between the members of the two teams. This also included a level of interpersonal trust between the negotiators. Secondly, they gained a clear joint understanding about the potential nature and benefits of the proposed joint venture. By spending time just canvassing the issues the negotiators understood the potential for themselves rather than the driver being their CEO's perception of the future.

As a consequence, the project team negotiators endorsed the Memorandum of Understanding (MOU) that had been signed by the CEOs. They agreed to continue further negotiations and they signed a confidentiality agreement. This document was necessary to provide protection for the two companies because the next round of negotiation would necessarily lead to an exchange of commercially sensitive technical and financial information. Perhaps somewhat paradoxically, the confidentially agreement was seen as an expression of mutual trust. Neither side would have been prepared to sign such an agreement unless convinced of the other party's trustworthiness in keeping to it.

Both project teams then returned to their companies and reported favourable outcomes to their respective CEOs. The clear expectation was that the two companies were en route to a successful joint venture.

Development of Proposals

Each project team then set about working out the practicalities of a joint maintenance system. In the airline industry, the quality of aircraft maintenance is upheld through complex and rigorous systems that are embedded in the airline's operations.

A2 Details 1 OPS 938 2023 T2

Not unexpectedly, the European cargo airline project team developed a proposal around its systems, while the Asian company's team based its proposal on its operating systems. In fact, the only commonality was the compliance with the aircraft manufacturer's required safety standards though again the documentary systems were different.

It could be argued that, with the benefit of hindsight, the two negotiating teams should have worked as one team (as in the notion of 'side by side' problem solving) to develop a proposal. In reality, the task was too complex; each negotiation team needed ready access to technical and systems specialists. In addition, a new 'joint' solution would mean either each company then operates under two systems, the joint one in China but their own one in the rest of their operation, or both companies adopting the new system across their entire operations. Again recognising the reality of negotiation, although each project team headed back to their respective companies with the intention of exploring and developing proposals, the more they worked on the proposal the more difficult it became as they got into more and more detail. On both sides the 'exploratory proposal' became a 'working solution'.

Second Round of Project Team Negotiations

The European team went to Asia again for the next round of negotiations. Based on the outcomes of their previous round of meetings, expectations on both sides were high.

At the first meeting, the Europeans put forward their proposal. Rather than discuss this, the Asian airline team put forward their proposal. In the ensuing discussion each side increasingly defended its own proposal and found more fault with the proposal coming from the other side of the table. The interactions became increasingly more difficult and tension rose. After a series of meetings it became clear to all concerned that no progress was being made, nor was it likely to be made. Each team was positioned solidly behind its own proposal and there was no apparent scope for movement towards a solution.

In fact, the negotiators did agree on one thing, that they should bring the round of meetings to a close before they got any worse. The Europeans returned home. There was no agreement on the issues. The high level of expected cooperation had not materialised; instead the negotiators now felt, such was the collapse in trust, they could not work together any more.

Aftermath and Rebuilding

Both project teams returned to their respective companies and reflected upon their experience. The fundamentals had not changed even if the process had not worked. The importance of the issue remained high - they needed to meet their respective CEO's goals and despite all that had happened, the potential for mutual benefit was still present. They realised they needed to try again, but how?

If they were to continue then there were basically three options. Firstly, the two negotiating teams could meet again and resume their discussions but this was not likely to be successful given the breakdown in the relationship. Secondly, the issue could be elevated to a higher level and handed back to the CEO's to meet together again. Although they would probably be more able to clearly see the potential benefits of reaching an agreement, they would be facing a win-lose scenario as a result of the outcome of the negotiating teams' discussions. Thirdly, it might be possible to change the dynamics through involving other participants, in this case through an intermediary.

The European company had a good working relationship with a particular aviation industry expert who was Asian and he approached the Asian company and learned from them that they too could still see benefit in continuing discussions. So following a little shuttle diplomacy the further negotiations between the project teams were scheduled in Asia again.

A2 Details 2 OPS 938 2023 T2

The meeting was difficult. Each party outlined its goals and its proposal again. This either/or situation could only be resolved by one company conceding to the other. Progress was made only when this occurred. The Asian negotiators agreed to work within the European company's proposal. As might be expected, technical and engineering departments in the Asian airline were not pleased with this decision to build the joint venture around the European airline's systems. While not actively opposing the joint venture they are always ready with issues and concerns.

Over a succession of meetings, the negotiators made significant progress on the detail of the proposal. These discussions involved periods when they worked jointly to find ways around their differences. At other times they worked separately to develop revised proposals for further discussion. Through these processes of joint and unilateral problem solving they achieved solutions, which both parties were comfortable with and the negotiating teams returned to their respective companies with their agreement.

Closing Stages

With broad agreement on the way in which the joint venture would work, each company then evaluated the situation it found itself in. The negotiations had reached the 'end game'. The technical and cost arrangements had been worked out and all that was left to do was finalise the financial arrangements. Broad financial scenarios had been under discussion throughout the negotiation but the time had come to make these specific; in particular, the two companies had to commit to their respective investments into the joint venture and agree on the fine detail of the profit share arrangements.

As outlined above although the negotiating teams from the two companies had achieved agreement this was only possible at all because one party (in this case the representatives of the Asian airline) had made a significant concession. While the European company regarded the substance of the agreement as satisfactory and so was in a position to enter into the negotiations on the financials, the Asian company was not ready. Further internal discussions were necessary to address the concerns still being expressed within the airline over having agreed to work with the European system. It was against this background that the airline concluded it was willing to continue discussions on the financial aspects of the arrangement.

Aware of the concerns which were still being expressed internally within the Asian airline, the European company decided that although the joint venture was - operationally - a good one it would not proceed to conclude agreement. Its analysis of the forthcoming end game was that in order to achieve an agreement it would have no option but to concede on price; that is, it would have to increase its initial investment and/or make concessions on its share of expected profit if it was going to get the Asian airline to sign the joint venture agreement. The CEO conveyed the decision not to proceed to his Asian counterpart and the joint venture proposal was grounded for good.

A2 Details 3 OPS 938 2023 T2

Minor Case Study Telco Negotiation: a Business Negotiation that Connected!

Case Study Context

This case study in negotiation relates to a European telecommunications company's acquisition of a strategic investor stake in an Asia Telecoms operator. The telecommunications industry is in a constant state of flux as new technologies open up new possibilities and new markets. A strong but single-country European telecommunications company (Eurocom) undertook a major review of its future, and concluded that it should expand internationally. Having carefully researched several prospects across the world, it made an exploratory approach to an Asian business conglomerate known to be seeking a partner to assist in the development of one of its own subsidiary telecoms companies (Asiatel) in the region. In fact, the conglomerate had been prospecting Eurocom, and so welcomed the approach. Asiatel had the operating licence, Eurocom the network expertise.

It was quickly agreed that the two companies should delegate negotiating teams to explore the potential for cooperation, which would take the form of Eurocom buying part of Asiatel and being involved in the subsequent operation of the company. The critical issues would therefore be the companies' respective investments in the new company, issues of governance and arrangements for the distribution of future profits. As such, the negotiations would involve both strategic and operational issues.

However, the conglomerate had determined that it would sell its share of Asiatel by competitive tender, so several negotiations commenced with different companies, each of which was exploring the prospects of making a bid for Asiatel.

Project Team Negotiations

The main negotiations were between mid-level executives and advisers from Eurocom and the conglomerate; while representatives from Asiatel provided input on company-specific business and operational matters.

An initial meeting between the parties focused on detailed introductions of Eurocom, the conglomerate and Asiatel, and - perhaps most importantly - the individuals who would be the leading representatives during the negotiation that lay ahead. Some social time was spent on dinners, facility tours and a little golf to build the relationship between the parties.

The Eurocom representatives were given a clear mandate from their senior management for the initial phase of negotiation: to establish acceptable ground rules for moving forward, and to ensure that no binding commitment was made.

These initial negotiations led to the drafting of a Memorandum of Understanding (MoU), which outlined the broad objectives Asiatel would achieve through the partnership and outlined Eurocom's role as a full strategic partner that would provide technical, commercial and operational support. The parties agreed on what was initially a contentious issue - the percentage of Asiatel that would be for sale to Eurocom - and also agreed to arrangements over an intended subsequent share issue by Asiatel via Initial Public Offering, another issue where the parties had contrasting initial proposals. The parties also had different approaches to the question of governance and appointments to the senior management team. Once resolved at a high level, the decisions on these issues were also included in the MoU.

For example, there was a legal requirement that the CEO be appointed by the host company (i.e. by the conglomerate), but it was also important to Eurocom to have influence over the appointment of senior positions. To overcome what was potentially a zero-sum issue (either we appoint or you do) the parties decided that a separation of management roles between the companies would make sense but that the overall management would be provided by Eurocom. This would be achieved by having a chief operating officer who would

A2 Details 4 OPS 938 2023 T2

sit directly under the locally appointed chief executive officer, and would have full control of and responsibility for all of the activities of the company. The appointment of this key individual would be based on the 'nomination' of Eurocom and the 'approval' of the conglomerate. Meanwhile, the very key position of chief financial officer would remain in the hands of the conglomerate, with reciprocal approval rights to Eurocom.

The MoU therefore dealt with a number of key and contentious issues. Although non-binding, it provided an agreed framework for subsequent negotiation. Once concluded, the MoU was signed by one of Eurocom's senior executives and by the Chairman/CEO of the Conglomerate. This ensured high level commitment to the process and to the sentiments expressed by the negotiation team during their discussion of the MoU.

It was clearly understood that the negotiation was not simply a sale and purchase deal where the two parties would walk away feeling that they had either 'won or were ripped off'; rather this deal required an attitude towards a 'developing and long-term relationship' that would need to continue beyond the closing of the initial deal. Hence bridges could not be burned permanently and mutual respect between the negotiation parties was essential to believing a long-term relationship could flourish.

On the basis of its discussions, Eurocom felt confident enough to submit a bid in the tender process and was subsequently granted a one-month period of exclusive negotiation with the conglomerate to conclude an agreement.

Negotiating the Framework Agreement

The negotiation teams consisted of five participants: a principal and a secondary representative, together with legal, financial and operational advisers. There were supporting groups behind each 'adviser' role; thus the project included a legal group, a financial group and an operational group. All were coordinated by the project management of the principal representative. Any significant decisions that were considered beyond the mandate of the principal representative to negotiate would be documented and 'escalated' for discussion between the senior management of Eurocom and the chairman/CEO of the conglomerate. Clearly, the task of the negotiation team was to keep these 'escalation points' to a minimum.

The negotiation team would meet in a large room with up to 16 people present. Almost all the talking would be between the two principals, who would sit directly opposite each other in the centre of the table, with advisers and colleagues arrayed to each side in approximately descending order of importance (e.g. lowest level advisers/minute-takers at the ends of the table rather than in the centre). Meetings were generally set for half-day to full-day sessions, and regular breaks were taken. The negotiation teams would sometimes have lunch separately and sometimes with each other, depending on the progress of the session.

If a topic looked particularly sensitive to one side or the other, a smaller group would agree to address the issue 'at the end of the session'. Problems that required brainstorming of ideas were generally tackled by the respective teams behind closed doors. The teams would then return to the negotiation table with two or three possible solutions as well as a clear preference for one of them. Generally, the negotiating team members were briefed not to speak 'out of turn' nor to suggest any solutions that had not first been discussed among the negotiation team. (Brainstorming ideas in front of the other party was not encouraged, as it would often lead to suggestions that were unacceptable to the proposer's own colleagues.) As solutions were found (which might be either through the creation of new options or by making a concession), there was positive feedback from both sides to help maintain the momentum through to an agreement.

Approximately two hours of preparation was undertaken for each hour of negotiation. This meant late nights and lots of brainstorming among the team to find solutions to the conflicts that were anticipated or had previously been identified.

A2 Details 5 OPS 938 2023 T2

The purpose of the negotiation was to find agreement on all the issues that would need to be part of the final legal document or, alternatively, to reach a conclusion that such an agreement would not be possible.

The 'Framework Agreement' negotiated at this stage provides a binding set of commitments from which the lawyers of the parties will draft final legal agreements. While the document is 'binding', it is generally only considered to 'bind' the negotiation team, not both companies. The deal is not really 'closed' until the final legal documents are signed, and plenty of 'escape' clauses exist for both parties up until that time.

However, at each stage of the negotiations the parties became more and more committed to the final goal of formal agreement. While both negotiation teams felt that they 'could' walk away if they wanted to, they both also felt committed to any points that they had together placed into the Framework Agreement; these documented items became points that would not be re-discussed (except with very good reason/new information).

Final Price Negotiations

One of the final stages was to set a binding price on the transaction; this is often only possible at the conclusion of the negotiations, so that both parties can see exactly what 'non-financial' terms they will have to abide by after the deal.

In this case, the price was set in a manner that allowed the local partner to state that he controlled a 'US$ 1 billion' company after the transaction; the valuation was acceptable to Eurocom, as it provided for a reasonable rate of return (after allowing for country risk) and a good strategic first step into the Asian market. The intention of the parties was for a long-term (greater than five years) relationship and the documents were drafted to reflect this.

Among considerable pomp and ceremony, the transaction was closed and the funds transferred into the accounts of Asiatel.

After the agreement: the next steps

It was important to appoint a new management team quickly. This included creating a new full-time role in the Asian country to demonstrate to both parties that there would be close monitoring of the agreement's implementation and that the agreement was not merely an opportunity for 'further negotiation'. Asiatel's position was monitored through monthly review meetings and quarterly board meetings. Such vigilance was also applied to Eurocom's performance of its own commitments by its own negotiating team. Promises of services, staff and skills were actively tracked by the European representatives to ensure that nothing was done against the spirit of the agreements.

A strong emphasis was placed on trust-building and professionalism to ensure that the relationship got off to a good start. Issues that were troubling management were very quickly brought up to board level so that simmering problems did not become larger concerns. If an issue was not covered by the agreement, then the parties would follow the same 'spirit' as had been shown during the negotiation to find a reasonable solution. Over time, as the new venture became established, both parties were prepared to show more flexibility over the letter of the legal document, where maintaining a strict interpretation would stand in the way of a practical solution to the problem.

Case Analysis and Research Report

Read the Cargo Airline Negotiations Major Case Study and answer the following:

1. Define the scope of the negotiation. What exactly is being negotiated?

2. Discuss what factors need to be taken into account. A strategic worksheet will help. In your answer include the quality of the alternatives and their practical implications.

3. Discuss what should be included in the negotiation script for each negotiation party. What image do you see?

4. Discuss what options might be considered other than those described in the scenario.

5. What lessons could be learned from this negotiation.

6. Develop a strategic analysis of the "end game", the analysis must critically analyse the negotiation contents, reasons and arguments for the final "no go" decision.

Read the Telco Minor Case Study and answer the following question: 7. Compare the negotiation from Airline Case with those outlined in the Telco Case negotiations.

In you answer explain the similarities and differences.