Winner takes all in battle for JAL
The news of talks between Japanese Airlines (JAL) and two possible US suitors suggests a new and much wider phase of consolidation could be underway in the world aviation industry.
Both American Airlines and Delta Air Lines are in talks to buy a piece or at least make an investment in Asia's largest carrier in term of revenues. The stakes are incredibly high. The winner is likely to gain a greater share of the Asia market, one that is predicted to grow on the back of China's booming economy. The loser could be effectively squeezed out altogether.
A tie up between a Japanese and an American carrier could also herald sweeping changes to the world aviation market.
The background to the talks is that JAL is losing money. According to the International Air Transport Association (IATA) Far East economies and carriers were the hardest hit in the recession. JAL posted a loss of $692m last year and a $1bn loss for the quarter to June this year. It is heading for a deficit of $700m for the financial year ending next March.
To combat this deficit, the airline has announced planned job losses of 6,800 - 14% of its 48,000-strong workforce and scrapping of international routes. It has also called for a pay and pension cut among staff and retirees.
JAL has also received a $1.1bn loan form the Japanese government but analysts say it is needs perhaps as much as $2.8bn more to set it on the path to recovery. Hence the interest of Delta and American.
Neither of these loss making carriers is exactly flush with cash. Both have posted losses, shed jobs and cut capacity. Delta is currently trying to raise $500m through a private offering of notes with the proceeds going to pay off the debt of Northwest Airlines with which Delta merged last year.
But the stakes are so high that their own operational problems slip into the background. JAL is a member of the oneworld alliance with American and has been codesharing with it for ten years or more.
With Japan's second airline ANA a member of the Star Alliance, Delta and its fellow SkyTeam airlines members need a partner in Japan and a gateway into the expanding Asian market. It has clearly seen JAL's problems as a way of prising it away from oneworld and into SkyTeam. For a $300m investment, this would be a bargain.
JAL has about 400 weekly slots at Narita, Tokyo's international airport, more than twice as many as ANA. It business is growing in China to where it has nine routes as well as services to South Korea, Taiwan, the Philippines, Singapore and Thailand.
Altogether the JAL has more than 250 routes out of Japan.
One of the bargaining chips Delta can offer JAL is that it has a small hub at Narita operating 21 international routes including nine solely in Asia.
American Airlines has just four routes out of Narita while its oneworld partner BA has one to London Heathrow.
But what adds spice is that there is a definite "winner takes all" scenario as the two carriers battle for JAL's favours. Not surprisingly shares in the Japanese airline have soared in the last few days at the prospect of new investment.
ATW quoted Yoshihisa Miyamoto, an analyst at Okasan Securities, as saying this week: "American will be totally left out if JAL decides to join hands with Delta because ANA is already a Star Alliance member.
"Considering how desperate American is, it's likely that they'll offer more than what Delta has been reported as ready to spend."
One further issues complicates JAL's choice. There is a new government in Japan, formed by the Democratic Party. It is likely to take a tougher stand on public spending and has said it will increase airport fees as a start. But it may also take a stronger line on state aid to loss making enterprises like JAL.
Reuters reported that there were already indications from Japan's trade industry that a link with Delta would make better economic sense. Set against that a switch from oneworld to SkyTeam would be costly and likely to cancel out any short term gains.
There is also the factor that American and JAL have worked happily together for a decade.
Add to this the continuing talks between the US and H Japanese government on an Open skies deal between the two countries which could affect any future tie ups.
If Delta wins, it would immeasurably strengthen both itself and Sky Team. Long term there is a real possibility it would seek with JAL a similar anti-trust immunity (ATI) status it already enjoys with on transatlantic routes with fellow SkyTeam member Air France KLM.
If it could pull of a similar deal with JAL which also included AF KLM, SkyTeam would be dominant. It would change the current rough balance between the three major alliances with oneworld pushed out into the cold.
For American such a set back would see it surrender much of its current influence in Asia and, as it and other oneworld members have not yet been granted ATI by the US Department of Transportation (DoT) on transatlantic routes, it would inevitably feel a sense of both exclusion and isolation.
JAL's president Haruka Nishimatsu, who confirmed the talks with American and Delta, said this week it would make a choice between possible investors by mid-October.
The next weeks are likely to see a possibly frantic bidding contest between Delta and American. It is an auction neither side can afford to lose.