Open skies to fuel Japan-US pacts

Washington DC
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Japanese and American carriers plan to take advantage of the freshly-inked Open Skies agreement between Japan and the USA to apply for strategic antitrust immunity agreements on trans-Pacific routes.

After five rounds of negotiations, stretching back to May, Japan and the USA have re-written their aviation agreement, which dates to 1952. This expands the number of airlines that can operate flights linking the two countries and the capacity of these services. It also increases access to Japanese airports and allows airlines to apply for antitrust immunity on lucrative trans-Pacific routes.

Delta Air Lines chief executive Richard Anderson says: "Most importantly, the Japanese government fairly wisely has conditioned Open Skies on antitrust immunity for ANA [All Nippon Airways] and Japan Airlines and their partners of choice."

 
 Japan Airlines has already said it intends to apply for antitrust immunity with a strategic US partner as soon as possible.
Finalising of the Open Skies agreement now depends on how swiftly the US Department of Transportation moves on the antitrust immunity applications filed by Japan's two largest carriers and their respective US partners.

An official with the US government says, depending on the agency's speed in processing the antitrust applications, that the Open Skies pact could be finalised between August and October next year.

Antitrust immunity is only available to airlines from countries with which the USA has signed an Open Skies agreement. This would allow the carriers to work together to set ticket fares, adjust flight schedules and routes, and co-ordinate operations in an effort to cut costs. They could form joint ventures for their operations and effectively operate like one company on trans-Pacific routes.

ANA Star Path

Following the Open Skies agreement, the path is much more straight forward for ANA and its Star Alliance partners: United and Continental Airlines. ANA plans to "quickly" make a joint application for antitrust immunity with its partners, and expects the approval to come by the end of 2010, it says.

The trio are reportedly keen to form a joint venture that would allow them to co-ordinate sales, routes and services in both Japan and the USA. This would help cut costs and boost sales by "billions of yen", analysts suggest.

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The latest regulatory thinking on airline antitrust immunity pacts see our recent analysis here

But how quickly the Star partners achieve antitrust immunity is likely to depend on the process which the US transportation department adopts to handle applications from carriers.

The US government official says that there is a possibility the agency could consolidate the application process, but stresses that is not a certainty.

A swift filing for antitrust immunity by the Star partners could accelerate a decision by JAL to either remain in oneworld or join the SkyTeam Alliance. "JAL intends to apply for antitrust immunity with a strategic US partner as soon as possible, so as to seize this opportunity to strengthen our network and bring added benefits to our valued customers," says the airline.

Chief executive of American Airlines Gerard Arpey says with Open Skies in place, ANA will "surely pursue immunity" with its Star partners United and Continental. "JAL must, in our opinion, act quickly or risk losing ground as these competitors grow stronger, which could very well derail its own restructuring."

Delta and some of its SkyTeam partners, and American and venture capital firm TPG, have both made lucrative offers to JAL. SkyTeam has offered the struggling carrier a $1 billion financing package to persuade it to defect from oneworld. American and TPG subsequently counter-offered with a $1.1 billion package. More incentives could be unveiled in the coming weeks.

Those would be welcome at JAL, which lost more than 130 billion yen in the six months to September and has debt of over 1.4 trillion yen ($15 billion). It has applied to the Japanese government for a bail-out, and is in discussions with the Enterprise Turnaround Initiative Corporation, a state-backed investment body set up to help revive companies with high debt levels, on a restructuring plan that is due early next year.

US carriers are keen to deepen ties with the Japanese carriers due to their strong connections to China and other Asian destinations. In addition, ANA and JAL are expected to be major beneficiaries of the opening up of Tokyo's Haneda Airport to international flights in October 2010 after a fourth runway is completed.

The new Open Skies pact allows four daily slots at Haneda each for US and Japanese carriers to conduct transpacific flights from midnight to 07:00. Originally the window was 22:00 to 07:00, but the two governments reached a compromise in negotiations after the US argued Japanese carriers would have an unfair advantage if operations were allowed at 22:00. This is because Japanese airlines could ready their aircraft for prompt 22:00 departures while US carrier aircraft would arrive at 22:00, which would require a couple of hours to turn the aircraft for a return transpacific flight.

The negotiators also devised a complex formula regarding US carrier access to slots at Narita. For every 20,000 increase in slots US carriers are allotted 11% of that amount, which is approximately 2,190 or three flights per day. That scheme applies through March 2015 or until Narita's available annual slot pool reaches 300,000. If the additional 80,000 slots are added, US carriers would have access to 12 additional slots per day. Currently, US carriers hold roughly 25% of available slots at Narita.

Summing up the pact, Delta chief Anderson says: "It begins to open the skies pretty effectively, and the key will be the antitrust application proceedings between now and next October."