Japan Airlines is at a major crossroads, with Japan's new government signalling an end to the state funds that have helped to prop up the carrier for years and potential airline investors eyeing it as a way to increase their presence in the Asia Pacific market.
The carrier received ¥100 billion ($1.1 billion) in government-backed loans earlier this year, and the Liberal Democratic Party government formed a panel to study JAL's restructuring plans as part of the deal.
JALhas had a turbulent past few years, often making heavy losses, and suffering board shake-ups and much publicised safety issues. It made a net loss of $630 million in its financial year to March 2009.
However, the LDP lost power to the Democratic Party of Japan earlier this month and the new government is scrutinising the use of public money to help JAL, especially because carriers like Delta Air Lines and American Airlines may be keen to invest. "We want to drop for now the committee that comes from the LDP government," said Seiji Maehara, the new transport minister. "At the same time, I want to sincerely listen to what the Development Bank of Japan and financial institutions that have provided loans to JAL now have to say, and judge if JAL's rebuilding plans are feasible."
That could pave the way for an equity investment from a foreign carrier. Both American and Delta would be keen to strengthen their important transpacific networks via a tie-up with Asia's largest player. Delta already has a major presence in Japan following its Northwest Airlinesacquisition.
A JAL link-up would give them over 50% capacity share on US-Japan services, which would be likely to faceregulatory scrutiny on competition grounds, whereas a JAL-American link would be about the same size as Delta, whichhas 30% of capacity. JAL is already strategically closer to American following its entry into the oneworld alliance in 2007.
At stake is not just JAL's lucrative Japanese and regional routes, but access to Tokyo's Haneda Airport when a fourth runway opens in 2010 and international flights are allowed from October that year. Given that almost all of those slots will go to Japanese carriers, JAL's new partner would almost immediately be able to expand its network reach.
An alliance with Delta would make more sense for JAL, say analysts. It would suit JAL's cost-cutting plans, which mostlyinvolves changes to the network as it gets rid of unprofitable routes and lower labour costs through a change in its retirement benefit plans, says JPMorgan Securities Japan analyst Hitoshi Hosoya. "Given that Delta and Northwest have a higher percentage of takeoff and landing slots at Narita Airport than any other non-Japanese carrier, a tie-up with Delta/Northwest would allow JAL to reduce its number of flights and yet maintain its network to some extent through code-sharing agreements," he adds.
Open skies talks
JALsays that anyalliance would only come after the US and Japan sign a new more liberal open skies deal. Negotiations between the two sides restart in October.
Meanwhile, JAL says it is working on its medium-term business plan to March 2012, saying that it will "continue pouring our attention and focus on the plans to return to profitability. That is our priority."
Regardless, rival All Nippon Airways is a victim of its own fiscal prudence. ANA complained earlier this year when the government came to JAL's aid, and it would surely be unhappy that the state is also behind the latest moves to help its larger rival. It too is likely to ensure that any new links will be closely scrutinised by the authorities.
American chief executive Gerard Arpey is going on the offensive in the apparent growing battle with Delta to take a stake in JAL. He declares that American is "deepening a long-standing relationship that has delivered hundreds of millions of dollars of value to AA".
He believes the expansion of JAL's relationship with American and other oneworld partners is "the best path forward for Japan Airlines. We have every confidence that JAL wants to remain a major international network carrier and not be relegated to becoming a feeder".
On the face of it Delta's move on JAL has more problems than American's. "I would think US regulatory approval would be far from automatic," says Hamlin Transportation president George Hamlin. He believes Delta would need to relinquish some of its Narita slots to win approval from US regulators for a JAL tie-up.Delta could be willing to hand over slots at Narita if current air liberalisation talks between the Japanese and US governments loosen constraints on Haneda.
Delta's chief executiveRichard Anderson has expressed concern to employees that a proposal offered by the Japanese government would grant US carriers access to only a few flights per day from Haneda at inconvenient times with no permission to serve other Asian markets.