At some point next year, American Airlines chief Gerard Arpey could be sitting at his desk with two incredibly significant bits of paper in his hands. The first might be government approval for a transatlantic pact with British Airways and Iberia; the second could be a similar OK for a transpacific alliance with Japan Airlines.

If Arpey and his team pull this off, the outlook east and west from American's headquarters on Amon Carter Boulevard, near Fort Worth, Texas, will look the most exciting for the country's largest carrier in years, in strategic terms. They will have the prospect of finally putting together the US-UK partnership American and BA's planners have cherished for a decade and a half and the chance of creating a substantially stronger Pacific business.

The fast arrival of a potential joint venture with JAL has been a surprise, but no less welcome and attractive, not only for American but for Atlanta-based rival Delta Air Lines. American and its oneworld partners have wooed JAL for years to join their side. Conservative JAL took its time in assessing the merits of each alliance before finally opting for oneworld in 2007. American says that JAL now gains about $500 million in annual revenues from being part of the alliance.

JAL health warning

The chance to cement a relationship with JAL has big risks and big rewards. JAL comes with a significant health warning. While the US majors fume if they get labelled as "legacy" operators these days, JAL remains the poster-child for the legacy carrier. After numerous failed turnaround plans, the Japanese government needs to find a big solution for its stumbling flag carrier, which posted an eye-wateringly bad $1 billion loss in the six months to the end of September. A state bail-out and new investors to pump in cash are urgently needed.

The risk for any potential investor is whether any cash injection into JAL will be enough. Itstrack record on pushing through big structural change is poor. Will this time be any different? That said, the rewards for the winner of the JAL race are rich indeed. It will hook up with the country's largest carrier at a time when the USA and Japan are negotiating a new Open Skies deal.

This timing is no accident as Tokyo's Haneda airport opens its doors to international flights in October 2010, when a fourth runway enters service. This will boost capacity at the airport by some 40%. As Haneda is much closer to downtown Tokyo than Narita, it is expected lucrative business traffic will switch airports.

The irony of the JAL situation is that business necessity is once again streets ahead of government bureaucracy when it comes to restructuring this industry and making it like any other. IATA is pushing hard for states to sign up to principles that commit them to liberalise air transport via its Agenda for Freedom Summit. The fact that the host country of the summit, Canada, did not sign a modest statement of liberal intent illustrates a general point: governments are wary of giving market freedoms in the short-term because they could damage their flag carrier's and national interests.

So, this industry's businessmen work the alliances and minority stakeholder route to make progress. If deals like that involving JAL and further transatlantic pacts are given the green light, this limited freedom of movement looks like it will improve some in 2010. Concerns about level playing fields and restricted competition will need to be addressed but shouldn't block deal-making completely.

If that happens, for American and Arpey the seeds of a huge strategic legacy could be sown in the coming months that will dictate its overseas flight path for years to come.

Source: Airline Business