American, partners offer $1.1 billion to JAL

Japan Airlines JAL
Delta Air Lines President Edward Bastian updates the media on the fight over the future of Japan Airlines in Tokyo, Thursday, Dec. 3.Junji Kurokawa / AP
/ Source: The Associated Press

American Airlines upped the ante in the tug-of-war over Japan Airlines, vowing Thursday to lead a $1.1 billion investment in the struggling carrier to prevent it from falling into the orbit of rival Delta.

American's chief financial officer, Tom Horton, told reporters that the offer is "far superior" to the $1 billion rival proposal from Delta Air Lines and its SkyTeam partners.

He refused to describe the composition of the offer, or say how much of the money would come from American. But he said the proposal by American, its oneworld partners and private equity firm TPG Inc. is part of a larger restructuring plan to get JAL back on solid footing.

Horton and his team asserted that if JAL enhances its links with American, over a 10-year period it would gain additional revenues of some $700 million.

Delta, meanwhile, is trying to lure JAL away from its partnership with American.

Ongoing battle
Aviation consultant Mark Kiefer of CRA International in Boston said the battle is far from over.

"It does sound like it has the potential to drag on further," Kiefer said. "There's a lot at stake here, especially given the importance of the Japanese market and the Asian market to all of these carriers."

Demand for air travel has been under intense pressure from the global economic slowdown, but U.S. carriers that compete internationally know it will be important to have a strong presence overseas when things rebound. Airlines can reap a premium for long-haul seats, particularly business and first class.

Japan Airlines has been teetering for years, hammered by surging fuel prices, global competition and an image problem caused by a series of safety lapses. It lost $1.5 billion in the first half ended September and has obtained approval for government loans in recent weeks to avoid grounding flights. The airline remains attractive as a partner because of its extensive routes in Japan and other important markets in Asia.

JAL President Haruka Nishimatsu has said he will make a decision regarding the offers by the end of the year.

Delta President Ed Bastian said Thursday the billion dollar offer by his airline and its SkyTeam partners to get Japan Airlines to join their alliance is still on despite the dollar's recent weakness. He expressed confidence the deal will get clearance from regulators.

"The offer was stated in dollars," Bastian told reporters at a Tokyo hotel. "That's not enough to change our offer," he said in acknowledging the dollar's fall. It dived to a 14-year low against the yen last week.

Third-party investor with Delta?
Bastian said Delta, based in Atlanta, would be willing to consider teaming up with a third-party investor if the Japanese government wanted more money pumped into JAL. He did not provide details.

American, a unit of AMR Corp., which is based in Fort Worth, Texas, has said if JAL switches from the oneworld alliance it will cost the Japanese carrier up to $500 million in lost revenue in the first two years after the changeover.

American officials have argued that if JAL sticks with them they could both apply for antitrust immunity from U.S. and Japanese regulators and bring in up to $100 million a year in additional revenue.

The immunity allows U.S. and foreign carriers to work closer together in coordinating schedules, sharing revenues and carrying each other's passengers — moves that can boost profits.

Such a tie-up depends on U.S. and Japanese governments striking a so-called open skies agreement that would reduce barriers to airlines from one country operating in the other.

Delta's lawyer said if JAL decides to join the SkyTeam alliance they could also win antitrust immunity.

"A JAL-Delta alliance would pose no threat to competition," said Jeffrey Shane, a partner at Hogan & Hartson and former U.S. transportation undersecretary, who appeared with Bastian at the news conference.

Risk to competition
But Horton asserted in his meeting with reporters in Tokyo that a Delta-SkyTeam-JAL partnership would not pass regulatory muster and would hurt competition.

"It is in the best interest of U.S.-Japan customers to have three robust alliances competing for their business instead of just two," Horton said.

Horton was joined by former U.S. Transportation Secretary Norman Mineta, who insisted the risk to competition from Delta's proposal is too great.

"There is no precedent for the Department of Transportation to immunize two airlines that operate connecting hubs in the same market, which is the case with Delta-Northwest and Japan Airlines," Mineta said.

Delta acquired Northwest Airlines last year, inheriting Northwest's hub outside Tokyo.

Japan Airlines has been losing Japanese customers to its local rival All Nippon Airways, which has an international partnership with United Airlines through the Star Alliance.