Bidding war for Japan Airlines heats up

American Airlines and TPG offer $1.1 billion for Japan Airlines, exceeding Delta Air LinesÆ $1.03 billion offer.

American Airlines, in partnership with private equity firm TPG, yesterday offered a $1.1 billion capital infusion to Japan Airlines (JAL) and cited an additional $700 million in incremental income from anti-trust immunity as it upped the stakes for Japan's ailing flagship carrier.

At a press conference in Tokyo, American Airlines' chief financial officer, Tom Horton, said: "As part of a comprehensive restructuring, American, oneworld and TPG are willing to invest up to $1.1 billion in JAL to bolster its financial foundation for the near and long-term."

On its own, the offer barely exceeds the $1.03 billion offer from Delta Air Lines and Skyteam last month. However, Horton said the offer is really worth $1.8 billion when you include $700 million in additional revenue generated if the two airlines receive anti-trust immunity across the Pacific.  

Delta's offer was split between a $500 million capital infusion and $500 million as compensation for switching alliances. Oneworld's annual revenue benefit to JAL has been estimated at $500 million.

According to Nomura senior analyst Makoto Murayama, American's offer is good for JAL. "From JAL's point of view, it is in a good situation," he said. "American doesn't want to have to inject capital into the airline because it already has an alliance, but because Delta offered financial aid to JAL it had to follow suit."

Murayama called the situation a "bidding war".

JAL is expected to make a decision by the end of the year.

American and Delta are not the only airlines that will be impacted by JAL's final decision. At stake is the ability to compete in the lucrative and strategic North Asia market by the globe's three major alliances -- oneworld, Skyteam and Star. If JAL, currently a member of oneworld, were to leave that alliance there would be an impact on other oneworld members in the region, including Hong Kong-based Cathay Pacific Airways and Australia-based Qantas Airways. However, this impact is likely to be small.

"American's motivation to keep JAL in oneworld is much stronger than that of Qantas or Cathay Pacific (as) it doesn't have a significant operation in Asia," said Murayama. Reportedly 40% of American's Tokyo-bound passengers connect to JAL flights throughout Asia.

Delta, by way of its 2008 acquisition of Northwest Airlines, flies from Japan to nine destinations in Asia (not including US territories) all of which are currently served by the Japanese airline. Other Skyteam members in Asia include Guangzhou-based China Southern Airlines and Seoul-based Korean Air.

"Unless Delta offers significant financial support, JAL doesn't have a motive to switch alliances," said Murayama. He cited the fact that JAL already partners with Air France and Korean Air, both Skyteam members, on select flights and stands to lose more partners than it would gain if it switches alliances.

Cathay Pacific declined to comment on American's offer, referring to oneworld's statement affirming JAL's importance to the alliance. "Japan Airlines is a highly valued member of oneworld -- and oneworld and its member airlines are determined to build on our long-standing, successful and mutually beneficial working relationships with JAL," said John McCulloch, managing partner at oneworld.

More important to JAL, American and Delta than intra-Asia routes is antitrust immunity on routes between the US and Japan. Immunity allows airlines to jointly plan schedules, make route decisions and manage revenue, and is subject to approval by regulators in both countries. Competing Star Alliance, which includes All Nippon Airways (ANA), Continental Airlines and United Airlines, reportedly plans to apply for US-Japan immunity next month, increasing pressure on JAL to pick a partner and follow-suit in order to stay competitive.

"We believe at this point that JAL and oneworld enhances inter-alliance competition, while JAL and Skyteam destroys it," said Horton. He continued to say that a Delta-JAL link would not receive immunity because together the airlines carry 60% of Japan-US travellers.

Delta maintained that it can receive antitrust immunity from regulators for flights between Japan and the US. The airline stated that the pair would only have a 46% market share and cited instances where other airlines have received immunity when they had over 50% of the traffic in a specific market, including Star Alliance carriers between the US and Germany and oneworld carriers (including American) between the US and South America.

American and Delta have been vying for the Japanese airline since August when Delta was first reported to be trying to woo JAL away from American and oneworld with financial incentives. The airline is sought after for its hub at Tokyo's Narita Airport, a major transit point for passengers between the US and Asia. Currently four airlines have hubs at the airport -- ANA, Delta, JAL and United Airlines.

"Japan is a very important transit point for the Asian market," said Young Joon Kim, a partner at Milbank Tweed who has represented JAL in the past. "This is why everyone is trying to hold on to JAL as a partner in one way or another."

Shares in the Japanese airline were unchanged in trading on the Tokyo Stock Exchange yesterday, closing at ¥92 ($1.05). Year-to-date the share price has fallen 56.6%.

Last month, JAL announced a $1.1 billion operating loss for its first half ending September 30, down 417% from a year earlier.

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