Japan Airlines decides to stay with Oneworld

Sticking with American Airlines in Oneworld could be a stop-gap move for Japan Airlines while it seeks financial stability.

After a drawn-out fight for its loyalty, bankrupt Japan Airlines (JAL) has chosen to stay in the Oneworld alliance with American Airlines -- a decision that some see as potentially just a short-term fix.

Announced after the close of business in Asia yesterday, the decision by the Japanese flag carrier to stay aligned with Texas-based American flew in the face of all previous signals from the Japanese government, transport minister Seiji Maehara and JAL's court-appointed trustee, the Enterprise Turnaround Initiative Corporation. It had been widely reported that the airline would switch to the Delta Air Lines-led Skyteam alliance, a move that would have fed more traffic into its Asian routes and given JAL and Delta a dominant market share over the Pacific.

"We have analysed this issue in great detail and we are excited at the prospects in terms of the convenience and benefits for our customers," said Masaru Onishi, chief operating officer of JAL Group, in a statement. "We also firmly believe that the advantages of this development with American Airlines can strongly support JAL at a time when we are striving towards the revival of our business."

Remaining in Oneworld is the best short-term solution for the airline. Switching alliances involves everything from changing computer systems to repainting aircraft and relocating airport facilities -- expenditure that a bankrupt JAL does not have the money for and would likely cost more than the $500 million in compensation Delta had offered it.

A source at the airline reportedly told Japanese media that a change in alliances now would have made it more difficult to turn the ailing carrier around quickly.

"This is a more realistic decision," said Makoto Murayama, senior analyst at Nomura in Tokyo. "Switching to Skyteam might be interesting, but if JAL had switched, American could have sued or taken other actions. Switching alliances involves risk, this decision reduces risk."

Standard and Poor's analyst Katsuyuki Nakai called the decision "safer", while Centre of Asia-Pacific Aviation executive chairman Peter Harbison said it was the "comfortable" choice.

But, what's comfortable now, is not always going to be best for JAL. "Long-term, forming an alliance with Delta was probably the better choice," said Murayama. He argues that a Delta-JAL alliance would have given the pair price leadership over the Pacific, which, while not necessarily best for the travelling public, would have helped JAL increase its yields per seat.

And not everyone is convinced that Delta is out of the picture for good. "American is a safe, but possibly short-term, answer," said Robert McFadden, a Hong Kong-based airline consultant. "The decision does not eliminate the possibility for future changes to alliance membership when or if JAL does fix its internal structural issues and is once again a viable airline entity."

There are also significant forces within the Japanese government that would have liked to see a JAL-Delta alliance go ahead. While quiet now, it is doubtful that these forces have gone away. Rather, it appears they have stepped aside to ease what will almost certainly be a tumultuous journey for the airline as it goes through a bankruptcy restructuring.

JAL and American plan to file for antitrust immunity from Japan's Ministry of Land Infrastructure, Transport and Tourism and the US Department of Transport for flights between Japan and the US. All Nippon Airways, Continental Airlines and United Airlines, which are all part of the competing Star Alliance, have already filed for immunity.

It remains unclear whether JAL will accept a $1.4 billion equity investment offered by American, its Oneworld partners, including Hong Kong-based Cathay Pacific Airways and Sydney-based Qantas Airways, and private equity firm TPG. Previous media reports have said the airline would turn down the offer, but these reports have not been confirmed.

Oneworld carriers have also offered to guarantee $2 billion in commercial benefits to JAL over three years, if it stayed in the alliance.

JAL applied for bankruptcy on January 19 after reporting ¥2.32 trillion ($25.5 billion) in liabilities at the end of September. The airline posted a ¥95.7 billion operating loss for the six-month period ending the same month.

¬ Haymarket Media Limited. All rights reserved.
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