JAL Revival Tied To Open Skies Pact, Japan Democrats

Posted by: Kenji Hall on September 17, 2009

As Japan Airlines attempts to avoid bankruptcy, slashing costs and raising funds aren’t its only concerns. The company must also appeal to newly elected Prime Minister Yukio Hatoyama’s administration for help and prepare for a possible loosening of restrictions on transpacific flights.

Like many airlines, JAL has been hammered by the global recession, suffering a drop in passengers and cargo. Japan’s biggest airline reportedly has asked creditors for more than $3 billion in funding to stay afloat this year after posting a $1-billion loss in the latest quarter. But lenders appear reluctant to cough up more money unless the airline promises more drastic restructuring steps and wins government assurances of support.

JAL is now considering ending flights to at least nine overseas cities and seven domestic airports and cutting back on many other routes, according to the Japanese financial daily Nikkei. It might also eliminate nearly 7,000 jobs from its work force of 47,000 and trim pension benefits for retired workers. This week, JAL reportedly began discussing a capital injection with several airlines, including Delta Air Lines, AMR Corp.’s American Airlines and Air France-KLM. The companies didn’t confirm the talks.

It’s unclear how much the government will get involved in JAL’s revival. The Democrats have long opposed probusiness policies but analysts said the new administration would likely take an active interest in JAL’s future. “The new Japanese government has a big role to play in this,” says Derek Sadubin, CEO of Sydney-based think tank Centre for Asia Pacific Aviation. “They have a chance to show their credentials as a reform power in Japan.”

On Sept. 17, Japan's new transport minister, Seiji Maehara, hinted that the new Democratic Party-led government would step in if JAL was in danger of failing. "JAL must not be allowed to go bankrupt," Maehara told reporters. He stopped short of making specific promises.

Another wild card: talks between the U.S. and Japan to reach a so-called "open skies" agreement. On Sept. 11, negotiators wrapped up three days of talks in Washington aimed at getting rid of restrictions on passenger and cargo flights that have been in place since the 1950s. The talks hinge in part on Japan's allowing U.S. carriers freer access to Tokyo's two major airports, Narita and Haneda. Both airports are slated to open new runways next year. American, Delta and UAL's United Air Lines hold roughly a fifth of the berths at Narita, according to JP Morgan analyst Hitoshi Hosoya. FedEx also operates flights between Japan and the U.S.

Cross-border equity tie-ups between airlines aren't common. Japan and the U.S. impose ownership limits on foreign airline companies and most carriers negotiate agreements with rivals to share flights on certain routes. But U.S. airlines are eager to expand into Japan as part of a broader strategy to push into Asia's fastest-growing markets. Liberalizing transpacific air travel could allow that, possibly triggering consolidation and a reshuffling of industry alliances.

Still, the global recession is hardly an ideal time to be investing big sums in an ailing Japanese airline. "The last thing U.S. carriers want is to dip into their pockets to shore up their what was formerly a code-sharing alliance and a cozy relationship at that," says the Centre for Asia Pacific Aviation's Sadubin.

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