Global Economics

American Airlines Could Sweeten JAL Deal


Determined to thwart Delta and maintain a presence in Japan, American may increase its $1.1 billion offer

By Mary Schlangenstein and Mary Jane Credeur

(Bloomberg) — AMR Corp.'s American Airlines (AMR) may increase the $1.1 billion it's offered to invest with private-equity firm TPG in Japan Airlines Corp. (9205:JP) to persuade the Asian carrier to stay in the Oneworld alliance.

No new proposal has been made, American Chief Executive Officer Gerard Arpey told reporters in Tokyo yesterday after meeting with Japan Transport Minister Seiji Maehara. He didn't say how much more Fort Worth, Texas-based American might bid.

A possible sweetening of the deal underscores Arpey's aim of keeping Japan Air from defecting to the SkyTeam group of carriers led by Delta Air Lines Inc. (DAL). Losing Japan Air would leave American without a partner in the world's second-largest economy and bolster Delta's leading position in Tokyo.

"American can't afford to lose, and they will do whatever it takes to win," said Jeff Straebler, an analyst at RBS Securities Inc. in Stamford, Connecticut, who doesn't rate AMR or Delta shares. "This is critical for them."

American, the world's second-largest carrier, is vying with Delta to invest in Japan Air as the money-losing Asian carrier restructures. Both U.S. carriers want to seek government approval to coordinate trans-Pacific flights and fares with Japan Air, also known as JAL.

"There could be a bigger investment made by the Oneworld-TPG-American group, depending on the circumstances that have to be worked out with the government and JAL," said Arpey, who met for the first time with Maehara to discuss the Japan Air offer. "The situation today is very fluid, and that's a big part of the conversation that's ongoing."

Delta's Offer

Delta, the world's biggest airline, and its SkyTeam partners have offered to invest $500 million in Tokyo-based JAL as part of a $1 billion package, including debt financing. JAL also is seeking a financial bailout from Japan's government.

Japan Air, not the government, will decide which U.S. partner it pursues, Maehara told Arpey, reiterating a statement made Dec. 9. Arpey and Chief Financial Officer Tom Horton also met with JAL executives and plan sessions with other government officials through today.

Owen Blicksilver, a spokesman for Fort Worth-based TPG, declined to comment.

JAL dropped 1.9 percent to 101 yen in Tokyo trading today. AMR rose 27 cents, or 3.6 percent, to $7.86 yesterday in New York Stock Exchange composite trading, while Atlanta-based Delta climbed 70 cents, or 6.4 percent, to $11.65.

'Open Skies'

Last week's agreement between the U.S. and Japan on an "Open Skies" accord will allow U.S. carriers to seek antitrust exemptions for closer ties with Japanese partners on flights and pricing, reducing costs and boosting revenue.

UAL Corp.'s United Airlines, Continental Airlines Inc. and All Nippon Airways Co. (9202:JP) have said they plan to seek antitrust immunity. All Nippon wants to file the application this year, the President Shinichiro Ito told reporters in Tokyo today.

Oneworld, SkyTeam and the Star Alliance that includes United and Continental each have about one-third of U.S.-Japan traffic. A JAL switch would give SkyTeam carriers 62 percent of that business, while Oneworld's share would tumble to 6 percent, according to American.

A Delta-JAL alliance "would make a mockery of Open Skies," Arpey said. "It would turn Open Skies and immunity into a farce. I don't believe that's the objective."

Delta has predicted it would be able to win antitrust approval with JAL and said it could deliver about 3.2 million passengers a year to the Tokyo-based airline.

Delta's Response

"A partnership with SkyTeam provides the best long-term option for Japan Airlines to thrive, with revenue opportunities that greatly exceed those of its current alliance," said Trebor Banstetter, a Delta spokesman.

Should JAL choose Delta, the damage to American would extend to the Oneworld alliance it leads alongside British Airways Plc. (BAY:LN). Oneworld is the smallest of the three global alliances based on traffic, and the loss of JAL's Asian network would create a gap in the group's route system and endanger travel contracts with business customers.

"It would be catastrophic," said Robert Mann, owner of consultant R.W. Mann & Co. in Port Washington, New York. "It would eliminate Oneworld from real contention in terms of a global travel network and corporate travel contracts."

Neither American nor Delta has said how much revenue it has at stake in a JAL move to stay in Oneworld or shift to SkyTeam.

SkyTeam is the only alliance without a Japanese partner. Delta acquired a Japanese route system and hub at Tokyo's Narita airport when it bought Northwest Airlines Corp. in October 2008, and a desire to protect those assets helped trigger interest in teaming with JAL.

"They can taste this," Mann said of Delta's pursuit of JAL. "If they were to pull this off, they would absolutely secure the No. 1 spot and eradicate a three-alliance problem. There can only be two winners because there are only two Japanese carriers of note."

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.


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