The scramble to control Japan’s skies and the “gateway to Asia” shifted into overdrive yesterday as American Airlines raised its capital injection offer to Japan Airlines (JAL) to $1.1 billion (£663 million) and All Nippon Airways (ANA) solidified its alliance with Continental and United.
American’s move, which involved sweetening an offer made last month, is expected to ratchet up a bidding war for the right to code share on JAL’s many routes from Japan to China and South-East Asia. JAL is heavily loss-making and desperate to secure cash to renew its ageing fleet.
The newly raised American Airlines offer of capital, which it is mounting jointly with the private equity group TPG, would keep JAL locked into the oneworld airline alliance. That would leave Delta and its SkyTeam allies without a Japanese partner — Delta already has a capital injection offer to JAL of $1.02 billion on the table and may now be forced to raise that.
Edward Bastian, president of Delta, said yesterday that he would consider bringing in a venture capital firm to supplement his airline’s existing offer. “If there was interest by the Government in raising more money than that [$1 billion package] by introducing outside, third-party investors, we would be happy to support that effort as well,” he said.
However, the combined offer from American and TPG is formidable: it is structured to flood JAL with about $1.8 billion of capital over a period of years. The American offer demands government guarantees that would allow it to negotiate jointly with JAL for new routes if Japan and the US sign an open-skies agreement this month, as expected.
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Tom Horton, the chief financial officer of American Airlines, said: “A healthy and stronger JAL is good for Japan, its economy and its travelling public. Oneworld, American and TPG are the partners to help make this happen.”
The stakes in the battle for Japan’s flight routes have risen sharply over recent weeks as JAL has rumbled ever closer to bankruptcy and Tokyo has moved nearer to signing an open-skies agreement with Washington. Government insiders expect the open-skies deal to be signed before the end of the month, placing the airlines themselves in the position of choosing the frequency and geography of flights between the US and Japan.
Separately, it emerged yesterday that ANA was planning to integrate its flight operations between Japan and the US with United and Continental, effectively creating a powerful bloc when it comes to deciding future routes under an open-skies agreement. Practically, the deal would form a single giant carrier handling Japan-US flights, but circumvent antitrust rules by staying separate from the other operations of all three companies.
ANA, Continental and United are part of the Star Alliance, whose members around the world have been closely watching developments in Japan. An open-skies agreement could come into effect next autumn.
JAL, meanwhile, remains firmly on the critical list despite securing a 100 billion yen (£684 million) loan from the state-backed Development Bank of Japan last month. Standard & Poor’s, the rating agency, downgraded JAL’s long-term debt ratings yesterday from CC to “selective default” as the company’s efforts to restructure itself continue to misfire.
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One of JAL’s worst problems has been its huge network of loss-making domestic routes. Airport construction has been a favourite public works project in towns where unemployment was rising. In order to justify the existence of nearly 100 airports, the Government strong-armed JAL into running flights to them.
Seiji Maehara, Japan’s Transport Minister, said this week that if JAL cuts domestic routes in its quest for financial survival, the Government would help “ensure service is maintained by other carriers”.