DealZone

Albatross of a feather…

Japan Airlines said it would keep its partnership with American Airlines in the Oneworld alliance, ending an attempt by Delta Air Lines to entice the bankrupt carrier to its rival SkyTeam group. JAL, Asia’s largest carrier by revenues, said it would file with American Airlines for regulatory approval for closer cooperation on transpacific routes under a recently signed “open skies” treaty between the United States and Japan.

Delta had been courting the Japanese carrier for months with an offer of $1 billion in financial aid. A nice offer, but hardly enough to put a dent in JAL’s $25 billion debt load. Of more value was access to Delta’s larger route network, which could have saved it some costs.

JAL’s new management team said switching alliances risked derailing its efforts to revive itself in three years with the help of a government-backed fund. Another big concern may have been one of antitrust. American had said that defecting to SkyTeam could drain JAL of about $500 million in revenues during a transition period of 18-24 months, but was also arguing that a Delta and JAL tie-up would stifle competition by creating a dominant player on transpacific routes.

With all of its problems, JAL can perhaps be forgiven for not wanting to keep that “dominant player” tag.

The afternoon deal with JAL

Kazuo Inamori speaks to reporters after meeting Prime Minister Yukio Hatoyama at the latter's official residence in TokyoFor a freshly minted CEO, Japan Airline’s Kazuo Inamori isn’t saying the standard fare.

“I don’t know anything about the transportation industry, but I would like to make my best contribution,” Inamori told reporters after meeting Prime Minister Yukio Hatoyama, adding that he did not plan to take a salary.

“I am old and a full-time job is hard for me, so I would like to work three or four days a week and I will work for free.”  Read the full story here.

The selling has been steep for Japan Airlines stock and many expect bankruptcy is looming. Not to understate the matter, but Inamori is in for a wild ride.

JAL in a tailspin

When it comes to airlines, bankruptcy has a long track record as the most viable business model. Such is the drama unfolding in Japan, where the market appears to be betting that Japan Airlines will turn down an offer of capital from American Airlines and its Oneworld alliance partners in favor of a government-backed bankruptcy, which comes with the promise of an injection of cash more than twice as big as what is on offer from the alliance.

American and Co sweetened its offer to JAL to $1.4 billion to keep the struggling national carrier from joining hands with rival Delta Air Lines. But JAL shares plunged 45 percent to a record low, wiping out nearly $900 million in market value, as shareholders anticipated getting wiped out in a bankruptcy.

Japan’s state-backed turnaround fund would put JAL on much firmer ground than any airline group appears able to provide. The fund plans to put about 300 billion yen ($3.3 billion) in fresh capital into JAL if it files for bankruptcy and its banks agree to waive 350 billion yen in debt, sources told Reuters last week. The banks have all but agreed.

DealZone Daily

A couple of nuggets from transport-land. Britain’s National Express unveils a 360 million pound rights issue and buyout giant TPG emerges as a potential investor alongside American Airlines in Japan Airlines.

For the latest deals news from Reuters, click here.

And in the papers:

* Fubon Financial, parent of Taiwan’s No.2 insurer, and China’s State Development & Investment Corp will set up a 3 billion Chinese yuan ($440 million) private equity fund, the Commercial Times reported, citing a Fubon executive. Reuters story here.

* Indian software services firm Patni Computer Systems (PTNI.BO) has shortlisted four firms for a multi-million dollar acquisition, the Mint newspaper reported, quoting Chief Executive Officer Jeya Kumar.

from Commentaries:

Consolidation Air, nobody’s favourite airline

JAL/With airlines around the world struggling to survive the economic downturn, the time should be nearing to break the taboo of consolidation in the sector.

Airlines around the globe face losses of $11 billion in 2009, according to IATA. Margins are expected to fall this year and next, with analysts predicting carriers are likely to struggle for years to reach levels needed to produce an acceptable return for capital market investors.

Societe Generale estimated in a recent note that margins would drop to -3.1 percent in 2010 before recovering to 1 percent in 2011, well short of the 10 percent needed.

Air Traffic Control

AIRFRANCE/JALJapan Airlines announced cuts to its international flight schedule, in line with thousands of layoffs planned over the next year, as it tries to navigate its heavy debt load. But the Japanese national carrier has never been busier with a different kind of traffic.

Air France-KLM has joined the list of would-be suitors, according to a source familiar with the matter. Delta and American Airlines are seen as being in better position to win a stake in JAL — if Japan and the United States can reach an “open skies” agreement.

JAL is Asia’s biggest carrier by revenue, and a deal would help any Western airline gain access to China and other Asian routes via code-sharing agreements. We hear the going price for a minority stake and a code-sharing deal is somewhere in the range of $200 million to $300 million.

A British-Iberia merger could squeeze American

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British Airways and Spain’s Iberia are in talks to create the world’s third-largest airline and inject some “long-overdue” consolidation in the industry, in the words of BA CEO Willie Walsh.

Where would a combined BA-Iberia leave American Airlines, which was in talks to form a transatlantic alliance with the two airlines? Would a BA-Iberia merger scuttle American’s chances at an alliance?

The argument for forming an alliance and seeking an antitrust waiver was that the “Open Skies” agreement — which frees up restrictions on carriers flying between the United States and Europe — is set to increase transatlantic competition among airlines. That’s a harder pitch to sell if a BA/Iberian merger, creating Europe’s largest airline, shrinks the number of major players in the market.