DealZone

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.

American Airlines is JAL’s preferred bidder because it is already linked with the carrier through the Oneworld alliance. But the Japanese government, which is pumping support into the struggling airline, is thought to prefer the financially healthier Delta or Air France-KLM.

JAL is said to be looking to close a deal by the middle of next month.

Christopher Kaufman; DealZone Editor

Delta’s Japan flight plan

Japanese media say Delta is in talks to take a big stake in Japan Airlines. It will spend several hundred million dollars to become JAL’s top shareholder, according to the reports – a purchase befitting the world’s biggest airline?

Delta has spent a chunk of 2009 swallowing Northwest, which it bought last year, and in July said it did not expect to record a profit this year. It is still talking about right-sizing and job-cutting. Meanwhile, JAL is forecasting a loss of 59 billion yen ($649 million) for the year ending next March. Northwest already had a strong presence in Japan – Narita airport was a major hub for its Asian business – so it’s not like Delta is breaking entirely new ground.

While there is a cold, hard logic to taking advantage of a tough economy to pick off competitors, at some point investors will need to be convinced that bigger is better, particularly in an industry like air travel, which depends so heavily on economic tailwinds. It’s hard to imagine what a position in JAL offers Delta that could warrant spending so lavishly at this point in the recovery.