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.

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.