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JAL-SkyTeam combination has mixed benefits: greater service concentration, but stronger #2 alliance

25-Jan-2010

The first rule of holes states that when you are in one, stop digging. American’s Gerard Arpey would do well to put his shovel down. Two stories last week on CAPA’s website chronicled Mr Arpey’s comments on the airline’s performance and, given JAL’s questionable allegiance, the precarious status of oneworld. While Mr Arpey’s job is to keep his game face on, there were a number of arguments put forward that may be valid points - or simply wishful thinking.

In reference to the fact that JAL is slated, as part of its restructuring, to shrink by 30%, he responded that “We would not want to see them shrink, but would instead make them our exclusive gateway into Northeast Asia.” A noble goal, but exactly how is this “ideal” to be achieved? Far superseding its role as an alliance member is the fact that JAL is a corporation not positioned successfully in the current environment - including its home market. Those responsible for its preservation have determined that the airline must shrink as one means of its survival. It would therefore appear that Mr Arpey’s goals for the future of JAL are at odds with the program established by those rescuing the airline.

It also is an interesting strategy from the CEO of an airline that has, itself, significantly downsized in order to survive.

His comments also restated American’s (and oneworld’s) interest in investing in JAL, again despite direct statements by the Japanese that they are not interested in such offers. This seems to indicate an agenda that is more interested in pursuing an external goal than listening to a partner. To be fair, both oneworld and SkyTeam have categorized JAL as a prize to be won rather than a partner to be nurtured. This cold-blooded and ongoing tug-of-war may be at the core of Japanese resistance to any US carrier investment.

Latin America is still not a relevant Japanese market

Mr Arpey also made reference to the oneworld strength in Latin America, valid by any measure. He invited us to “compare communities of interest between Japan and Latin America.” It is true that Brazil is home to the largest Japanese expatriate population, estimated to be roughly 1.5 million -- and the greatest concentration of Japanese outside of Japan. Nonetheless, this group would, if that number were correct, comprise 0.6% of Brazil’s population.

It is also noteworthy that the Sao Paulo route is one which JAL has (perhaps temporarily) downsized and Mexico City has already been discontinued. In its day Varig, too, struggled with profitability on its Tokyo service, despite having full traffic rights between Los Angeles and Tokyo.

While unable to discount the importance of Latin America to a global network, and especially the unique connections between Brazil and Japan, of the more than 5 million foreign visitors to Brazil in 2008, just over 81,000 came from Japan - less than 0.02%. And for the whole of Asia, JAL’s catchment area, that number rises to just over 0.05% according to the Brazilian Ministry of Tourism. Clearly there is a lot of potential for growth, but it’s far from a compelling argument for oneworld.

Blocking the SkyTeam move: some facts

And there were strong words from Mr Arpey regarding a JAL move to SkyTeam, especially in light of the recent Open Skies deal. “We would move aggressively to block the anti-competitive outcome of such a deal,” he said. “That would mean 65% of the traffic is being controlled by one partnership. I would be astonished if that would pass any form of competitive scrutiny. Having a duopoly in a market where we have been restricted for 50 years, it would be a joke; it makes a farce and mockery of the whole process.”

A lot of numbers have been tossed about in this debate, partly because of the variables inherent in a slimmed-down, bankrupt JAL. But the following table, created by Phil Roberts, former Chairman of R2A and based on current Japan-US schedules, suggests a far less Draconian shift than Mr. Arpey predicts. While one could not expect him to be at all supportive of an alliance shift, the effects on American’s primary market are less dramatic than indicated, and Star, currently the champ, retains that position.

Why JAL switching from oneworld to Skyteam offers mixed public benefits: greater service concentration - but a stronger #2 alliance

Current and post-JAL market shares if JAL moves to Delta/SkyTeam:
Narita to the 48 Mainland US states

 

 

Eastbound Seats

By Alliance

By top 2 Alliances

American   1,840    
JAL   1,104    
         
United   1,616    
ANA   2,208    
Continental   736    
         
Delta   2,840    
         

1) Current Global Alliances

   

Star

 

4,560

44.1%

72.5%

oneworld

2,944

28.5%

 

SkyTeam

 

2,840

27.5%

 

 TOTAL

 

10,344

   
         

2) Post JAL Switch

     

Star

 

4,560

44.1%

82.2%

SkyTeam

 

3,944

38.1%

 

oneworld

1,840

17.8%

 
   

10,344

   

Mr Arpey’s 65% figure may apply to global positioning, but the ramifications of change beyond the US-Japan market are a different issue.

And another step towards improved “full” service?

Finally, perhaps another glimmer of hope that the US airline scene will pull back from the brink of service collapse on which it has teetered. In terms of service, American’s CEO announced that the company has developed a Customer Blueprint for delivering safety, dependability, cleanliness, baggage handling, courtesy and professionalism. This appears to be an effort to match United’s previously announced “Every Action Counts” initiative that CAPA has already reported on .

Arpey’s comments indicate that AA’s program will be more targeted at Premium travelers but it is nonetheless encouraging to hear that the concepts of dependability, cleanliness, courtesy and professionalism are reappearing across the US legacy industry. The next step is to translate concept to reality.

(From Ron Kuhlmann, with CAPA)


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