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The battle for JAL: “oneworld is by far the best fit for JAL”, says oneworld’s John McCulloch


As the recovery plan for JAL is worked out and US-Japan bilateral talks continue, two global alliances are fighting to emerge as partners for what is currently one of the most strategically important airlines in the region. On one side, the oneworld alliance is fighting to retain JAL as a member of the partnership. Meanwhile, the SkyTeam alliance, led by Delta and Air France-KLM is making an aggressive bid to wrest the carrier away, to join it.

The following is oneworld’s position, courtesy of John McCulloch, Managing Partner of oneworld

Japan Airlines is a highly valued member of oneworld – and oneworld and its member airlines are determined to do whatever we can to ensure it remains that way.

Before it joined our alliance, only two and a half years ago, JAL carried out a thorough assessment of which grouping to join – and oneworld was the outstanding choice. 

The arguments for it to remain a oneworld member are even stronger today.

Highest quality partners

In oneworld, it has the highest quality partners from each region worldwide.   They are all carriers it can feel comfortable in passing on its most valued customers.

They have won between them almost twice as many international consumer industry awards than SkyTeam carriers in the past year alone – and oneworld has itself extended its lead as the most prolific winner of alliance awards, picking up the World Travel Awards’ Leading Airline Alliance title for the seventh year running.  oneworld is the only alliance to have won this award since it was first introduced.

Most attractive connecting hubs

Our member airlines offer JAL access to the most attractive hubs for Japanese business travelers.

In Europe, British AirwaysLondon Heathrow base is by far the most popular destination in Europe for business travelers worldwide, including those to and from Japan, with excellent links from there throughout the European continent.   The Helsinki hub of Finnair is also growing in importance and attractiveness as a gateway between Asia/Pacific and Europe as a whole, thanks to its geographical position right underneath the Polar route.

In North America, American Airlines’ key bases of Los Angeles, Chicago, Miami, New York and Dallas/Fort Worth are all far more attractive places to enter the continent and connect than Detroit, Minneapolis-St Paul or Atlanta.

The only truly global alliance presence

In Asia/Pacific, we have excellent hubs that compliment rather than compete with JAL’s Japanese bases – Hong Kong and Sydney.

Indeed, oneworld is the only alliance with member airlines based in every continent – and the only alliance with any member based in South America, in Australia or in Asia’s Middle East.

That makes oneworld the only alliance that can offer JAL a truly global network.

On the basis of our evaluation, and on the calculation of JAL itself only a couple of years ago, that means oneworld has the capability to generate more revenue for the airline, both through regular interlining and through alliance fares, which our research indicates outsell SkyTeam’s offering by a massive margin.  

And we have two and a half years of experience with JAL to prove it – not just forecasts and promises that could in reality turn out to be grossly inaccurate and empty.

Complementary – rather then overlapping – networks

Apart from the quality of our airlines, their hubs and their global coverage, a key reason for this is the complimentary nature of the networks of our member airlines’ and JAL’s.   They provide feed without the massive overlap that JAL would suffer with SkyTeam.

In SkyTeam, JAL would have Delta/Northwest, Korean and China Southern all competing for the same regional slice of the alliance pie.

This “complimentary rather than overlapping” network strategy is a key tenet of the oneworld approach to alliance working.   SkyTeam seems to take a different tack, and this was one of the key reasons identified by Continental for its recent move from SkyTeam to Star, prompting incoming Continental CEO Jeffrey Smisek to say: "The best alliance is with people you don't compete with, so you can offer scope and scale. You don't really want to be in alliance with someone who wants to cut you off at the knees."

He also said that Continental had been relegated to junior partner status in SkyTeam following the merger of Delta and Northwest.  Status and the ability to have a strong voice at the table is crucial for alliance partners – and within oneworld, where JAL is a natural and ideal partner with no competitive overlapping network, JAL enjoys and will continue to enjoy that status.

In a scathing parting shot to SkyTeam, he said Continental was “upgrading to a first class alliance”.

Best opportunity to earn more revenues by deepening relationships

So oneworld already offers JAL the best revenue-generating opportunities – and oneworld and our member airlines are committed to deepening their long-standing partnerships with JAL to enable it to build on that substantially further still.

American Airlines has made it clear that it is keen to apply for anti-trust immunity with JAL as soon as the open skies agreement is concluded between the USA and Japan, hopefully within the next few weeks.

The advice we have received from Washington is that while the regulators are expected to support this application, any similar approach with Delta would be extremely likely to fail, because of the dominant position Delta and JAL combined would have in the USA-Japan market.

Most likely the only opportunity to gain ATI with a US partner

Today, oneworld, SkyTeam and Star possess roughly equal shares of the USA-Japan market.  A combined JAL-Delta, however, would give SkyTeam more than 60 per cent of that market.   With Star, those two alliances would control more than 90 per cent of that market.  This would completely undermine the enhanced competition that open skies is intended to provide to travellers of both countries.

It is also important to keep in mind that the US Department of Transportation’s (DOT) most important priority is protecting consumers.   As such, it has promoted inter-alliance competition to improve choices for consumers, not reduce choices. Given the competitive concerns that a Delta-JAL partnership would raise, it is hard – if not impossible -- to believe that the DOT would approve a partnership that would so markedly reduce alliance competition within the North Pacific region, a key part of the world’s fastest-growing travel market. 

Some cynics may even suggest that Delta may not even seek anti-trust immunity with JAL – that it simply wants to get closer to the Japanese airline to protect its own interests, including its massive investment in Northwest and Northwest’s long-time hub at Tokyo Narita while at the same time frustrating American Airlines’ ability to compete..

That would place JAL in exactly the same condition Continental found itself in at SkyTeam, relegated to junior partner status  - a position Continental found so untenable that it defected from SkyTeam to Star.

By staying with oneworld, JAL will continue to benefit fully from all the revenues flowing from all its partnerships – not just within oneworld, but because of our more liberal approach to such things, from its co-operation with carriers outside our grouping, including in other alliances - and it would be far more likely to realize the benefits of an immunized US relationship, which would have significant incremental long-term value for them.

Best chance to expand co-operation in Europe and elsewhere

British Airways has also offered to widen its co-operation with JAL between Asia and Europe, and so too has Finnair. This combination would provide JAL with even more appealing access across Europe.   And, should JAL ever want to deepen its relationships with European partners, the regulators are likely to look far more favourably on strengthened links with BA rather than Air France/KLM, with the London-Japan market significantly more competitive than the France-Japan market, where an Air France-JAL partnership would dominate.

Elsewhere, our Latin American partners have volunteered also to develop their links further, enabling it to continue its presence in Central America through  American and new partner Mexicana, following JAL’s decision to end its loss-making flights to Mexico City via Vancouver, and expand its offering throughout South America.

Qantas is going one step further in volunteering its expertise from its highly successful Jetstar and two-brand strategies should JAL be interested in exploring similar opportunities.

The only profitable alliance grouping

In terms of broader best practice sharing, oneworld member airlines have the industry’s soundest collective financial track record.  In the 10 years since oneworld was launched, its member airlines are the only alliance grouping to have reported a collective net profit – at US$8.3 billion*.   During that same decade, SkyTeam member airlines lost between them US$32.6 billion net.

The current global economic environment has hit carriers in the Asia Pacific region harder than anywhere else, and as its country’s, and the region’s, biggest airline, JAL has been right in the eye of the storm.   Restructuring it back to profitability will require substantial cash.

The best source of funding

As American Airlines’ CFO Tom Horton indicated in Tokyo earlier this week, his airline has teamed up with the TPG group with an offer of investment, should this be welcomed by JAL and Japanese government.

The TPG group has unparalleled experience of airline restructurings – and access to substantially more funds than any airline grouping could offer.

We at oneworld are convinced that we can deliver the most meaningful alliance value to JAL and the biggest access to investment -- by a wide margin, and without any of the regulatory risk a change in alliance strategy would mean, not to mention the financial costs JAL would incur, if it changed alliances at such at a critical phase in its restructuring.

We estimate that changing alliance horses at this stage would put some US$500 million a year at risk for JAL.

SkyTeam’s unanswered questions mean more uncertainty

We read that Delta has offered to underwrite the costs should JAL opt to move to SkyTeam.   What costs?   The interline revenue it would lose?  The alliance sales revenue it would lose?  The loss of revenues to JAL from passengers switching to competitors with more attractive transfer hubs than SkyTeam can offer?   The huge investment JAL has made to join oneworld just a couple of years ago and its considerable investment in the alliance and oneworld activities since then?  

And then how would JAL ensure that any hand-outs from Delta accurately reflected all these losses?   How would then ensure they were paid?  What happens after this proposal’s three-year period expires?

How would the colossal Delta/Northwest operation at Tokyo Narita fit alongside JAL’s?   It may just squeeze in to Terminal 2, but think of the implications of that in terms of the inevitable deterioration of the customer offering and lack of space for growth.

How can Delta reduce network overlap with JAL when it used its slot holdings recently as surety to raise capital?  What impact would cutbacks in JAL’s operations to avoid overlap with Delta have on its capability of maintaining a solid route network and schedule with all that implies for the Japanese economy and the airline’s own financial future?

oneworld is JAL’s best alliance choice

Lots of unanswered questions at a time when the consumer and financial markets are looking for more stability and certainty.  

And apart from what we consider an all-round substantially superior alliance offering, oneworld also provides just that - stability and certainty.

oneworld and all our member airlines are dedicated to building on our successful working relationships with JAL and to do whatever we can to help our alliance partner weather its current challenges and to assure it a long and healthy future as an important and equal member of the world’s leading quality alliance. 

We firmly believe that oneworld offers JAL by far the best route to fly through its current turbulence and emerge back in the rising sun – the best quality partners, the best network fit, the best hubs, the best revenue opportunities, the best access to funding, the best experience to diverse to a two-brand strategy if it chooses… 

It seems to be a pretty clear cut choice.

*As at June 2009  

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