Delta Air Lines’ Japanese (and Asian) dilemma


Delta Air Lines is a bull in china shop. Fresh from its takeover of Northwest Airlines and trans-Atlantic alliance with Air France-KLM, the Atlanta-based carrier is plotting a course of global domination. But the Asia Pacific region, as Boeing reminded us last week, will become the world's largest aviation market over the next 20 years and Delta has few strong local partners. Enter Japan Airlines (JAL), which just happens to be in need of fresh funds, and the new Japanese Democratic Party government keen to establish its reform credentials.

As negotiations for a Japan-US open skies agreement intensify, Delta's Asian dilemma has come into sharp focus. Upon the signing of an agreement, applications for antitrust immunity would have quickly followed by JAL and its oneworld partners, including American, as well as All Nippon Airways (ANA) and its Star Alliance partners, including United Airlines. This has been the experience on the Atlantic, although the oneworld grouping is facing some considerable hurdles in their antitrust request.

Delta needs a local partner - fast

Delta would be quickly found short. Its presence in Japan (and Asia) is built on the former Northwest Airlines' Pacific network, which has been costly to develop and maintain - even more so in the future. In today's environment, it is easier and cheaper to have someone else do the local flying for you.

The increasingly global open skies regulatory context is also opening a new chapter of ownership-based cooperation between airlines.

SkyTeam is weak in Asia. Korean Air is the main anchor with a strong position at Incheon, but the region's other SkyTeam player, China Southern Airlines, has a limited international network. Future members, Vietnam Airlines and Garuda Indonesia, offer very limited clout.

Japan is certainly a big blank spot for SkyTeam. Another is Australia, where Delta has put its own metal to try and stem the dominance of oneworld (via Qantas) and Star (United). A JV on the US-Australia route is in the works between Delta and Virgin Blue's V Australia (with some potentially powerful synergies at either end), but the route, like many others, is bleeding.

There are only so many holes in the dam that Delta can plug with its own resources, particularly as the downturn in premium travel markets grinds on, as well as the fact that there is no other unaligned Japanese carrier.

Red rag to a bull

Unfortunately for Delta, its Tokyo approach has the appearance of an archaeological field trip. JAL is not a 21st Century airline, Tokyo is not a 21st Century hub, the glory days for the Japanese economy are 20 years in the past and the attractions of a highly regulated aviation environment are progressively being stripped away. JAL's competitive outlook is anything but benign.

The recipient of multiple government bailouts already this decade, JAL is now undergoing a government directed restructure after it recorded a USD1 billion loss in the three months to 30-Jun-2009. Upwards of USD2.3 billion more in funding is likely to be sought by JAL by next March to help it complete the restructure.

But Japan is still the third largest economy in the world and it is a market that cannot be ignored. The Japan-US open skies deal will be a major catalyst for change in the Asia Pacific region - the doors to the world's biggest china shop are opening.

Delta is reportedly prepared to stump up USD300 million for a slice of JAL, but oneworld airlines, led by American, with a great deal to lose, are mounting a vigorous response and the price could quickly escalate. With airlines around the world in cash preservation mode, it could be a question of how much support the groups can gain from their financiers.

For Delta, the equation is stark. It can continue fighting at Narita (and across Asia) with its own metal as the competitive flood gates at Tokyo open next year, or try to stitch up a deal with JAL and a likely receptive government.

JAL is expected to lean towards oneworld, but alliance considerations are secondary when billions are being lost (and the alliance map is constantly being re-drawn anyway). The highest bidder will win and the stakes are high.

Want More Analysis Like This?

CAPA Membership provides access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More