JAL-Delta rumours strengthen. But does Washington agree?


Rumours strengthened over the weekend that Delta and SkyTeam have won the beauty contest for the hand of Japan Airlines, after bankruptcy is declared, probably tomorrow. If that is the case – and cautious judgments are always wise in the Japan environment – then beauty was probably not the determinant so much as pure muscle. But Tokyo bureaucrats are not the right ones to take that decision; ironically it will probably be Washington’s bureaucrats who do.

It has been no secret that both the Ministry, MLITT, and the national lending authority, the Enterprise Turnaround Initiative Corp of Japan (ETIC), favour Delta over American, mainly on the grounds that biggest is best. Delta, through its Northwest Airlines acquisition last year, is the biggest and longest established foreign airline in the Japan market. Together with JAL, it would be a powerful force in the North Asian market, where Star Alliance airlines currently prevail.

Who will run the new JAL? Hopefully not the bureaucrats

But there is more to this partnership decision than the Tokyo bureaucrats’ sumo preferences. For one thing, this is a judgment that a new JAL management should be taking. Unless it is to be a puppet of what will be its near term prime shareholder (not a good recipe for commercial success), the airline’s management should be given flexibility in making such a fundamentally important decision.

Even though, on the balance, Delta may appear a more powerful partner, if this formative choice were removed from JAL management it would create an unhappy precedent. If the first big decision of what must now become a commercially sustainable airline is to be taken by unaccountable bureaucrats, the outlook must be challenging.

The Tokyo rumour mill meanwhile suggests that current JAL senior management favour remaining with oneworld and American – or they are at least maintaining the position that no decision has been taken. This is understandable, as many linkages, personal and operational, have been established with oneworld members since JAL joined the alliance in Apr-2007. Although nor is that arguably the best basis for looking ahead; what has not worked in the past may not be the best way ahead.

The US will surely have its say in the outcome

Perhaps the most important ingredient that any partner for JAL must possess is antitrust immunity to operate as a single airline on US routes. If that is not possible, the value of any partner relationship will be greatly undermined. (A parallel issue exists with the EU also, but that is arguably less important to JAL’s well-being and perhaps less contentious.)

There has been some very public debate about who is most likely to win the US antitrust race. For example, American Airlines CEO Gerard Arpey has suggested there would be “zero chance of DL/JAL receiving ATI,” mainly because Delta is so powerful in the Japan market. Delta has dismissed that as mere hubris.

It is possible that the issue came up on the sidelines at last month’s bilateral talks, but Washington’s officials and JAL’s Washington lobbyists are not in any position to offer definitive judgments on what has to be a transparent administrative procedure in the US system. So ETIC officials will be in no position at this stage to be able to make the call on what Washington will decide.

Indeed, with the current anti-alliance atmosphere in the Department of Justice, echoed by House Transportation and Infrastructure Committee Chairman Rep Oberstar, no alliance can be assured of gaining anti-trust immunity.

That uncertainty alone makes it unlikely that any formal decision on a partner has in fact been taken yet. There will necessarily be lots of conditions attached to everything that is being reviewed at present – including the nature of the post-bankruptcy JAL itself. JAL’s resurrection is becoming a three-dimensional dilemma.

…at the highest levels perhaps

Diplomacy is becoming a good candidate for a role in what unfolds from here on. Japan-US relations have had a rocky few months since the Obama administration demonstrated its preoccupation with China, much to the concern of Tokyo. And JAL is still so close to the Japan flag that getting this process right is extremely important to the Hatoyama government. It would not be the first time that heads of government have been directly involved in working out an aviation issue.

This is a situation without precedent. There are so many moving parts to the JAL revival that the airline – and Tokyo’s bureaucrats – may well still be working through the details in six months' time. That is not a pretty prospect for an airline that desperately needs resuscitation in a fast moving world.

But the sooner that bureaucrats are removed from the scene, the better. That may be a forlorn hope.

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