oneworld dodges a bullet. But the war is not won yet

Now it is done. JAL has elected to remain in the oneworld group and there is undoubtedly a collective sigh of relief amongst its members. See related report: Japan Airlines sticks with oneworld. Major victory for American Airlines, British Airways and Qantas

But “done” is clearly the wrong word. All that has occurred is that a decision has been reached – to retain the status quo. As we noted yesterday, the real work has yet to actually start. We have seen bankruptcy before and it has rarely been a pretty picture. And, in the longer term, many of those bankrupt carriers never really reestablished themselves and many eventually failed despite the best efforts (sometimes) of all involved.

Continental, which is probably the airline that has made the best of its rebirth, endured more than a decade of turmoil before the sun really began to shine for it. Additionally, the rehabilitation of JAL will coincide with a sea change in the Japanese regulatory structure, providing new opportunities and corresponding threats.

Amongst the primary claims touted during the alliance face-off were the consumer benefits that would accrue through each affiliation. We have in the past presented numerous comparisons of the pricing, for instance, on the North Atlantic, where both immunity and JVs exist. Our findings indicated that pricing was stabilized and that in many cases, the fares were equivalent, irrespective of the airline actually operating the service.

United-Lufthansa Y class fares SFO-FRA rtn

United with Lufthansa
SFO/FRA/SFO	837
SFO/FRA/SFO	837
SFO/FRA/SFO	939
SFO/FRA/SFO	939
Eastbound: 2/15 WB: 2/25

Source: Websites

In combination (Lufthansa operated services indicated in bold), the fares have a symmetry. It is likely that the outbound Lufthansa flight on 15-Feb-2010 already had a higher load factor, affecting both fares that utilize that flight. And even though there is a differential, it is modest. Interestingly though, the one-stop services by Air France, American, British Airways and Delta are all priced around USD1,000 - again, not a large premium, but, in a price sensitive market and with a weaker (one stop) product, there is some fruit here that is being left on the vine, were these carriers to price more selectively.

But the Japanese market has been different. Absent many of the liberalizations that have been enacted elsewhere, alliances have been unable to operate with the same level of integration. While some benefits such as frequent flyer programs, have been successfully pooled, the pricing model remains a long way from those seen in other markets.

US to Japan fares

In order to assess the present state of things, fares between Tokyo and 3 offline US cities were researched for travel in mid-February. All the prices shown were taken from the web displays of American, United and Delta. As might be expected, the options were quite diverse and in some cases low fares were accompanied by rather unusual conditions. The fare from Denver to Tokyo via Dulles Airport in Washington, is appealing but the routing is uncomfortable. Likewise, a decent fare is offered between Miami and Tokyo but it involves some 20 hours wait at LAX.

The fares and routings chosen are generally logical and involve reasonable total travel times. And they are operated using established partnerships. The results are in Chart 2.

Fare comparisons are not straightforward

Each of the carriers involved uses a different format for bookings online. American displays all outbound flights first, followed by the return options. One must choose both directions and then continue to a fare quote. The only means of comparison is by repeatedly choosing different combinations--and there is no indicator as to which combination provides the lowest price.

Delta’s site, by contrast, is more friendly, offering prepackaged round-trip combinations, displayed with the applicable fare for that package. Unlike American, the fares are often equivalent irrespective of the routing. Also, unique to Delta, is the presentation of the same routing at very different fare levels, the differentiator being the booking class specified. Interestingly, though, there is no information on the initial display that helps the traveler discern the difference between the USD2,000 fare and the USD8,000 fare--using the same flights. That comes on a later screen with conditions.

United employs yet another system in which the outbound and return flight possibilities are displayed in parallel columns. After choosing an outbound flight on the left and a return on the right, a box appears in the center indicating the cost of that particular combination. At the top of the display, the lowest possible fare is shown and by clicking on that number, the relevant flight combinations are then highlighted.

While all three websites guarantee that the lowest fares are available, actually making like-for-like comparisons presents different challenges for buyers.

Fares on US points to Narita with American and JAL

American with JAL
MIA/DFW/NRT/LAX/MIA	1485
MIA/ORD/NRT/ORD/MIA	1185
MIA/JFK/NRT/LAX/MIA	5004
MIA/SFO/NRT/DFW/MIA	3031
DEN/LAX/NRT/LAX/DEN	1237
DEN/LAX/NRT/LAX/DEN	2739
DEN/DFW/NRT/DFW/DEN	1342
BOS/NYC/NRT/NYC/BOS	1168
BOS/NYC/NRT/NYC/BOS	4994
BOS/ORD/NRT/ORD/BOS	1161
BOS/ORD/NRT/LAX/BOS	4829
Delta
MIA via DTW/ATL/MSP	1318
MIA via JFK	1178
DEN via SEA/MSP/LAX	1170
BOS via JFK	1067
BOS via DTW/ATL/MSP	8871
United with ANA
MIA/ORD/NRT/ORD/MIA	1464
MIA/ORD/NRT/ORD/MIA	7831
DEN/SFO/NRT/LAX/DEN	1036
DEN/LAX/NRT/LAX/DEN	1465
DEN/SFO/NRT/SFO/DEN	6158
BOS/ORD/NRT/ORD/BOS	1253
BOS/ORD/NRT/ORD/BOS	7647
BOS/IAD/NRT/IAD/BOS	1212
Travel WB 2/15/10, EB 2/25/10

Source: Websites 1/29/10

Sectors shown in black utilize the services of the US carrier while those in red are operated by the Japanese alliance partner. The results were illuminating.

The high price of traveling a Japanese airline

First, American and oneworld, while certainly competitive, did not win the lowest price competition from any of the three origin points. Delta, incorporating its new best buddy Northwest, but with no foreign partner, won in two of the three comparisons, while United took one “lowest fare” award.

Secondly, for all the talk of customers deriving benefits from the alliances, it appears that cheaper fares are not necessarily among them, at least when a Japanese airline is the partner. Each time a Japanese carrier was inserted into the routing, the price skyrocketed. The fare between Miami and Tokyo using ANA was five times higher than the same routing on United. The same kind of huge differential is evident from Boston if JAL is used rather than American.

The alliances in Japan markets may provide more travel options but at a very steep price that for most consumers would make little sense. Compare these results to the modest 11% differential in the UA/LH display of the first chart.

Finally, even without a current foreign partner in the market, Delta has a broad selection of connections available to consumers and at very competitive prices. That is explained by the fact that it serves Japan from ten US gateways. The very high cost of travel from Boston via gateways other than JFK was exclusive to the dates chosen and showed more variation if other travel dates were selected. But for most travelers, the routing is far less important than the price if other variables, i.e. elapsed time, are generally equivalent. (They are.)

1. Anti-trust immunity the first step

First of all, both ANA and JAL will apply for anti-trust immunity for partnerships with their US colleagues. ANA actually began its application in Dec-2010. The timing of the JAL/oneworld announcement (and, presumably, their imminent filing) means that the two proceedings can now be held in parallel, which does at least make a lot of sense. It is likely that American and JAL will gain immunity within the pending deregulation - as well as United and ANA – but it is less clear just how the pricing will be integrated, and when. And, as always, there is the lingering threat that Rep Oberstar will regroup his forces and raise the bar on alliance ATI approval criteria and conditions.

2. JAL’s recovery will not be simple

JAL may remain under the oneworld banner but it is a severely wounded contestant in the market. Still to be announced are the additional cuts and limitations to be imposed that will diminish JAL’s contribution to the other alliance partners. American especially, is infinitely better off with JAL than without it, but how long will it take to achieve the optimal benefits that the other partners have anticipated? This is not going to be a simple process and will need lots of loving care from all of JAL’s partners – each of whom has more than a few issues of its own on the home front.

3. Delta remains a powerful competitor

Even without an alliance partner in Japan, Delta remains the top dog in the US market. It operates nonstops from 10 US gateway points to Tokyo and offers the only nonstop from Nagoya to a US gateway. The following table shows the network currently operated from Japanese cities—a group of destinations that is impressive in its own right. True, it lacks a partner in the Japanese domestic market, but of the three alliance groups none is more self-sufficient within its own network than Delta.

Delta’s Japan network

Tokyo	Osaka	Nagoya
Bangkok	Guam	Guam
Beijing		Manila
Guam
Ho Chi Minh
Manila
Saipan
Seoul
Shanghai
Singapore
Taipei

4. Japan market deregulation.

Finally, the apparently imminent further deregulation of Japan’s market may spur the expansion of more low-cost players. Since the majority of JAL’s capacity remains dedicated to domestic routes, and JAL will be further scaling back its international routes, new entrants could provide an additional challenge to recovery, again redefining the nature of the carrier’s efforts. Short haul low cost international operations are almost certain to become a force by the end of 2010.

5. The obscure process of Narita and Haneda slot allocation

Airport slots have been an important sub-plot of the JAL fallout. For a decade Japan’s aviation strategy has been on hold pending the new capacity to be presented at Tokyo’s two main airports. 2010 was to be the year of the “Big Bang” – although that inevitably did not foresee disaster befalling JAL. Until this year Narita and Haneda were massive bottlenecks in an airline system that focused remarkably around Tokyo. This was in no small part due to the power of the major airlines and their preferences, but it also reflected the importance of Tokyo in Japan’s system.

So, now, just as a whole array of new slots becomes available, JAL is in no condition to occupy them, even having to relinquish previously held slots as it reduces service.

The recent open skies agreement with the US annexed limits on additional US airline slot access, despite howls of protest from US free marketers, protesting that the slot restrictions undermined the value of the open skies agreement. This is almost certain to be raised as an issue in the forthcoming DoT hearings on ATI and greater access may well become a condition of approvals being granted.

However, there is no transparent process for slot allocation at Narita and Haneda. And every slot that goes to a foreign airline reduces the Japanese airlines’ fiercely held market power. American will be happy to see this perpetuated, because it relies on JAL’s strength to lean on. But all the other foreigners, especially those in the US, will now be making a charge for greater access.

Now for the difficult bit: living together

There will be some sore heads in the oneworld party today, and the alliance is justified in being highly satisfied with the outcome. Its publicity team has worked overtime and most of its members have rallied to the call.

But what the whole alliance battle temporarily covered up was the real issue of simply how complex a JAL revival was always going to be. The bride is not in good health at all and will still need major surgery to regain a strong global presence. Tokyo will not want to see the flag carrier’s direct influence diluted by excessive codesharing, so pressures will arise there, among many others. For JAL internally, achieving the massive culture shift and economy cuts necessary for efficiency can by no means be taken as a given.

Then there is oneworld itself. We have previously noted the lukewarm support provided by some oneworld members over recent weeks, where their own direct interests were not actually best served by a stronger JAL/oneworld team; Cathay Pacific, already partially linked with Star and whose Hong Kong based operation competes with Tokyo; then there is Finnair, which does not want to see a stronger British Airways/JAL axis competing with its over-the-pole operation to Europe. There may be movement here. Against that, BA, Qantas and LAN will undoubtedly also be very pleased with the outcome.

For JAL and its partners, it is only now that the hard yards begin.