The oneworld team yesterday increased its JAL offer by USD300 million, to around USD2 billion plus turnaround expertise. However, the offer, spread over three years, mostly includes the USD1.5 billion in synergies that JAL is already getting from the oneworld partnership. It also includes USD300 million in incremental revenue guarantees from American Airlines, and approximately USD200 million in enhancements from British Airways. Meanwhile, Delta and SkyTeam appear still to be favourites.
“If deemed appropriate and welcomed, American Airlines/oneworld and TPG…are prepared to invest up to USD1.4 billion as part of a comprehensive plan supported by the relevant participants to return JAL to financial vitality,” said the airline in its letter to Japanese officials. “This is a USD300 million increase from their previous proposal, and it would be available, if this was deemed an appropriate resource, to aid in the restructuring of JAL.”
In the meantime, the Japanese flag carrier is moving rapidly toward bankruptcy as early as Monday, 19-Jan-2010. The proposal also includes a pledge to offer JAL guidance and expertise from partners that have successfully executed airline restructurings.
"This proposal demonstrates oneworld's extraordinary commitment to JAL. It brings stability and certainty to Japan Airlines at a time when it is most needed, as it faces turbulent times over the coming weeks and months," said Tom Horton, American's Executive Vice President of Finance and Planning and CFO. "We believe our proposal is in the best interests of JAL and its employees and customers, and the government and taxpayers of Japan. It provides JAL the greatest long-term value at the lowest risk."
The enhanced total value proposal is outlined in a letter from oneworld to Seiji Maehara, Japan's Minister of Land, Infrastructure, Transport and Tourism; as well as to Hiroshige Nishizawa, President and Representative Director, Enterprise Turnaround Initiative Corporation (ETIC) of Japan; and Hideo Seto, ETIC Committee Chairman, Enterprise Turnaround Initiative Corporation of Japan.
Part One: "vastly enhanced commercial relationships”
Part One of the proposal “provides for vastly enhanced commercial relationships” between the Japanese carrier and American, British Airways and Qantas which pledged approximately USD2 billion, in various forms.
American/oneworld estimates that the anti-trust immunity it plans to apply for with the US and Japanese governments would add another USD100 million annually in value. In addition, American is guaranteeing the USD100 million in new annual revenue for the first three years of the proposed venture.
British Airways' most significant of the initiatives in the venture is its offer to create a joint business agreement with JAL so that, from April 2011 the two carriers can enjoy greater revenue sharing opportunities, as well supporting new service between London Heathrow and Tokyo's Haneda International Airport, as new slots become available at the previously domestic-only airport. BA commits to double the number of European points at which it will codeshare with JAL starting this April. It also plans moving its Narita operations to Terminal 2 for easier passenger connections beginning in Nov-2010.
"We are committed to playing a full part in supporting the recovery of Japan Airlines within the oneworld alliance," said Roger Maynard, Director of Investments for British Airways. "London remains the premier destination in Europe and needs to be central to JAL's European plans. This change will provide more convenient connections and an improved customer experience for Japan Airlines passengers arriving at Heathrow and connecting to flights operated by British Airways.”
Qantas Airways will share expertise in relation to its two-brand and low-cost carrier business strategy. This strategy “has provided Qantas with unique strength in terms of scale, network and customer reach and has enabled us to meet the challenges of the global economic downturn,” said the carrier.
Part Two: guidance on turning around and restructuring
Part Two covers guidance on turning around and restructuring an ailing airline, including fleet planning, network analysis, financial forecasting, revenue management, and maintenance operations. American noted its 2003 plan, which allowed it to be the only major US legacy airline that did not enter bankruptcy in the post 9/11 period, netted USD6 billion in cost savings. Expertise, it said, could also come from TPG, the private equity group which is also planning to provide funding.
Part Three: "unique cornerstone hubs"; and even Cathay joins in this time
Part Three of the proposal is less substantive, stressing the value of the three-way JAL/Qantas/Cathay Pacific "unique cornerstone hubs in the Asian marketplace". Despite its limited clout, this argument at last features the until-now bashfully reluctant oneworld partner, Cathay Pacific - but only from its local manager, Simon Large, President of Cathay Pacific-Japan. According to the letter, Mr large says, "Cathay Pacific Airways, with its Hong Kong hub, believes keeping JAL as a member of the oneworld alliance is a key to maintaining a strong presence in the strategically important and fast-growing Asian marketplace. The corporate business traveler wants access to the world's most prestigious markets and JAL's Tokyo hub and Haneda facilities are vitally important to link flyers to the major business centers of Japan, Hong Kong and Australia."
Cathay has been less than conspicuous in the debate so far, generating some criticism among its oneworld partners. Despite being a oneworld member, Cathay's partnership with Star Alliance member, Air China and its active presence in the Chinese market - where Chinese hubs, including Hong Kong - are seen as the next generation replacements for the steadily weakening Japanese aviation role, makes its position ambiguous.
Meanwhile, although Delta and its SkyTeam partners are playing a much more low key role - or are just not as coordinated as oneworld - the word is that the Japan government is leaning towards a relationship with that grouping. Northwest, now a part of Delta, has a very long history in the Japan market and is obviously well-entrenched in its relationships with the bureaucracy, as well as possessing a powerful market presence. The option of being supported by oneworld and competing with Delta may not be seen as attractive as being on the same SkyTeam, where Delta is a strong competitor.
Another layer of this highly complex onion will revolve around how any airport slots which JAL has to relinquish as part of its inevitable downsizing will be reallocated. The outcome may well vary depending on who JAL's partner becomes. Given the procedural opacity in Tokyo, this could perhaps be a factor in that decision-making and will only become apparent well after the anticipated bankruptcy occurs. These and many other issues will be being closely followed in Washington too.
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