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AMR-Japan Airlines Ties

American Airlines to expand JAL ties on trans-Pacific routes

Mary Schlangenstein and Mary Jane Credeur  Feb 09, 2010

AMR Corp.’s American Airlines will expand its ties to Japan Airlines Corp. on trans-Pacific routes after fending off Delta Air Lines Inc.’s “aggressive” bid to pry Asia’s largest carrier out of the Oneworld alliance.

Japan Air opted to stay with American because they have a 10-year relationship and out of concern that regulators wouldn’t grant the right to set fares with Delta, two people familiar with the matter said. Japan Air, also known as JAL, made its choice after five months of jockeying by the U.S. carriers.

“American’s tactically astute approach has paid off with a big win,” Douglas Runte, managing director at Piper Jaffray & Co. in New York, said today. “And a win that appears to have been accomplished at far less cost in the form of capital infusions than many expected.”

A deeper connection with JAL will shore up American’s operations across the Pacific, the smallest region by revenue for the Fort Worth, Texas-based airline. American and JAL now will seek government authority to coordinate fares and schedules across the Pacific, a step to reduce costs and boost revenue.

“It’s the right choice by Japan Air,” said Makoto Murayama, a Nomura Securities Co. analyst in Tokyo. “The continuation of the partnership with American also means there will still be competition among the three airline alliances at Tokyo’s Narita airport.”

AMR rose $1.01, or 14 percent, to $8.33 at 4 p.m. in New York Stock Exchange composite trading, the biggest one-day advance since Sept. 17. Atlanta-based Delta gained $1.14, or 10 percent, to $12.39, the most since Dec. 11.

Bidding Prize

Japan Air’s routes in its home country and elsewhere in Asia made it a prize to American and Delta even after the Tokyo- based carrier filed for bankruptcy protection last month. Losing JAL would have cost American’s Oneworld its only Japanese partner, while a Delta victory would have cemented that carrier’s grip on U.S.-Japan traffic.

American and TPG, the private-equity firm founded by David Bonderman, had proposed an investment in JAL of as much as $1.4 billion, which the Japan airline played down in recent weeks. A TPG spokesman, Owen Blicksilver, declined to comment today about the plans for any investment.

“Our offer hasn’t changed, but it would depend on the needs and desires of JAL and the government,” Andy Backover, an American spokesman, said today.

Approaching JAL

AMR Chief Executive Officer Gerard Arpey approached JAL about seeking so-called antitrust immunity to expand their existing marketing accord last year when Delta began efforts to lure the Japanese carrier to the SkyTeam alliance from Oneworld.

American’s effort began without publicity. In September, Japanese news outlets reported negotiations were under way between Delta and JAL on a capital tie-up, which Japan Air initially denied. Only one major carrier, Continental Airlines Inc., has ever switched alliances.

Delta CEO Richard Anderson “made AMR defend their territory, and went after them aggressively,” said Jim Corridore, a Standard & Poor’s equity analyst in New York who recommends buying Delta shares and holding AMR. “Delta was looking at it as a chance to steal something from a competitor and it didn’t work.”

SkyTeam had proposed a $1 billion package for Japan Air, half of which would have been a cash injection. Anderson led Delta’s acquisition of Northwest Airlines Corp. in 2008 to leapfrog American as the world’s largest carrier.

‘Important Win’

“This is an important win for American and its CEO, particularly after the aggressive efforts by Delta to snatch JAL away from AMR’s arms,” said Runte, who doesn’t rate AMR or Delta.

Delta said in a statement that it “remains committed to providing a leading option for travel across the Pacific,” including service to Tokyo from 10 U.S. destinations. A spokeswoman, Betsy Talton, said the airline would have no comment beyond the statement.

JAL will probably generate $2 billion in revenue over three years from its membership of Oneworld, AMR reiterated today. That includes $1.5 billion from ongoing ties and an additional $200 million from greater cooperation with British Airways Plc and $300 million in revenue guaranteed by American over the period, the carriers said last month.

“We will now talk to JAL about turning these plans into reality,” Laura Goodes, a spokeswoman for London-based British Airways, said today in an interview.

AMR “remains confident” that the U.S. will approve the antitrust immunity application, Arpey said in a statement today.

‘Open Skies’

Japan and the U.S. reached an initial “open skies” deal last year that would remove government restrictions on flights between the two countries. All Nippon Airways Co., Japan’s No. 2 carrier, has already requested antitrust immunity to extend cooperation with Star Alliance partners United Airlines and Continental on Japan-U.S. flights.

The U.S. and Japan air-travel market is about evenly divided between Delta’s SkyTeam, Oneworld and Star.

“JAL finally got the message that they had very little chance pursuing an immunized relationship with SkyTeam, and that it would have jeopardized the entire open skies treaty,” said Hunter Keay, a Stifel Nicolaus & Co. analyst in Baltimore. “They saw that getting antitrust immunity was the most important thing and that that’s a lot more certain with American.”

Delta previously said that a tie-up with JAL would give the two carriers 58 percent of Japan-U.S. services including flights from beach locations such as Hawaii. American has said its share would shrink to 6 percent without JAL.

JAL has started on a 900 billion yen ($10 billion) state- backed turnaround after seeking court protection following three losses in four years. CEO Kazuo Inamori, Japan’s 28th-richest man according to Forbes and the founder of electronics company Kyocera Corp., will oversee a restructuring that will include axing 31 routes and almost a third of JAL’s staff.

American Airlines to expand JAL ties on trans-Pacific routes
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