The AMR and Delta offers are, in our view, both unsolicited and ill-timed. JAL, and ETIC, have bigger issues to address than the questions of an alliance.

At TWC Avaition, we beleive that there are many alternatives still availbe for JAL, and it appears that Minister of Transport Meihara and the Opposition Demoncrats are doing all they can to keep the carrier operating.   Our view is that there would be more political will to legally restructure JAL and start fresh than allow a major change in foreign ownerships laws that woudl allow a firm to acquire even non-voting equity to the maximum allowed by current Japanese law.  Lets take a look at why that might be how this may play out.

Two Bidders, and empty lot number, and no Auctioneer

What a difference a week can make, not to mention a few billion US dollar bids.  The bids were not fully cash, mind you.  More a mix of revenue gurantees, non-voting equity stakes, and guranteed securities-backed access to cash.

So this week we see  both the Delta (DL) and American Airlines (AMR) unsolicited, and in some ways unwelcome, bidding war to attract JAL to/or remain loyal to an alllinace.

We liken it to watching two bidders at Sotheby’s waving their paddles and starting a bidding frenzy prior to the auctioneer ever taking his place.

Even though JAL had previously announced its intent to “put aside these discussions”, it seems that fine point has been overlooked by both these would be suitors.

The tone being played out this week has certinaly changed as well.   Far from the threats that American Airlines CEO Gerard Arpey was making last week, this week AA’s ASPAC MD has taken a more traditional Japanese approach in his public statments.  He said,  “if invited, we would like to [better] the current offer”.  A C+ for the change in tone and effort.

We would give also give the Delta CEO’s comments failing grade for claiming among other things that Delta (DL) are “No 1 to-and-from Japan”.   Simply Cringe-worthy and Ameri-centric.

A Ward of the State

The point that I think that most of us commentating on this from the outside are missing is that JAL has become for all intents and purposes a “ward of the state” via the Hatoyama’s Opposition Democrats placing it in the Enterprise Turnaround Initiative Corp (or just ETIC).  In the very near future, they will technically have the majority say of JAL’s operations up to an including the reorganization of its management team- right up to the CEO. 

A few faux pas

Along with the departure of some key execs, perhaps DL and AA will also pack their bags for home

I would urge everyone to take a breath and to look at the JAL from a Japanese viewpoint vs. the more propagated stories being put out by the more western press on this issue.   Both JAL and the Japanese government are well aware of the losses JAL will continue to sustain- but they do not view foreign equity investment or guarantees that contain covenants to places like Haneda or skirt current Japanese equity law by being non-voting and revenue guarantees as a viable solution. 

In our analysis the entire reason why intial, and solicited talks with JAL,  initially fell apart wast the prescence of  Macquarie Bank in the role as a potential funding source.   This was, in our opinion, a grossly misplayed hand by all involved.    Macquarie is at best a controversial prescence in many nations, at least in aviation circles.  This is due to their airport dealings in both Australia and in the Haneda financing chain.  So, as AMR steps away to find new backing to go along with their own 2.5M USD warchest, TPG was hastily invited to the party after the initial JAL rebuff.   Then came SkyTeams non-US based chequebook. 

JAL’s biggest shareholder bails

Then the Tokyu Corporation, JALs largest shareholder (a real-estate and rail company) carefully announced its intent and began unloaded shares as a result of seeing JAL as no longer part of their “strategy”.   

The Minister Speaks and New Laws are on the way

JAL's Narita Lounge, where customers go about their business

It is also this formal move that has also gave cover to Minister of Transport Maehara the freedom to carefully craft a statement to a Diet commission where he was mis-translated by western sources.  What he actually said was, “We have carefully considered all possibilities, and we have ruled nothing out, including court supervised protection and restructuring”.   As you are well aware Japanese nuance is often mis-translated, and that as a general rule Japanese Gov’t Ministers do not misspeak.  They are careful, and deliberate.

In addition, should JAL fail to reach the required pension cutbacks- new laws are already being prepared in the background of the Diet by several ministers to override the tradition provision requiring a 2/3 majority agreement to change a pensions terms- again further referenced by the above article.  Bear in mind, these people came to power on the promise of corporate reform- and even with great Union support.

Suspicion and the “Tempest in a Teapot”

Make no mistake- we believe that these offers are a tempest in a teapot, and moreover the Japanese and JAL care about keeping JAL flying- and keeping it Japanese.   They are also as I understand it a bit “troubled” by a perceived incongruity in the offers on the table and the behaviour of DL in particular.  They do not appear understand how their partners AF/KLM could be looking for 1000+ redundancies- but yet still seeking a deal with them.  This is not something that the Japanese understand at a deeper level, and it also could make them believe that their partner(s) are unworthy of their trust.   What would happen if the tables were turned, they ask themselves.   Would my partner not come to my aid lie a kieretsu partner would.

What the West fails to undertand about kieretsu

JAL is a vertical kieretsu- which includes things like JAL catering, JAL Asia Airways, JAL Hotels Group, and many other ancillary businesses- including being the second largest shareholder of Haneda.  You will have note by now that one of the chief characteristics of a kieretsu is their secrecy in terms of deals done behind closed doors- and companies pooling resources to help one another for the common good.

 The Cultural Context

JAL's domestic network make it truly "too essential to fail"

You may find the following paragraph is perhaps un-important but I offer it as history.  Contextually you are already aware that Japan, while outwardly friendly, is in the pains of a major internal cultural upheaval.  The veneers that have been allowed to exist for generations about family units, company loyalty, and thoughts around the keiretsu are still quite strong. Social contracts are being violated about pensions, company loyalty to employees, and even the very core ideas of family.   In many ways it is not unlike the late 1950’s-1970 America- with its resulting seismic social shifts.  Although we think  these adjustments to approach and culture may be a more difficult process due to the deeply ingrained nature of their own identity.  Something, which, is worthy of a great deal of respect. 

So what’s next for JAL

A painful, and public, time of ETIC being in the cockpit and boardroom.   Resignations of senior staff as required by their inability to effect change.   Fundamental Japanese laws changing as the relate to unions pensions, and a goverment that needs to look tough on such old-style business practices.  We will see a streamlining of operations, and even potential use of Haneda for more international flying- but not the US- rather the rest of Asia.  

While they are at it, they may have to look at the now strained relationships with their OneWorld partner, and see if the trust is still there.   I hope it is. as I think OneWorld is the right answer for JAL short of an all Asia alliance, of which there is no obvious answer.

The author, Carter Stewart, is a full time airline analyst and strategist at TWC Aviation Consulting- and is based in London.

At the time of this article, the author did not have any shareholdings or active contracts with any of the companies covered in the scope of the work.

Copyright TWC Aviation 2009  – TWC Aviation 2009

Photo Credits:  C. Stewart, Copyright 2009

Overview

No one has JAL by the tail, except the Japanese Government

Overview

No one has JAL by the tail, except perhaps The Japanese Government

No bidder had Japan Air Lines (JAL) by the tail, but the Japanese Government, through ETIC,  is centainly firmly now at the helm and in the boardroom.

In our view the AMR and Delta offers are both unsolicited and ill-timed. JAL, and ETIC, have bigger issues to address than the question of an alliance.

The simple fact is that JAL is a quality brand, and an essential link to the Japanese Home Island which in our analysis cannot be allowed to fail.  Japan Air lines accounts for the majority of the key domestic capacity in Japan.

Lufthansa has woven a strong strategic web - Original Artwork ©2009 TWC

As we talked about in our previous Airline Anchluss column, Lufthansa is in an interesting position in the European market at the moment.  With the new deal of Austrian Airlines moving ahead, they are well positioned to take advantage of the market once the recession crisis is over.   In the interim, they are in an excellent position to execute on their longer term strategies.  One of those strategies is what to do with bmi, which we will explore hypothetically in this post.   First, however, lets have a look at the latest earning reports.

The Latest on Earnings

This week Lufthansa reported a net loss of €265 MM compared with a restated profit of €44 MM from a year earlier. Hit hard in the past year has been the cargo business, as well as the other ancillary aviation businesses that Lufthansa’s has a stake in.  Specifically, we feel that as their airline customers look for cost savings of their own in areas like catering and handling where Lufthansa has significant global holdings. Click here for quick view of Lufthansa’s holdings in a .pdf format. (please note that this opens in a new window, and is in German.)

 The real bad news was that the deficit was wider than the €180 MM loss estimates that were coming from leading industry analysts.    

 There are few people who cover this sector better than Holly Hegeman of www.planebusiness.com.  

To quote Ms. Hegemann, ,  “Lufthansa reiterated that it will report “clearly positive” operating profit for the year, albeit with a “considerable” decline from 1.35 billion euros in 2008.

First quarter revenue fell 11% to 5 billion euros. The operating loss was 44 million euros compared with operating profit of 172 million euros the year before.”

 The tangled web that is Lufthansa

In our previous blog, Airline Anchluss, we went over the details of the Lufthansa/Austrian deal, and how that single deal could impact aviation in Western Europe.   In today’s instalment we want to take a broader look at Lufthansa ownership of British Midland, or bmi, and what implications that may have for the commercial aviation market in the EU.

 The fate of Heathrow’s Second Largest Airline is basically in Lufthansa’s hands

Sir Michael Bishop, the long-time Chief Executive of bmi agreed last year to sell a majority share of the carrier to Lufthansa.

Currently the bulk of the remaining shares are with Scandinavian Airlines (The SAS Group), which  is undertaking a painful reorganisation, focusing on freeing cash from assets such as its interests in Spanair, and its 20% stake in bmi.

Earlier this year Sir Richard Branson has “confirmed” his interest aquiring bmi, as it would allow him to create the short haul networks in Europe that have strategic value.  Since that first comfirmation, however, neither Virgin or Lufthansa have made any public comment.

So what is going on with bmi today?

bmi has had some changes in key management positions, this year, including a new the head of Marketing Katherine Gershon and new VP of Operations Martyn Bridger, both formerly of the British all-business class carrier Silverjet.    While Gershon has managed to begin to change the way people may thing about the carrier through a revised website and new ad campaign, we don’t see the revenue numbers reflecting a return on the new marketing budget. bmi has made some shrewd operational changes including new markets in the Middle East, Israel, and Russia while also cutting some domestic routes. 

bmi is also remained a member of STAR Alliance and coordinates with its other airline partners in the alliance.

So the stage is set, and you can begin to see why Lufthansa’s position is an enviable one.  Through long term strategic investment they have managed to now successfully gain majority control of London Heathrow’s second largest airline.   When you take a look at the strength and breadth of the airline holdings that Lufthansa has built you can be forgiven for thinking that Lufthansa has spun one of the strongest webs in modern airline history.

The Lufthansa “Fantasy Playbook” for bmi

With the Austrian Airlines deal seeming settled, it become interesting to thing about the commercial opportunities that bmi offers Lufthansa, particularly if it were to pick up the SAS share.

So we took out our numbers and began to look into our airline crystal ball (which as you all know comes without warranty for all but a glimpse of 1 hour into the future of aviation.)  None-the-less we stated to play Fantasy LH Boardroom.

With that we have come up with four potential scenarios:

One: If it is not broke then don’t fix it.  In our view, however, bmi is not poised to do anything unique in the market that Lufthansa could not do better, and more cost-efficiently, themselves.

Two: Keep bmi as they do Swiss, Germanwings, Lufthansa Italia and Austrian- as separate entities under their wing but with a shuffle of the boardroom chairs.

Three: Acquire the whole of bmi and promptly sell it off to a willing buyer with cash.  Logically this would be either BA or The Virgin Group, both of which are a little cash strapped at the moment.  We don’t see this happening, as the value to Lufthansa would be too great to simply sell, unless it began to desperately need the cash.  Well in the frame for interest in bmiBaby and bmiregional could be another regional player in the UK: Flybe.  This is a rumour that they strongly deny as ”pure industry rumour.” 

Four /Step One: Do nothing at the moment, but leverage bmi Heathrow real estate for an assault on lucrative London trans-Atlantic traffic when the numbers, especially business class numbers, begin to improve.

Four/ Step Two: Having taken the cream Heathrow slots for Lufthansa metal to begin taking London transatlantic market share, they could then move the focus of short haul operations to Dublin’s new terminal two building and take on Aer Lingus (if they are still around) and Ryanair.  In essence give Irish consumers a true choice from Ireland that has some service that might wine and dine passengers rather than nickel-and-diming them.   Obviously some rebranding may be required, as bmi may not sell as well as say Lufthansa Eire.

Would they be cannibalising their own traffic?

The short answer is that we do not think that they would be losing much of their trans-Atlantic loyalty from their German operations by doing setting up direct London-US routes.   Taking into account the new Swiss product offering, our estimates were less than 4% of Lufthansa and Swiss London traffic connecting across the Atlantic.  

We credit most of the up to their PrivatAir agreements, strong demand out of London City,  and a few hard to reach non-stop jewels like Portland (PDX) and Seattle which are smart bets for a busy business traveller.

If they were to try focus on Ireland, we believe that they could gain a significant competitive advantage by feeding Westbound Asian traffic through Frankfurt, Zurich, and Munich, while at the same time serving the Ireland-UK market at a decent profit.

So what are your thoughts on the subject?

We would love to hear your thoughts on the subject, and what you think may or may not happen in the scenarios discussed in this article.   Do you have any alternate theories?  So you think our numbers are out of the park?   Or do you think we might be on to something?    We look forward to your comments!

Disclosure: The author does not maintain any positions or contracts with the airlines and companies mentioned in this blog.

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Plane Business Banter at www.planebusiness.com

Was Manion wounded by the last Ryanair's last Takeover attempt? Image ©TWC 2009

Is Aer Lingus CEO Dermot Mannion preparing to leave?

 UPDATE: 06 April 0600 LON: 

Aer Lingus has annouced that Mannion will be leaving the airline with immediate effect, and that Chaiman Barrington will hold the interim responsibility.

 In today’s Sunday Business Post, it is being reported that Mr Mannion is “preparing to leave the airline”.  TWC tried to get independent confirmation from Aer Lingus PR, where were unable to reach anyone for comment.

It has not exactly been an illustrious couple of for Mannion since taking the helm at Aer Lingus.   The latest takeover attempt mounted by Ryanair did not succeed in taking the airline, but it may have well wounded Mr. Mannion.   Not to mention the latest dismal earnings reports, and the fairlure some of it’s new long-haul strategies to materialise a much needed profit.

Of the more colourful moments of the last takeover bid was the request of Mr Mannion for a “golden parachute” in the form of compensation in the event of compensation in the event of constructive dismissal, nearly unavoidable if Aer Lingus were to be takeover.   After this new clause in his contract was exposed, by a suspected Ryanair leak, Mannion took the only honourable option and asked to have that removed.    (Small side note for our UK readers:  Sir Fred, did you hear that?)

That said, he did succeed in defending the carrier twice from the hands of O’Leary and Ryanair.   In addition, he is to be credited for seeking out the new codeshare agreements with UA on the DC-Madrid, and the JetBlue codeshare partnership.

Will his departure put Aer Lingus in a weaker position? 

Overall, we don’t think it could makes things much worse. At the moment, Ryanair has a bit of time before it can begin the process of another takeover bid.   So there is some breathing room here for the airline’s Board of Directors to locate some top talent.

Readers: Your chance to play “fantasy casting” for new EI CEO:

While we have our picks of who we would cast in the role of the new Aer Lingus CEO, frankly it it is more important to us to hear what you think.  So how about it?  Who would you replace Mannion with?  There is a lot of top talent out there at the moment, but will they go for such a mission impossible as Aer Lingus? 

A bottle of fine John X. Merriman Rustenburg goes to the first person who correctly posts the what will eventually become the correct answer.*

*system time prevails, and all decisions of TWC judges are final.  Shipping and handling included, except where prohibited by law.

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http://www.rte.ie/news/2009/0405/aerlingus.html