Posts Tagged ‘American Airlines’
_ No one has JAL by the tail
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.
Do JAL’s suitors understand that sometimes you can’t always get what you want?
JAL's future could be solely a Japanese question (Photo C. Stewart 2009)
At the American Airlines Fall Management Conference, CEO Mr Gerard Arpey stated that JAL would not benefit by leaving the OneWorld alliance. A day later AA CFO Tom Horton followed-up by saying JAL would “have have difficulty clearing regulatory hurdles if they sought antitrust immunity for closer business ties with another alliance. ” In fact, AA has clearly alluded it would oppose any such move.
There is no argument that JAL is in serious financial trouble, and perhaps even less of an argument that Japan may yet be the next sovereign national default. That could even be part of the AMR strategy, as they begin to see their chances with a mutual AA/BA eclipsed slightly by BA/Iberia- and the delay U.S. governments official ruling on this important subject.
Even in that light, Mr. Arpey’s recent comments represent, at best, a fundamental misunderstanding of his Japanese partner’s cultural approach to business. At worst they demonstrate yet again a narrow U.S.-centric view of the global aviation industry. Even if JAL would make a comment, which they wouldn’t, statments of this calibre would generally only serve to further isolate AMR from this important strategic partner both culturally and financially.
I personally know the ladies and gentlemen of AMR to be clever, erudite, and savvy people. I respect them. In my opinion, however, I have seen them demonstrate a repeated weakness through the years. This weakness comes in two parts. First is to unabashedly apply US style business approaches in places where an alternate approach may be advisable, and the second is to rely on US O/D traffic on most int’l routes to an excess that isolate them from some local markets. Ironically, this appears to not a mistake shared by all of their US competitors.
I do not believe that AMR, DL and the rest of JAL’s recent suitors could have been unaware of Japan’s much stricter foreign ownership rules, which make U.S. ownership appear positively liberal. They also could not have been oblivious to the complexities of lobbying a new Diet that has barely taken office for a change in laws related to restrictions on simple equity stakes. Add into mix the potential suitors intense interest in Haneda, and then overlay the already contentious presence of Macquarie Bank in Haneda financing chain, and I think what you will find is a perfect storm. In my view, it is a storm that has already taken both JAL and the new Japanese Government to a more isolationist stance.
I would even go so far as to hypothesise that JAL simply and strategically used the OneWorld and SkyTeam interest to their own political advantage, never fully intending the follow through with a financing offer without first doing what the foreign carriers could not- lobbying their own government.
JAL knew that the guaranteed financing was in place prior to the landslide election victory by the Opposition Democrats. Now that that money had evaporated in a single August evening, a sense of careful self preservation became the focus. JAL had to demonstrate contrition for their failures through management shake-ups and uncomfortable cultural issues around lay-offs and pension issues, and painful semi-public audits.
Simultaneously, however, it also began to draw a picture the new Hatoyama government what life might be like with another major Japanese company, some say even the “flag-carrier”, being funded by non-Japanese- and with access covenants that may not have been in best interest of any Japanese carrier.
The manner in which the Opposition Democrats have responded to the JAL crisis only further proves that there are discrete and delicate cultural issues at play here that must not be ignored. The most telling demonstration of this is the first radical change in government in over fifty years was swept to power on a wave of promises to reform government handouts to corporations chose to break with their own platform of reforms within weeks of taking office. This very public break with policy came in the form of mixture of guarantees and promises of further support measures for JAL on the condition of reform.
One of the most painful reforms is the requirement for JAL to cut their pension by a two thirds consent of it’s retirees. It is this requirement that has JAL seeking professional mediation.
While most western carriers such as BA and AA are no strangers to pension shortfalls, this is a more difficult issue in Japan. Japanese culture still holds on to the idea, even if it is an illusion, that a company has a tacit understanding to look after the employee during the course of their lives. While the reality has been quietly changing over the past decade, and represents one of the core changes occuring in Japanese society, it is difficult for for the culture as a whole to adapt to this particular change.
Overall JAL has most likely “shelved these discussions” with AMR and DL and moved on to chart it’s own course. It is a mixture of national pride, culture, and their potential to turnaround that make it plausible that JAL can chart an independant course.
As for AMR and Mr. Arpey, you would think that he of all people should know that threats, no matter how veiled, rarely will win you many friends in Japan- much less help you conclude a successful deal.
Great Links:
JAL charts an independent course to find clear air
JAL does it "Their Way"
What a month it has been for Japan Air Lines! Prior to the Japanese elections at the end of August, which swept Yukio Hatoyama and the Opposition Democrats to power for the first time in 54 years, JAL believed it was to be the recipient of a carefully crafted short-term financings package with the previous government.
This left the normally conservative JAL with a serious problem, and as other carriers have already long ago realised – there were very few places to turn for funding. So what is Asia’s largest carrier to do when it finds a new government that came to power on a promise to wean Japanese Corporations off of preferred public funds?
A Helping Hand
Well we did not have to wait long to find that other carriers were more than interested in lending a helping hand. From OneWorld partner American Airlines leading the charge to Tokyo, to SkyTeam’s Delta it suddenly seemed that there was ample opportunity for JAL to forge new partnerships. Soon, some of the larger members of the major alliances were scrambling to put together a deal. In that frenzy of activity, including AA’s major liquidity drive which found them with 2.9MM USD in cash for various strategic moves, a few finer points seemed to be being papered over. To keen observers of Japan, none of these ovetures really seemed to fully add up. From talk of mergers to liquidity buyouts it seemed as though the principals and the mainstream reports all but ignored some of the more practical issues with Japanese ownership laws, which make US foreign ownership rules look positively liberal.
I would not want to play chess with JAL
The whole affair also seemed to focus on the partnership possibilities and missed some of the all important cultural cues that caused some to wonder if JAL were not just strategically playing their suitors. Surely JAL has to know at the start that without a swift and unlikely change in Japanese law, at best, they could only accept well under 10% of any liquidity offer that included stocks and other securities.
Also surprising was the move by JAL’s potential suitors, as none of the carriers involved in the negotiations could actually be accurately described as in a position to throw a financial lifeline to a new partner. Of particular mystery was AA/BA’s combined approach, with AA’s health only now beginning to stabilise and BA being self described as being in a “critical cash position”. So tenuous is BA’s position that they recently asked staff to voluntarily forego a month of pay, or work a part-time schedule. Delta is still wrapping up the final costs from it’s acquisition of Northwest Airlines. So what was in it for them? Access to the lucrative Japanese market and the coveted slots of Haneda were a good start. Having a foothold in once of the densest markets in Asia was certainly another.
I did it ”My Way”
During the past month none of this ever really added up for us at TWC. Now in the wake of the Japanese Government and the Japanese Development Bank’s latest promise of support and assistance, and the caveats that come with it, will JAL be able to navigate its way to clear air? We would argue that while cultuarally Japanese companies, and their employees, still want to fulfill the covenant of lifetime employment, it is no longer practical. It is a positive sign that JAL make the hard choices that other carriers have already had to make in recent years. I do not think that we should underestimate the pain and cultural complexity that they will have to negotiate while cutting the bottom line. In many ways it will be harder than in the right-to-work culture found in the U.S.
So as JAL’s President steps down- some would say in less-than-honourable circumstances- the carrier is this month intensifying the scale and depth of its voluntary restructuring. Having been with three carriers who stared down insolvency, and two who succumbed, all I can think is no matter how hard the cuts, there is no replacement for charting your own voluntary course through these hard times. I wish JAL nothing but luck as they do things “their way”.
Why AA/BA Antitrust Immunity Makes More sense that Virgin’s resitance to it
Why AA/BA Antitrust Immunity Makes More Sense now than ever…
Art © TWC 2009
The History
When American Airlines (AA) and British Airways (BA) filed for antitrust immunity in 2002 there was little hope that an agreement could be reached with the US and EU Regulatory authorities. New entrants into the EU-US market were prohibited, and AA and BA were opposing businesses nearing an effective monopoly hold on daily departures between Heathrow and the US.
In 2007, the first phase of the new EU-US Open Skies accord was reached. Since then several new entrants have started flights in this lucrative market. This agreement has allowed these new market entrants to fundamentally change the competitive landscape at Heathrow and other airports throughout the EU. Ultimately the passengers now have a wider choice of carriers, service levels, and new non-stop destinations than ever before. As a result, consumers on both sides of the Atlantic should urge their lawmakers to approve the AA/BA application for immunity.
The Opposition from Virgin
In spite of these competitive changes some consumer groups, and competitors such as Virgin Atlantic (VS), vehemently oppose the proposal. Virgin Atlantic claim that if the deal were to be approved that AA/BA would have a “stranglehold on London Heathrow-US services, and be able to coordinate schedules enough to inflate demand, and as a result also inflate fares. While the anti-trust immunity would arguably have some impact on frequency and schedule as the two carriers coordinate, in the end consumer demand and pressure from new competitors will keep fares in check and provide passengers an alternative choice of carriers on a scale not previously available.
The Politics
Since the implementation of the Open Skies agreement, we have seen many carriers such as Air France, Delta, and US Airways, and Northwest begin to challenge the established carriers in the Heathrow-US market. While the economic downturn has temporarily scaled down the expansion efforts of some like Air France, these are an example of the healthy competition that comes from open markets. Since then Congressman Orbester has made his protectionist position clear via US HR 831, while UK Transport Minister Hoon Geoff Hoon stopped short of threats to dissolve the current EU-US open skies agreement as he reinforced European calls for further liberalisation in stage two talks during a speech to the International Aviation Club in Washington two weeks ago.
Hoon indicated that if no second-stage agreement is reached next year, either party has the right to withdraw traffic rights secured under phase one – an option highlighted by previous UK transport officials but not by Hoon. It was the stance of his predecessor Ruth Kelley the former Transport Minister.
During the meeting of aviation professionals Hoon said that “[we] should stay clear of retaliation,”. “I have no doubt the United States should not be afraid of opening up its aviation business to further competition.”
In our opinion it is entirely likely that with the European and Local elections in June, and current turmoil over UK domestic policy issues such as MP’s expenses, and the recent defeat in the House on the issue of Gurkha’s, it is possible that this Labour Government, and its ministers, will not be present around the final negotiating table.
In his speech Hoon indicated that protectionism offers cold comfort in an economic downturn. That same day United States Congressman James Oberstar (D-MN) was receiving an award for “service to aviation’ while at the same time being the main architect of H.R. 831 calling for limited the power of the DoJ and calling for tougher reviews, restrictions, and rollbacks on airline alliances and
immunity.
What is the rest of the world doing?
In a related story, Canada raised it’s foreign-ownership limits this week to just short of 50%, while Inida continues to liberlise it’s foreign ownership criteria.
Another concern for the UK, and EU, is the US reaction to including commercial flights in the EU carbon emissions scheme, which we at TWC have lobbied against.
The New Threat at Heathrow
There is also a serious potential contender in the London-US market. BMI (BD) and their majority owner Lufthansa have been raising their profile to business travelers over the past few months As Heathrow’s second largest airline could direct links to US be far off? Lufthansa’s recent increase in its BMI stake is further evidence of the emerging strength and competition in the Heathrow market by the Star Alliance, who already operate with antitrust immunity.
The past few years have also seen some important experimentation with trans-Atlantic links between other London airports, such as Stansted and Luton, with mixed results. Fairly radical change came at Gatwick as a near mass exodus of carriers shifted their Gatwick operations to Heathrow soon after the final agreement on Open Skies was in place. Virgin Atlantic also has a unique opportunity to redefine the overall London-US airport experience as it leads a consortium proposing the purchase of Gatwick Airport from the British Aviation Authority (BAA). If it succeeds in its bid, they will have the opportunity to potentially shift consumer preference away from Heathrow with a superior airport experience.
The Upshot
We agree that consolidation is no silver bullet, and it will not solve any carriers problems overnight. That said, we feel that there is no cogent argument for opposing the AA/BA request for the same immunity that has been granted many other alliances in the EU and US already. We believe that its approval will level the playing field between the airline alliances, increase competitive pressures, and ultimately benefit consumers as a result.
Immunität gegen AA/BA Sinn macht
Einblick in die Luftfahrtindustrie:
Warum die Immunität gegen kartellrechtliche Wettbewerbsbeschränkungen für AA/BA Sinn macht
Art © TWC 2009
Als American Airlines (AA) und British Airways (BA) im Jahr 2002 die Immunität gegen kartellrechtliche Wettbewerbsbeschränkungen („Antitrust Immunity”) beantragten, bestand wenig Hoffnung, dass sich die Regulierungsbehörden der USA und der EU auf ein Abkommen einigen würden. Neuzugänge auf den EU-US-Markt waren nicht zulässig, und die Fluggesellschaften AA und BA waren in Bezug auf die aktuelle Monopolstellung im Bereich täglicher Flugverbindungen zwischen Heathrow und den USA zudem harte Gegenspieler.
2007 trat die erste Phase des neuen „Open Skies“-Abkommens zwischen der EU und den USA in Kraft. Seitdem bieten eine Reihe neuer Fluggesellschaften auf diesem lukrativen Markt Flugverbindungen an. Dank des Abkommens gelang es den neuen Anbietern, die Konkurrenzlage in Heathrow und auf anderen Flughäfen innerhalb der EU grundlegend zu verändern. Für die Fluggäste bedeutete dieser Wandel ein umfangreicheres Angebot an Fluglinien, ein höheres Serviceniveau und weitaus mehr Nonstop-Flüge als je zuvor. Verbraucher auf beiden Seiten des Atlantiks sollten ihre Gesetzgeber daher dazu auffordern, dem Antrag von AA und BA auf Immunität stattzugeben.
Doch trotz dieser wettbewerbsfördernden Neuerung lehnen einige Verbrauchergruppen und Mitbewerber wie Virgin Atlantic (VS) das Abkommen entschieden ab. Virgin Atlantic kritisiert, dass AA und BA im Fall einer Genehmigung der Immunität den Flugverkehr zwischen London Heathrow und den USA fest im Würgegriff halten würden und somit eine uneingeschränkte Kontrolle über die Flugpläne hätten, sodass die Nachfrage und, damit verbunden, auch die Flugpreise in die Höhe getrieben werden könnten. Obgleich die „Antitrust”-Immunität sich bedingt durch die Koordination der beiden Fluglinien durchaus positiv auf die Flugfrequenz auswirken könnte, würden die Flugpreise aufgrund der Nachfrage von Seiten der Verbraucher und des Konkurrenzdrucks durch neue Mitbewerber letztendlich reglementiert werden. Die Immunität gegen kartellrechtliche Wettbewerbsbeschränkungen bedeutet für Fluggäste daher ein alternatives Angebot an Fluglinien, das in einem vergleichbaren Mass zuvor nicht zur Verfügung stand.
Seit der Implementierung des „Open Skies“-Abkommens lässt sich beobachten, dass zahlreiche Fluggesellschaften wie Air France, Delta, US Airways und Northwest Airlines die etablierten Fluglinien auf dem Heathrow-US-Markt nahezu herausfordern. Obgleich der Wirtschaftsabschwung die Entwicklungsbemühungen mancher Fluglinien wie etwa der Air France vorübergehend eingeschränkt hat, ist dies ein gutes Beispiel für die gesunde Konkurrenz, die ein offener Markt bewirken kann.
Unter den potenziellen Anwärtern auf dem London-US-Markt befindet sich im Übrigen auch ein ernst zu nehmender Kandidat. Die Fluggesellschaft BMI (BD) hat ihr Profil im Verlauf der letzten Monate mehr und mehr auf Geschäftsreisende ausgerichtet. Für die zweitgrösste Luftlinie in Heathrow macht eine direkte Verbindung in die USA sicherlich Sinn. Die jüngste Übernahme zusätzlicher BMI-Anteile durch Lufthansa ist auf dem Heathrow-Markt ein weiterer Beweis für die wachsende Stärke und Konkurrenz der Star Alliance, die bereits Immunität gegen kartellrechtliche Wettbewerbsbeschränkungen geniesst.
In den letzten Jahren haben eine Reihe anderer Londoner Flughäfen, wie Stansted und Luton, mit unterschiedlichen Ergebnissen mit transatlantischen Flugverbindungen experimentiert. Gatwick erlebte einen vergleichsweise radikalen Wandel, als zahlreiche Fluglinien unmittelbar im Anschluss an die Gewährung des „Open Skies“-Abkommens ihre Geschäftstätigkeiten grösstenteils von Gatwick nach Heathrow verlegten. Virgin Atlantic hat die einmalige Gelegenheit, die globale Stellung der Flugverbindung „London-USA“ insgesamt neu zu definieren, denn die Fluggesellschaft steht an der Spitze eines Konsortiums, das die Übernahme des Flughafens Gatwick durch die britische Luftfahrtbehörde (BAA) plant. Sollte dieser Plan umgesetzt werden, wäre dies die ideale Gelegenheit, Fluggäste von Heathrow abzuziehen und ihnen in Gatwick ein besseres Flughafenerlebnis zu offerieren.
Insgesamt sind wir der Meinung, dass es kein triftiges Argument dafür gibt, sich dem Antrag von AA/BA für die gleiche Immunität, die bereits zahlreichen anderen Allianzen in der EU und in den USA gewährt wurde, entgegenzustellen. Wir glauben, dass die Erteilung der Immunität die Wettbewerbsbedingungen zwischen den einzelnen Airline-Allianzen ausgleichen und den Konkurrenzdruck erhöhen kann, was für die Verbraucher letzten Endes von Vorteil ist.
Haftungsausschluss: Die geäusserten Meinungen beruhen auf der laufenden Analyse des TWC-Teams und unterliegen unseren Nutzungsbedingungen. Der Autor ist zur Zeit der Erstellung dieses Artikels mit den in diesem Bericht genannten Unternehmen weder vertraglich noch durch Aktien oder Sicherheiten verbunden. Diese Analyse/dieser Bericht dient ausschliesslich Informationszwecken.