Posts Tagged ‘JAL Bid’
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
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
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
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
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.
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.