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.

• What happened to the FedEx MD11?
• What is the impact to Narita Airport and to Passengers?
• Some real-time passenger stories
• Our Summary of the situation

The Departure Boards at Narita today had to be watched closely, as they changed frequently and generally for the worse.

Having just arrived in Tokyo on Sunday evening, I can personally attest to how the winds were already causing a few delays on the arrival of our flight from London. As we approached Runway 34L the on-board “birds eye view” camera gave us a wonderful view of the runway as we pitched slightly from side-to-side. I often forget how tired you can be after nearly twelve hours on an airplane.  I was to learn today, however, that my long trip was nothing in comparison to what some passengers were about to go through.

I was awake at 0500, as travellers often do on long trips. My wife and I got up and wandered around the early morning streets of Tokyo. While still a little dark, the wind was howling through the clean streets of the city. Having watched a bit of the local news earlier, we had heard it was going to be a beautiful day, but the Japanese Meteorological Service had  issued a warning for high-winds through the Tokyo area.

What happened?

Then this morning at approximately 0650 Tokyo London time, FedEx Flight 80 from Guangzhou, China was landing at Tokyo Narita. As the MD11 flared up, just before touching down, the aircraft appeared to come down onto the runway in an uncontrolled manner. Bouncing up again only to clip its wing causing the aircraft to fatally lose control and in a fiery explosion come to rest with the front of the fuselage turned upside down.

Japanese Rescue workers focus on saving the pilots -- courtesy NNC

We watched in horror as the Japanese fire and rescue response was immediate and efficient, and it took the fire-fighters just under an hour to cut their way into the MD11’s cockpit area to rescue the two pilots. While initial reports from the Japanese Fire Services advised that both the pilots were alive after being extracted, they later both later died.

The impact of this tragic event is being felt at Tokyo Narita, not only by the Fire and Rescue Services, but also by the passengers. The closure of one of the runways at Japan’s busiest airport is having a serious ripple effect on travellers.

While waiting at Tokyo Station for the Airport Express train I met the Hanson family from New York. Doug and Anna Maria Hanson were booked to travel today on JAL’s flight to Honolulu. They, and their two teenage daughters, had been travelling the world for over a month visiting South America and Asia. They had just finished enjoying a one week stay in Tokyo and said “We are looking forward to the Hawaii portion of their trip.” Now as we approach Narita airport the Hanson’s are not sure if they will be going at all today.

I am fairly certain the Hanson's did not make it today.

Anna Maria said, “It is a terrible tragedy. If there is a delay, we can handle it.” They had the air of seasoned travellers. When asked what she thought of their trip so far, she said, “People we have met here in Japan, and in Asian countries in general, have been among the most polite and organised that we have encountered. I am sure that we will find a way to make it to Honolulu.”

The Departures Hall was full of queues that one might expect, and on the far side of the airport check-in area, the queue for the information desks was full of passengers and their baggage that were not heading anywhere, at least for today. In typical Japanese fashion, everything was calm, and orderly, and there were plenty of airport staff available to answer questions and direct passengers.

At Narita I met William Oliver, a British businessman who came to Tokyo last week for meetings and stayed over the weekend to do some sight-seeing. Learning that his flight home JAL flight, JL401 to London was now cancelled he said, “I wish I had just gone home as originally planned; but there is nothing for it is there? Understandably, and for obvious reasons, there is just not another airplane available“ He said that his airline has been very accommodating, and helpful, “… but I am still not sure how, or when, I am returning home.”

The arrivals board told the story of the diverted and cancelled inbound flights. Despite the cancellations, some flights did arrive several hours late.

What could be worse than not being able to get a flight out of Tokyo?

The news is actually worse for those who were already heading for Tokyo, especially for passengers who were in the air and on their way from European destinations. Generally these flights are set to arrive in the afternoon. Flights from the UK, Germany, and the Gulf Region are particularly affected. In the case of JAL’s London inbound flight, it was diverted to Nagoya airport. Some flights have been diverted as far away as Sapporo on the north island of Hokkaido, not an easy rail trip for passengers.

There were a few passengers who were luckier, and were diverted to Central Japan. I spoke to Jennifer Tolliver, a University student from Liverpool, as she was slumped over a cup of coffee in the Departures Hall. Bleary-eyed she relayed the story of how she was on her way to China to visit friends, and had chosen to fly via Tokyo to save money. “Our flight was diverted to Nagoya. I had no idea where exactly that was in Japan. Now, I have had to spend so much time and money on a train ticket that I could have just flown directly.” Her airline has managed to get her another flight later tonight, but with all of the other cancellations she voiced a concern that she would actually be able to make it. “I am just afraid I will need to spend more money for a hotel, if I can even find one.”

Emily Logan, a Australian on an extended “around the world trip” had been helped out significantly by her airline. Her next stop is San Francisco, and JAL was able to transfer her to a Cathay Pacific flight leaving tomorrow via Hong Kong. “We are not actually upset, but we are little annoyed that we are going to miss so much of our time in San Francisco.” At one point an airline representative had told her that things may not return to normal at Narita until Thursday. While we were speaking her travelling companion was on the phone checking to see if their travel insurance would cover extra expenses in this particular situation.

The International Arrivals hall would normally be full at this hour on a Monday

As I stood in the nearly empty Arrivals Hall on what should be a busy Monday night, watching the cancellations, an automated message was playing overhead. “The NAA (Narita Airport Authority) is advising that some aircraft have been diverted for operational reasons. Please contact your airline for further information, and we apologise for any inconvenience.”

Nothing to apologise for, but plenty of other emotions to express.

In my opinion, there is nothing to apologise for. I personally observed the Japanese Authorities, the airport, and the airlines handling issues and doing their best given the tragedy that they are also dealing with. While everyone I spoke to may have been inconvenienced, and it may take days for Narita to return to normal, people were still acutely aware that two pilots lost their lives today. That puts it all in perspective.

From all of us at TWC, we wish the FedEx pilots friends, family, and co-workers our sincere condolences for their loss.   To the brave firefighters and rescuers who tried their best to reach the pilots in time, we stand in awe of your bravery.