As the world’s two largest carriers vie to form a strategic tieup with crippled Japan Airlines Corp., opinions are split over whether a JAL alliance with Delta Air Lines, the biggest, would create unfair competition and sting consumers.
JAL’s state-run turnaround body reportedly prefers a tieup with Delta.
Industry observers have warned that a Delta-JAL tieup would be too dominant in the trans-Pacific travel market and that the U.S. government is unlikely to grant the alliance antitrust immunity status. Immunity will be crucial if JAL, which is expected to file for bankruptcy next week, is to take full advantage of the partnership and bolster the SkyTeam alliance.
“JAL-Delta tieup would be so dominant that it would irreversibly harm competition, including Japan-to-U.S. routes and Asia-to-U.S. routes, and among the competing alliances,” Kevin Mitchell, chairman of U.S.-based Business Travel Coalition, said at a news conference in Tokyo last week. The coalition represents corporate travelers from around the world.
JAL, which is set to seek bankruptcy protection Tuesday, currently belongs the oneworld alliance led by American Airlines.
Delta and American have been trying to woo JAL with capital investment offers so they can expand access to the lucrative Asian market. The government-backed body sponsoring JAL’s turnaround reportedly plans to allow JAL to form a business alliance with either, but not a capital tieup. But reports last week said it was favoring Delta.
Mitchell said that if JAL joins SkyTeam, oneworld’s share in U.S.-Japan routes would plunge from 35 percent to 6 percent, while SkyTeam’s share would shoot up to 62 percent. Delta, which bought Northwest Airlines and is absorbing its Pacific routes, currently has a 32 percent share.
The Star Alliance grouping led by United Airlines counts JAL rival All Nippon Airways as a member and has about 30 percent of the trans-Pacific market. If JAL switches to SkyTeam, 93 percent of the U.S.-Japan market will be dominated by SkyTeam and Star, Mitchell said.
“Studies by the U.S. DOT (Department of Transportation) have shown over again when alliances are reduced from three down to two, prices for tickets can go up 15 percent or more,” Mitchell said.
The reason these scenarios are being entertained is that the U.S. and Japan struck an “open skies” pact last month. This paves the way for groupings to get antitrust immunity, which is essential to taking full advantage of international alliances.
Neither American nor Delta have that immunity with Japanese airlines. Open skies gives airlines more freedom to open routes and choose the number of flights. Such deals are decided by the two governments.
Under the accord, two airlines from different countries can be given immunity, enabling them to act as if they were a single company and allowing them to engage in business activities that would normally violate antitrust law, such as arranging ticket prices and flight schedules on their own. They can also put the revenue into one pool.
The applicants must apply separately to the two governments for approval.
Debate is heating up over whether a JAL-Delta tieup will be able to quickly get U.S. approval. The DOT examines applications in close consultation with the Justice Department.
Mitchell said the DOT favors granting immunity to airlines with complimentary networks, which means a JAL-Delta tieup won’t work because there are too many overlapping flights.
He added that the BTC will file an objection if JAL and Delta join hands and file, and American said it would object as well.
Meanwhile American has claimed that if it keeps JAL on board, they will probably be granted immunity more smoothly because their network is complementary, and this will enhance trans-Pacific competition among the three alliances.
Delta, however, said that immunity won’t be a problem because the DOT has granted that status to other alliances that would enjoy a larger piece of the pie than would be seen in a JAL-Delta tieup. Delta, Northwest, KLM Royal Dutch Airlines and other carriers, for example, jointly won immunity status although it gave them about 80 percent of U.S.-Netherlands routes.
The application process takes about six months in general but could take longer.
For example, the U.S. Department of Justice recently objected to the immunity application filed by American Airlines, British Airways and other oneworld members after a wait of about 18 months because it could disrupt market competition.
Mitchell said the JAL-Delta case would face stiff opposition and take a long time to resolve, adding that JAL has no time, considering its plight.
Aside from immunity, the two alliances are also jousting over the benefits each tieup would offer.
JAL is expected to drastically cut operating costs if it partners with Delta as they have many overlapping U.S.-Japan flights.
“The cost-cutting airlines can do from just being in the same alliance is limited,” said Makoto Murayama, senior analyst at Nomura Securities Co., adding that if JAL and Delta cannot get immunity, the partnership is not so worthwhile.
Mitchell said Delta would win if immunity isn’t granted. A Delta-JAL alliance would still enjoy a dominant market share, with oneworld losing most of its Pacific routes, currently operated by JAL. Murayama said a JAL-Delta tieup can probably be granted immunity if conditions are attached, such as reducing the number of number airport slots.
Eiji Shiomi, professor of transport economics at Chuo University, said it is still to early to judge if a Delta-JAL tieup would get immunity.
But “my opinion is that the immunity would be granted in the case of the JAL-Delta tieup under some conditions,” Shiomi said. He said research has indicated airfares tend to rise if major airlines occupy larger shares at international gateways, but overall benefits for consumers would likely be greater because it would offer better networking.
It would also be beneficial for consumers to be able to use the seamless service that would be provided by a Delta-JAL partnership, such as jointly operated flights.
“It cannot be said that a Delta-JAL partnership would harm consumers,” he said.
ANA wants level field
All Nippon Airways Co. President Shinichiro Ito said Thursday that ANA wants the government to secure fair market competition if public funds are injected into Japan Airlines Corp. under government-backed rehabilitation.
“We have been stressing that it is important to secure a fair competitive market environment. So we may make some specific appeal (to the government),” Ito told reporters at ANA headquarters in Tokyo, adding the carrier has yet to decide concrete steps.
Meanwhile, Ito denied recent media reports that ANA proposed to the government taking over JAL’s international flights during the bankruptcy procedure. ANA has no such intention at this point, he said.
However, according to Ito, the transport ministry has already informed ANA that it might ask for help from the carrier if JAL’s flight operations are disrupted during its bankruptcy process.
“If we are requested, we will do our best,” said Ito.
Transport minister Seiji Maehara said the government would try to avoid any disruption to JAL’s flight operations.
JAL is expected to file for bankruptcy under the Corporate Rehabilitation Law next week, and the reconstruction plan is likely to include cutting a large number of jobs, domestic and international flights, as well selling off assets.