Q+A-Why are Delta and American Airlines courting Japan Airlines?

Mon Sep 14, 2009 5:17am EDT

By Nobuhiro Kubo

TOKYO, Sept 14 (Reuters) - Delta Airlines (DAL.N: Quote, Profile, Research, Stock Buzz) and American Airlines are in rival talks to invest in Japan Airlines Corp (JAL) (9205.T: Quote, Profile, Research, Stock Buzz) and form an operational alliance with the loss-making carrier, Asia's largest airline by revenue. [ID:nT277410]

Following are questions and answers on how JAL got here and why Delta and American are keen to invest in it.

WHY IS JAL SEEKING OUTSIDE INVESTORS?

JAL is headed for its second straight annual loss in the year to March 2010, hit along with other airlines by a downturn in global travel in the wake of the financial crisis.

The slump has exposed JAL's bloated cost base, including generous pension payouts to a growing group of retirees.

JAL secured a 100 billion yen ($1.1 billion) state-backed loan in June but needs more money to fund a restructuring plan that must be submitted to the government this month. It may seek as much as 250 billion yen more through a mixture of equity and debt financing, the Nikkei business daily reported.

Issuing stock would help bolster its shareholders' equity ratio, which fell to around 9 percent at the end of June, well below the 20-30 percent that is considered a healthy level for airlines. It has about $9 billion in interest-bearing debt.

By forming a capital tie-up with either Delta or American it could also secure a viable business partner to help it weed out unprofitable routes and lower its operating costs.

WHY WOULD DELTA INVEST IN JAL?

Delta, the world's largest airline, wants ties with JAL to help it expand in Asia. Delta operates a hub at Japan's Narita airport, where it operates 21 international routes from, including nine to other points in Asia. That could be joined with JAL's much larger network of 258 international routes from Japan.

Partnering with JAL would also allow Delta to tap the growth potential of Haneda, Japan's main domestic airport. Haneda is scheduled to open a fourth runway next year as part of an expansion expected to increase annual capacity by 40 percent by 2012.

Delta or American would likely invest as part of a group of investors that could include trading houses and aircraft makers.

WHAT WOULD AMERICAN GET OUT OF DEAL WITH JAL?

American Airlines, a unit of AMR Corp (AMR.N: Quote, Profile, Research, Stock Buzz), is also in talks to invest in JAL with the aim of expanding their existing business ties while also blocking a deal with Delta, which could lead to JAL defecting to a rival frequent-flyer group.

American and JAL have had a code-sharing agreement for a decade and both are members of the Oneworld alliance. Delta would likely persuade JAL to join the rival SkyTeam network, which would weaken American's presence in the Asian market.

American has four international routes from Tokyo on its own planes, all to North America. In addition, American has code-sharing agreements for 26 international flights on JAL planes. American would look to expand code-sharing with JAL.

American has also proposed forming a joint venture through which the two would eventually share revenues and offer business customers joint contracts. Both of these hinge on the enactment of an "open skies" agreement between Japan and the U.S.

WHAT ROLE WILL THE JAPANESE GOVERNMENT PLAY?

Japan's transport ministry regulates JAL and therefore could play a key role in which airline chosen as JAL's partner.

Hiroaki Taniguchi, Vice Minister of the transport ministry, was quoted by media as saying on Monday that a tie-up with a foreign carrier could help JAL expand its international network and improve its business, suggesting state approval of a deal.

But some trade ministry officials have been quoted by Japanese media as saying a deal with Delta would make more sense because many of their international routes overlap and JAL could cut more of them to lower costs.

The Democratic Party of Japan, which won an election and is due to take office on Wednesday, could change the situation if it decides to take a harder stance than the outgoing Liberal Democratic Party government, which had put its weight behind a state-assisted revamp of JAL. The Democrats have vowed to place a greater scrutiny on the use of state funds. ($1=90.52 Yen) (Editing by Nathan Layne and Lincoln Feast)