January 4, 2010 9:57 pm

JAL/Delta alliance could have trouble receiving ATI approval, experts say

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An alliance between Japan Airlines (JAL) and Delta Air Lines may encouter difficulty receiving anti-trust immunity (ATI) from US competition authorities, lawyers and academics well-versed in the history of international airlines told dealReporter.

“We must recognize that anti-trust cultures between Japan and the US are significantly different,” Waseda University professor Hajime Tozaki, an aviation industry expert, said. “Japan is quite generous with anti-trust approvals but JAL might be frustrated by extremely strict US competition regulations”.

“Also, the risk of changing an alliance partner is considerably high because of the leakage of classified information and the considerable time it would take to complete the integration,” Tozaki added.

On 1 January, in an interview with the Asahi newspaper, Haruka Nishimatsu, JAL’s president, said an alliance with Delta held an advantage over one with American Airlines (AA). On Monday, 4 January, Yomiuri Shimbun reported that JAL and the state-sponsored Enterprise Turnaround Initiative Corp (ETIC) had decided JAL would team up with Delta. Both JAL ad ETIC immediately released statements to say nothing had been decided. A spokesperson for AA said the US airline continued to negotiate with JAL over a possible alliance.

Nonetheless, a JAL executive said the group’s management might now be inclined to favor Delta over American. The rationale would be that teaming up with Delta could offer better prospects for future growth, compared to a partnership with AA. The latter would involve TPG, fuelling concerns that ultimately the private equity house could seek some level of management control.

Tozaki, however, said that almost no one at JAL or within the government has paid attention to the difficulty of obtaining anti-trust approval. “They have worried only about how much Delta and American would be able to invest in JAL. There is a complete lack of understanding on the complexity of this issue,” Tozaki said.

AA argues that Delta’s Sky Team controls 62% of the Japan-US market and a combination between JAL and Delta would raise serious competitive issues.

To counter this argument, Jeffrey Shane, a legal advisor to Delta, said in early December that Pacific beach market flights, such as Tokyo-Honolulu and Tokyo-Guam, are largely irrelevant to the US Department of Transportation’s competition analysis because these markets cater primarily to Japan-origin leisure travelers and have an exclusive Japan point of sale component.

Bruce McDonald, an antitrust lawyer at Jones Day, argued, however, that “the US antitrust analysis does not distinguish between markets in which most of the passengers are American citizens or most of the passengers are non-American citizens.”

In mid-December, when the Japan-US open skies agreement was concluded, Japan’s aviation bureau issued a letter to the US government saying that ATI approval is needed by October 2010 when Haneda Airport’s fourth runaway will be commenced.

“This is an aggressive timetable. Today, major ATI applications, such as AA/British Airways proposals, still remain undecided,” said Andrew Steinberg, another anti-trust lawyer at Jones Day. “The AA/BA case is a good example. Contested cases are rarely decided in 10 months.”.

AA and BA submitted ATI applications to European and US regulators last year. But in late December the US Department of Justice claimed that BA’s proposed alliance with AA could lead to 15% higher fares and proposed that BA and AA divest landing and take-off slots.

In mid-December, Delta advisor Shane said DoT had approved all 28 ATI applications ever presented, reasoning that the JAL/Delta alliance should therefore be approved. However, Steinberg noted that the list excluded three denials – Sky Team 1 and the first two attempts by American and BA. It also included nine cases that were heavily opposed but approved with conditions.

Meanwhile, Jones Day’s McDonald said that JAL moving to Sky Team would create a lopside duopoly between Sky Team with 62% and Star Alliance with 31%. “Moving JAL to Sky Team leaves only two or one competitor in the market. Prices would increase between the US and Japan and between the US and Asian markets,” McDonald said.

On 4 January, the Japanese government asked the state-run Development Bank of Japan (DBJ) to double its credit line to JPY 200bn (USD 2.1bn). A source close to the situation said that the increased credit line would be good for another month or so until the state-sponsored ETIC makes its decision on JAL’s restructuring plan, including a court-backed rehabilitation similar to Chapter 11 in the US.

In addition, JAL could be forced to abandon its international routes, which had been the source of the Japanese airline’s major revenue losses. “Yes, it would make sense to align with Delta because JAL and Delta will be complementary if JAL abandons its international routes,” the JAL executive said.

However, MIT professor William Swelbar said JAL would be marginalized if it joins with Delta because US flyers would no longer find the need to transfer via Japan.

JAL shares jumped 31.34% on Monday in Tokyo to close at JPY 88.

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