Japan Air Said to Near Delta Deal, Dropping American

Japan Air Said to Near Delta Deal, Dropping American

Jan. 18 (Bloomberg) -- Japan Airlines Corp., facing possible bankruptcy this week, may drop partner American Airlines for an accord with Delta Air Lines Inc., according to two people familiar with the situation.

Delta is unlikely to take a stake in JAL and will only pay costs resulting from the switch, said the people who declined to be identified as the talks are private. The U.S. carrier earlier offered JAL $300 million in compensation for lost sales as part of a package designed to lure the Tokyo-based airline into its SkyTeam from American’s Oneworld.

Atlanta-based Delta has sought a tie-up with JAL to access the carrier’s networks in Japan and China. A state-affiliated fund is due to announce a turnaround plan for JAL tomorrow, which will likely include seeking court protection, three people familiar with the matter said earlier this month.

“Delta should be the first priority for JAL,” said Yasuhiro Matsumoto, an analyst in Tokyo at Shinsei Securities Co. “JAL will be able to reduce more unprofitable international routes” through cooperation with Delta than American.

Delta and JAL intend to apply by mid-February for antitrust immunity to cooperate on transpacific routes, pending a final decision by JAL’s incoming management, said the two people. JAL posted a 131 billion yen ($1.4 billion) first-half loss.

American, Delta

JAL hasn’t yet decided between an accord with Delta or American, said spokesman Kojiro Waki. Delta spokeswoman Ryoko Matsumoto said talks with JAL are on-going. She declined to comment further.

American spokeswoman Mary Frances Fagan said suggestions JAL would switch to Delta were “unsubstantiated.” The carrier is “eager” to submit a venture plan it has worked on with JAL for some months to the appropriate regulators as soon as possible, she said by e-mail. The plan guarantees JAL $300 million of revenue over the next three years, she said.

Delta and its SkyTeam partners in November proposed a $1 billion package to JAL, including buying a $500 million stake. Delta also offered to cover lost sales and to provide $200 million in financing. American and partner TPG have offered to invest $1.4 billion in JAL.

JAL fell 29 percent, or 2 yen, to a record low close of 5 yen as of the end of trading in Tokyo today. The stock has tumbled 93 percent this month. The yield on JAL’s 10 billion yen in 2.94 percent notes due 2013 reached 69.7 percent on Jan. 15 from 15.6 percent on Dec. 30, according to Japan Securities Dealers Association prices on Bloomberg. The notes yielded about 9.5 percent a year ago.

JAL, Delta Talks

JAL and Delta executives confirmed the plans at a Jan. 15 meeting in Tokyo, the people said. All Nippon Airways Co., Japan’s No. 2 carrier, has applied for antitrust immunity to cooperate on Japan-U.S. routes with Star Alliance partners, UAL Corp.’s United Airlines and Continental Airlines Inc.

American has said that Delta and JAL would struggle to win approval to cooperate on U.S.-Japan routes, as their market share would be too large. At present, the market is about equally divided among SkyTeam, Oneworld and Star.

Should JAL choose Delta, they would have 58 percent of service including flights from beach locations such as Hawaii, Delta has said. American has said its share would shrink to 6 percent without Japan Air.

Delta flies to 23 cities from Tokyo, including nine year- round in the U.S., and Asian markets such as Beijing and Shanghai. American and JAL now jointly market flights between Tokyo and five U.S. cities, plus 15 Pacific destinations.

Delta has said its SkyTeam alliance would provide JAL with 3.2 million passengers a year, compared with the 400,000 the Asian carrier gets now from American.

Government-affiliated Enterprise Turnaround Initiative Corp. of Japan will make a final decision on what assistance to provide to JAL tomorrow, Transport Minister Seiji Maehara said last week.

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