**Reports Of Delta/JAL Deal Add Wrinkle To US-Japan Sky Talks **
Chicago - It appears that as skies open, companies may be closing in on deals.
With the valuable U.S.-Japan market on the verge of being opened to greater competition, reports that Delta Air Lines Inc. (DAL) plans to buy a stake in Japan Airlines Corp. (9205.TO) gives regulators and airline alliances another item to consider and act upon.
Initial talks in Washington this week, scheduled to end Friday, have been aimed at opening up airline competition in the trans-Pacific market.
Although business travel has fallen sharply with the global recession, airlines fight fiercely for routes to serve global business travel, their biggest money-maker. As well, airlines compete in a global market where regulations bar cross-border mergers and limit where foreign carriers can fly.
Sources told Dow Jones Newswires that Delta, the world’s largest airline, is in talks with Japan Airlines, that country’s biggest carrier, to buy a stake in the financially strapped Japanese airline. The discussions are expected to take several months, a source said. Japanese media reported that Delta plans to pay tens of billions of yen to become JAL’s biggest stakeholder. Delta hasn’t commented on the reports.
Along with many other airlines, both Delta and JAL are losing money this year. JAL has begun financial restructuring, including seeking aid from the Japanese government.
An investment in JAL would give Delta a bigger beachhead in Tokyo, and also force changes to major global airline alliances.
The proposed shakeup comes at a time when officials in the U.S. and Japan taking rare steps toward loosening market regulations. A new bilateral treaty, which could take effect as early as next year, would open the Tokyo market to more international flights.
Tokyo is home to two major airports, Narita and Haneda. A long-standing treaty between the U.S. and Japan allows a few carriers, Delta, UAL Corp.'s (UAUA) United Air Lines, and FedEx Corp. (FDX) in the U.S.; and Japan’s two biggest airlines, JAL and All Nippon Airways Co. (9202.TO), to fly between Narita and U.S. cities.
A new agreement would open the market to more airlines, for the first time permitting limited international flying between Haneda and the U.S.
Japan said earlier this year that it wanted to open its tightly regulated market. Its proposal allows 40 daily international flights at Haneda, including 20 for Japanese carriers and 20 for foreign airlines. But U.S. carriers are concerned that the proposal allocates just four daily flights to the U.S.
An agreement is likely to come about, according to industry-watchers. A major new open skies treaty implemented last year between the U.S. and the E.U. successfully opened London’s Heathrow International Airport to new competition, which both governments have said will add customer choice, create new jobs, and generate millions of dollars in additional revenue.
A deal between the U.S. and Japan brings questions for airlines as they jockey for position: with international mergers off the table, airlines have formed global alliances, falling mostly in three main groups, to share ticketing and other operations, cutting costs and adding revenue.
A Delta stake in JAL would bring JAL into the SkyTeam alliance, giving SkyTeam a Japanese partner, something it doesn’t now have. JAL would drop out of the Oneworld Alliance, with key partners American Airlines, a unit of AMR Corp. (AMR), and British Airways PLC (BAIRY).
All Nippon is part of the Star Alliance, which also includes United and Lufthansa. The Japanese government is looking to get U.S. antitrust immunity for All Nippon, a status enjoyed by other Star members.
Assuming a successful deal with Delta, JAL is going to need more financial help, according to a Tokyo analyst. “An investment of only Y10 billion ($108.7 million) or so would be just a drop in a bucket for JAL.”
Granted, they are only looking at buying stake in JAL, but DAL just bought NWA, giving them a huge Far East presence. Adding JAL may be too much for them at the moment, as they are bleeding money, and while might help JAL (they just posted a $1billion loss this quarter), both are still in a world of hurt, especially when DAL could help out their employees with such money.
Second, Japan may not like their flagship airline being owned by an American company (I remember reading somewhere that it was a 65% stake that DAL was looking for).
Lastly, if this goes through, this will seriously hurt AAL and BAW as they might lose a OneWorld partner needed for that area.