JAL shares slide to record low; Delta offers support

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Shares in Japan Airlines slid to a record low after the transport minister rattled investors by saying bankruptcy was still a possibility, even as US carriers lined up with offers of financial support. Delta Air Lines said it and partners in the SkyTeam alliance were ready to offer USD 1 billion, including a USD 500 million equity investment, in return for JAL defecting from the Oneworld alliance and its partnership with American Airlines.

The offer follows news last week that private equity firm TPG was considering partnering with American Airlines on an investment in JAL. The Nikkei newspaper said on Wednesday that investment could be as big 100 billion yen (USD 1.1 billion). Delta and American have been courting JAL for the past few months, eager to gain access to its network to fast-growing Asian markets and a stronger foothold in Japan.

But the talks have been overshadowed by much larger problems facing Asia's largest airline by revenue. JAL is seeking a state bailout and, by a previous government task force estimate, needs 300 billion yen in capital, or six times the offer from SkyTeam.

Shares of JAL closed down 3.9% at 98 yen after touching 94 yen, their lowest since relisting in 2002, in a sell-off triggered by comments from Transport Minister Seiji Maehara that a court-led bankruptcy was an option for JAL. "I have never said a court-led bankruptcy is impossible. I have just said that we will not allow JAL to fail," Maehara told parliament, explaining that he is ruling out a liquidation as opposed to a rehabilitation led by the courts.

JAL, choking on USD 15 billion in debt and crippling pension costs, has applied for assistance from a government-backed turnaround entity that is expected to take until January to study its assets and decide whether it is worthy of public funds. JAL's domestic rival All Nippon Airways Co is also struggling. Moody's said on Wednesday it had cut its long-term ratings on Japan's No 2 carrier by two notches to Ba2, a speculative or "junk" grade.

Delta and American have both pitched themselves as the ideal partner. Delta emphasises its size, which it says would bring more passengers to JAL's network, while American has highlighted the risks of leaving Oneworld and of regulatory hurdles. "The best scenario for JAL is to rebuild itself with help from the government and foreign airlines," said Kotaro Toriumi, an airline analyst and teacher at the Faculty of Tourism at Josai International University. "But making a fresh start after a court-led bankruptcy could be an option too."

OPEN SKIES
In addition to USD 500 million in capital from SkyTeam members, Delta said it would offer USD 300 million in guarantees on any short-term revenue loss from switching alliances and USD 200 million in asset-backed financing. Delta President Edward Bastian told a briefing in Tokyo that JAL could gain USD 400 million in annual revenue by joining hands with Delta given that it carries several times the number of passengers between the United States and Japan.

American Airlines has estimated JAL would lose USD 500 million in revenues over a two-year transition period if it left Oneworld but stood to gain USD 100 million in annual sales if they formed a venture to work closely on pricing, scheduling and marketing. Such close cooperation is contingent upon the implementation of an "open skies" treaty to liberalise travel between the United States and Japan. The two governments are in negotiations and hope to finalise a deal by the end of this year.

"Improvements to costs and the balance sheet alone won't provide the kind of long-term stability that JAL needs to thrive out into the future. It must have top-line revenue growth as it restructures," Bastian said. American has also argued that JAL and Delta would have difficulty clearing regulatory hurdles if they sought antitrust immunity under open skies, as it would give SkyTeam control of the bulk of air traffic between the United States and Japan.

Toriumi said a tie-up with the SkyTeam would make more sense because it would allow JAL to cut costs. "Delta has many routes from Japan to Southeast Asia, so JAL could become more efficient by cutting its own routes," he said.

American has touted TPG's experience investing in the airline industry, which includes its role in helping fund Continental Airlines' emergence from bankruptcy in 1993. The Nikkei said TPG was willing to buy up to 100 billion yen in JAL shares. But it is unclear if such a large investment would be possible with current laws limiting the total stake of foreign entities in an airline to one-third of voting rights.

A source familiar with TPG's thinking told Reuters after the Nikkei report that it was still in the early stages of mulling an investment and had not made any concrete decisions. Delta's partners in SkyTeam include Air France-KLM and Korean Air Lines Co.