Summary
JAL's somewhat precarious state has fueled a frenzy for control of the number two Japanese Carrier. With Star Alliance firmly entrenched
with ANA - a win for either remaining consortium could significantly alter the balance of global airline alliances - indeed possibly the make up of the Global Airline Market.
Analysis
Legacy Carriers were clearly impacted by the recent downturn. Far more so than the Low Cost Carriers. IATA's prognosis of a continuing loss of traffic/revenue and a 2009 global loss for the world's airlines of $11 Billion (recently revised from $9 Billion) can be seen more starkly in the Asia Pacific market than elsewhere in the world.
This analysis evaluates some of the issues and why the battle between the two lesser Alliances - OneWorld and Skyteam for JAL may be a precursor to a total realignment of the world's airline market - and not necessarily a good one.
The legacy airlines have almost universally cried for external help when the going gets rough. After 9/11 Billions in aid was poured into the airlines by governments around the world. With the global recession taking deep hold the buckets of money left available for bailing out airlines has been largely depleted by the need to prop up the banking system. Good or bad - this is a realistic view of the situation.
The legacy carriers have frequently sought refuge in merging or government protection or one sort or another - sometimes both. The premise that bigger is better has driven these airlines to create monolithic organizations. Most recently Delta and Northwest merged to create the world's largest airline - surpassing Air France and KLM the merged entity that formerly occupied the top spot. But has this resulted in a better product or better financially stronger resulting corporate entity? Probably not - there is little evidence to support this - the airlines' argument is that things would have been substantially worse if they had not been allowed to merge.
Now comes one of the world's largest airlines (by RPKs) JAL who has suffered an extraordinaly loss. Across the sea to Hong Kong the CEO of OneWorld partner Cathay Pacific is frequently quoted as saying that the sky has fallen and its not getting better any time soon. JAL is therefore confronted with a dilemma. What to do? They have appealed for a merger both with Delta and American. And this is the stark reality of the situation. Both of them represent a realignment. Let us walk through the possibilities.
Firstly the Japanese Government is unlikely (particularly with the new centrist government) to want to bail out JAL in any way with large amounts of cash. However it could organize a local rescue mission - but this would only delay a certain inevitability that JAL needs to reorganize itself and then must be aligned with someone.
If American (from the OneWorld camp) wins - then it is essentially status quo. JAL will move closer to American and likely BA and Qantas. Cathay Pacific will continue its tilt towards greater China. So essentially this is a status quo. Nothing much will fundamentally change in this scenario. As JAL is actually only a recent inductee into OneWorld (April 1st 2007) it still has some opportunities to gain from cross feed in the alliance it currently sits.
However if JAL moves to Delta - there will be a major realignment. Skyteam would wrench a big part of OneWorld out of its both psyche and market footprint. Given the performance of the Star Alliance with significant overlap of routes and services (with little or no competitive concerns raised by respective authorities), it is likely that Skyteam could keep its other Asia partners in line. China Southern is somewhat weak and has its own problems at the moment. Korean seems to be resurging but remains cautious. However the co-existance of Asiana and ANA in Star would be a model to behold. But Japan one of the world's largest originating markets in its own right represents a hole for Skyteam today. Thus realigning JAL to Skyteam would represent a big win.
And don't forget Skyteam is still smarting over the defection of Continental to Star.
Thus it can be clearly seen that the value to Skyteam to ascend over OneWorld and rival Star is compelling. Thus the battle will be interesting and will definitely be a long drawn out one.
But allow me to add a further view point. Perhaps Alliances have indeed reached their useful point and are at a plateau. Thus either a stay in OneWorld as a result of an alignment with AA or a realignment going with DL is not necessarily in the best interests of the consumer.
Perhaps this may be the catalyst for the US Congress to actually start to look at airline competition - something it has failed to tackle in recent years.
I would definitely put money on JAL going with one of these two options. There is no white knight or secret Keiretsu waiting anywhere else.
Timothy O'Neil-Dunne consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
