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Behind the Fight for Japan Airlines

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American and Delta are clambering for a piece of the Asian market.

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American Airlines (AMR) and Delta Airlines (DAL) are not waging war over Asia's Japan Airlines to strengthen foreign relations, but to pad their own bottom lines.

In the latest move, American said Wednesday it could again up the ante for JAL from its current bid of $1.1 billion. The US airline, along with the OneWorld alliance, a contingent of 11 airlines, and the private equity firm TPG have tried to make the case that its proposal would be the best solution to JAL's problems: Namely, $15 billion of debt, huge operating costs, tight competition, and its likely fourth annual loss.

"Conceivably there could be a bigger investment made by the Oneworld/TPG/American group depending on the circumstances that have to be worked out with the government and with JAL," said American Airlines Chief Executive Gerard Arpey in press conference Wednesday in Tokyo after a meeting with Japan's Minister of Land, Infrastructure, Transport and Tourism.

American stipulates that its proposition would be the most worthwhile for JAL because it already has a partnership in place under the OneWorld alliance --of which they're both members -- and that JAL would gain another $100 million in revenues annually from the alliance on top of the $500 million it already garners from the pairing.

"American Airlines has a strong interest in seeing JAL succeed because JAL's success ultimately means success for American Airlines," said Arpey. "In short, our interests are aligned."

Yet, American faces a tough argument from Delta Air Lines and its SkyTeam partners, an alliance of 12 carriers, which countered with a $1 billion offer for JAL in November. Delta argues that its Asian presence (it gained a hub outside Tokyo through the Northwest merger) would help it more easily integrate with JAL. American contends this alliance would impede competition in the country, giving only two alliances access to the region.

"Our direct investment offer is worth more than twice to JAL as any other proposal. The difference is even greater when you consider the commercial implications of JAL exiting a superior global alliance with the strongest U.S. network for a less desirable global alliance and US network," added Aprey at the press conference in Tokyo. "We estimate this would cost JAL hundreds of millions of dollars per year."

Yet, it isn't just what American has to offer JAL, but what the Japanese airline can do for the legacy carrier. A recent "Open Skies" agreement between the US and Japan opened up the sky competition (previous arrangements favored certain carriers over others). This would make an alliance between Delta and JAL immune to antitrust regulations. It also paves the way for American to enter the market.

All of the US carriers, legacy and discount alike, have been hit hard by fuel expenses, a slowdown in travel, and technological failings. The best way for each of these airlines to regain footing is to find ways of expanding their international dealings, which can garner premium prices for longer flights. Japan is one of the most attractive and untapped areas of the world for the aviation sector. All of the legacy carriers would benefit from JAL's expansive domestic network. It offers the US airlines a built-in infrastructure, as well as a locally well-known brand name to attach themselves to -- accounting for the high value that each of the carriers is willing to bid.

"AMR has the most to lose and Delta the most to gain if JAL defects from OneWorld to SkyTeam," said JPMorgan analyst Jamie Baker in a recent note.
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