Japan Airlines Corp (9205.T) is likely to opt for a tie-up with Delta Air Lines Inc (DAL.N) or AMR Corp's (AMR.N) American Airlines, among rivals seeking to invest in the loss-making carrier, if Japan and the United States can reach an "open skies" agreement.
The U.S. airlines, and others including Europe's Air France-KLM (AIRF.PA), are chasing a stake in Asia's biggest carrier by revenue to help them grow in China and get access to JAL's other Asian routes via code-sharing agreements.
The talks came as the cash-starved industry received another reminder of the damage recession is inflicting on its finances.
The International Air Transport Association raised its forecast for 2009 industry losses by $2 billion to $11 billion as weak passenger and cargo traffic hits revenue. [nWBT013153]
Still, some airlines have already reported signs that a slump in passenger and cargo traffic is beginning to correct itself, feeding hopes of economic recovery later this year and sparking a rebound in shares of carriers such as Air France-KLM.
The Franco-Dutch carrier's shares rose more than 2 percent on Tuesday before shaving gains slightly on the IATA report.
Shares in Delta and American parent AMR rose early about 5 percent. JAL shares in Tokyo fell 3.4 percent in a flat market.
Airlines have been severely damaged by the recent economic crisis and volatile oil prices, coupled to a lesser extent with health fears over swine flu, and those that can afford it are striking deals to lay claim to future sources of traffic growth.
"This would be a strategic investment and only a minority stake, but it does bring some recognition that the biggest area of growth going forward will be Asia," said Stephen Furlong, aviation analyst at Davy Securities in Dublin, of the JAL talks.
One source, not authorised to discuss the talks publicly, said the carriers were each discussing investing $200-300 million in JAL for a minority stake and a code-sharing deal. Continued...
Asked if JAL would choose either Delta or American as a partner, CEO Haruka Nishimatsu told reporters on Tuesday: "Yes, I think so, if an open skies agreement looks likely."
That would echo a recent liberalisation move between the United States and Europe and allow closer cooperation on flight scheduling and profit-sharing among U.S. and Japanese airlines.
Air France-KLM (AIRF.PA), formed from a Franco-Dutch merger in 2004, is also in talks to invest in JAL, said the source who was familiar with the matter. Air France-KLM declined comment.
Kyodo news agency said Korean Air (003490.KS) was also in talks with JAL.
Investing in JAL would bring access to Haneda, the world's third-busiest airport by passenger numbers.
Both Haneda and Tokyo's Narita international airport are expanding, adding international flights and airline slots.
The decision by JAL, which is undergoing a state-supervised restructuring after years of losses, could reshape the alliances that dominate the global airline industry. The company said it hoped to wrap up the capital tie-up talks by mid-October.
ONEWORLD
If JAL opts for investment from Delta or Air France-KLM, it would be defecting from the Oneworld Alliance, a move analysts say would deal a huge blow to a group that includes British Airways (BAY.L), Cathay Pacific (0293.HK) and American.
OneWorld would lose JAL's more than 400 flight slots a week at Narita, twice those of Japan's No.2 carrier All Nippon Airways (ANA) (9202.T), as well JAL's growing business in China.
ANA is in the Star Alliance, with Air China Ltd (601111.SS), Singapore Airlines (SIAL.SI), Lufthansa (LHAG.DE) and others.
"Losing JAL would mean OneWorld suddenly has to rely more on American Airlines' few slots in and out of Narita," said Nomura analyst Makoto Murayama. "American (AMR) in particular would be harmed, and is likely to fight that at all costs."
American Airlines, which is seeking U.S. approval by next month to form a transatlantic alliance with BA and Spain's Iberia (IBLA.MC), is the No.4 international carrier at Narita, with about 70 slots a week. Northwest Airlines, acquired by Delta last year, is the leading foreign airline at Narita.
Analysts said JAL would have to weigh the advantage of teaming up with Delta, the world's biggest airline, against the significant cost of leaving OneWorld.
"If you just look at what the companies can offer, then Delta would make more sense as an ally because it has more services between Japan and North America," Credit Suisse analyst Osuke Itazaki said, adding that a tie-up with Air France-KLM would not expand JAL's network by much.
Delta and Air France-KLM are members of SkyTeam, with Korean Air (003490.KS) and Russia's Aeroflot (AFLT.MM). JAL has a separate flight incentive partnership with Air France-KLM.
BIG JOB CUTS
JAL prefers American Airlines because of the Oneworld alliance, the source said, but the Japanese government prefers the financially healthier Delta or Air France-KLM.
JAL lost about $1 billion last quarter and is under growing pressure to raise money and slash costs after securing a 100 billion yen ($1.1 billion) government-backed credit line.
The airline has forecast a net loss of 63 billion yen ($693 million) for the year to end-March.
For related graphic, click: r.reuters.com/hak66d
At end-March JAL had total liabilities of 1.44 trillion yen, with the Development Bank of Japan its biggest long-term lender.
As it looks to cut operating costs 30 percent, CEO Nishimatsu said JAL faced its "largest-ever downsizing" through 2011, with plans to cut 6,800 jobs, or 13 percent of its staff.
The carrier will also cut its overseas routes to below half its total flights, Transport Ministry official Yasuhiro Shinohara told reporters. (Additional reporting by Mariko Katsumura and in TOKYO and Jui Chakravorty in New York, John Crawlery in Washington, Tim Hepher in Paris, writing by Mayumi Negishi, Editing by Ian Geoghegan) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) ($1=90.90 Yen)
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