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In Battle for JAL, Antitrust Ruling Is Key

The battle between Delta and American for a partnership with Japan Air Lines is now focused on how the U.S. Justice Depatment may rule on Delta's antitrust request.
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) -- In the battle between


(DAL) - Get Delta Air Lines, Inc. Report




for a partnership with JAL, the focus has shifted.

Previously, the world's largest and second largest airlines sought to outbid each other. Now, they are debating whether U.S. regulators would approve a joint request by Delta and JAL for antitrust immunity across the Pacific, if one were to be filed.

As an example of the intensity of this debate,

American CEO Gerard Arpey declared last week

that "it would make an absolute farce of the Open Skies process" if regulators approve the Delta request.

Why so much attention to predicting the DOJ's intent? Because the Japanese decided they had enough of the bidding war, which turned the nation's flag carrier into an auction prize for two big U.S. companies.

Both airlines had offered more than $1 billion before the Japanese rebelled, saying they did not want any foreign investment in JAL. American's bid even includes participation by private equity firm TPG Group. Aviation consultant Robert Mann suggests this might have pushed the Japanese over the edge as far as the idea of seeking outside investors.

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It is bad enough that two U.S. carriers can fly beyond Japan's principal airport, an internationally unique arrangement enabled by a post-World War II agreement, and that a U.S. airline would own a portion of their flag carrier. Now, he says, in a final insult, somebody wants to bring in a U.S. "vulture player."

As Delta bids to replace American as JAL's partner, the prize is not JAL itself, but rather JAL's pre-eminent position at Tokyo's Narita Airport, Asia's most important hub. Meanwhile, the U.S. and Japan have reached a preliminary Open Skies agreement, and some Japanese media reports have said the agreement includes guaranteed antitrust immunity for Japanese carriers JAL and ANA and their partners.

Oddly, media reports from Japan invariably indicate that JAL is either about to close a deal with Delta, cannot wait to close a deal with Delta or, in the latest case, has committed to a deal with Delta and has a stamp of approval from the U.S. Department of Justice. Either the reports are generally true, if a little ahead of themselves, or someone in Tokyo believes that press leaks are the way to go if you want to influence policy-making and have no better way to make your point.

The U.S. Transportation Department is not pleased by the suggestion that it might have guaranteed a favorable ruling on antitrust immunity. "It is a longstanding, and widely understood, policy of the department to decide every antitrust immunity application on its own individual merits," the department said Monday, in a prepared statement. "Moreover, the U.S. government never makes commitments to foreign governments about the outcome of any pending or potential proceeding." The DOT has final say on antitrust immunity, in consultation with the DOJ.

Empirically, it seems obvious that if Delta were to replace America as JAL's partner, then Delta would have an inordinately large share of the critically important U.S.-Japan market.

Delta already operates a small hub at Narita.



has both a Narita hub and a partnership with ANA, while American partners with JAL. As a result, the market is split between the world's three global aviation alliances, with each alliance claiming roughly a third. Were Delta/Skyteam to have two thirds, and United/Star to retain one third, little would be left for American/Oneworld.

Delta's case is less empirical, more analytic. First, Delta has said, the proposed Open Skies treaty would open Tokyo's Haneda airport to trans-Pacific flights, albeit at undesirable times, enabling American to boost service. Narita would still have two competing hubs, ensuring competition. And certainly, it is not DOJ's job to select a foreign carrier's alliance partner.

Both sides have their own numbers. Delta says its partnership with JAL would command just 44% of U.S.-Japan traffic, not the 62% that American claims. To get to this lower number, Delta considers only mainland traffic. It disregards traffic from Japan to beaches in Hawaii and Guam, saying that those markets are highly competitive; that Japan is the point of sale, so U.S. travelers are not impacted, and that DOJ would not even consider the beach markets in its ruling.

It may well be that regulators do not choose foreign carriers' alliance partners. But in fact, Mann says that JAL's eventual decision could be heavily influenced by a pending ruling on whether to grant American and its partner,

British Airways

, the same transatlantic antitrust immunity that American's competitors already have. "That speaks to the viability of Oneworld as an alliance," he says.

-- Written by Ted Reed in Charlotte, N.C.