Narita landing rights at centre of Japan AirlinesÆ alliance decision

An air treaty between Japan and the US that was signed more than 50 years ago could be behind the Japanese government's reported preference for Japan Airlines (JAL) to switch alliances and join Delta Air Lines in Skyteam.

"The [Japanese] government is deeply concerned with the open sky policy between Japan and the US," said Hajime Tozaki, professor of transport at Tokyo-based Waseda University's organisation of Asian studies. "The [former] air transport treaty between the US and Japan has been unfair. The main issue for the government is to reduce the share of slots at Narita Airport held by US airlines."

Ever since the 1952 Civil Air Transport Agreement between Japan and the US, two American carriers have been able to fly via Japan into Asia. This provision, created when aircraft could fly far shorter ranges than they can today, gave US airlines a highly sought after right that few countries grant carriers from other nations. Today, despite the vast improvements in aircraft technology, Delta and United Airlines still hold these rights and, combined with other US carriers, control a third of the available take-off and landing slots at Japan's busiest international gateway, Narita Airport near Tokyo.

The open skies agreement between Japan and the US that was announced this past December will not change the existing "beyond rights" or slot allotments. What it will allow is for unlimited air services between Japan and the US by any airline of either country as long as they can acquire the necessary slots.

JAL is currently part of the Oneworld alliance with American Airlines. Since last fall, American and Delta have offered the Japanese carrier competing bids for its allegiance, including equity investments and cash for staying or joining their respective alliance. A decision is expected this month and could come as soon as today.

Tozaki said that if the government were to push JAL to align with Delta, it would likely ask that the US carrier relinquish some of its Narita slots and rights to fly beyond Japan into Asia. However, Delta would be in a good position to receive new international slots at Tokyo's Haneda International Airport, which is closer to downtown than Narita, as a symbol of the airport's new "international" status, he continued.

Aligning with Delta could be both good and bad for JAL and Japan. "If Delta wins in this race, the balance between the three alliances will be lost," said Tozaki. "The choice [of airlines] for the Japanese people will be reduced." He said JAL, which reportedly will drop at least 34 routes as part of its bankruptcy restructuring, could be asked to cut trans-Pacific services to the US -- one of Japan's largest international markets -- and to beef up services to Asia.

Makoto Murayama, a senior analyst at Nomura in Tokyo, agrees with Tozaki that slots and rights to fly beyond Japan could be one reason for the government's preference for Delta and Skyteam, but said it is unlikely to be the only reason. "A Delta-JAL alliance would have the largest share of trans-Pacific traffic," he said. "By joining Delta, JAL would receive more traffic and [hopefully] recover faster."

American currently has slots for 35 flights per week (or five daily flights) at Narita Airport, but no rights to fly beyond the airport into Japan. If JAL were to stay in the Oneworld alliance with American, the Japanese government would have no leverage to reduce the number of slots US carriers have at its main airport.

What has not come up in the discussions about the Japanese government's decision-making process is whether or not JAL and its future alliance partner would be able to receive antitrust immunity for flights between the US and Japan. This issue has been hotly debated in the US press and argued about by both American and Delta, but in Japan it appears to have taken a back seat to reviving the country's flag carrier and to reducing the hub operations of US carriers at Narita Airport.

The government of Prime Minister Yukio Hatoyama is gambling considerable political capital on JAL. By allowing the airline to enter into bankruptcy last month, it is letting one of Japan Inc's largest and best known brands risk insolvency. Minister of transport Seiji Maehara has been quoted as saying that the government is not trying to find a solution for the airline, but with so much on the line for the four-month old administration, JAL's return to profitability is almost a must for the government.

"The Japanese government injected taxpayer money [into JAL]," said Murayama. "They can't afford for them to fail again."

The final decision of whether JAL stays in Oneworld with American or switches to Skyteam with Delta will ultimately be made by the airline's management and the Enterprise Turnaround Initiative Corporation (ETIC), which is acting as trustee of the airline while it operates under bankruptcy protection. The opinion of the airline's new chief executive, Kazuo Inamori, who officially starts today, is unknown, but he is reported to agree with the bureaucrats at Japan's ministry of land, infrastructure, transport and tourism in preferring Delta's offer.

JAL's current management reportedly prefers to stay part of Oneworld. This preference could be due to any number of reasons, including a Japanese disinclination for sudden change and the cost that switching alliances would place on the bankrupt airline. A switch to Skyteam would mean changing everything from its reservation system to rebranding its aircraft.

"Senior management's predilection to remain with Oneworld has been over-ridden by the government and the investors providing financing," said Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation. "The creditors and owners of JAL should not be making calls on the airline's operational future."

However, asked what airline he thought JAL should form an alliance with, Harbison said he preferred Delta.

Of course, it's not over until the fat lady sings, or in JAL's case, until Inamori and the ETIC decides. Sources say American and Delta met with Inamori this past Thursday in Tokyo to discuss their respective alliance offers. Now, after a fierce, several month-long bidding war in the midst of an industry-wide slump, all the parties can do is sit back and wait for the Tokyo bureaucrats to make their decision.