October 01, 2013

Haneda Fights Takes Global Turn

Featuring Patrick M. Cronin

Source: Wall Street Journal

Journalist Phred Dvorak

TOKYO—A spat between Japan's two top airlines has turned into a global business battle, with both American Airlines and British Airways taking the unusual step of warning the Japanese government that a pending allocation of coveted flight slots could crimp their profits if their Japanese partner is shortchanged.

The allocation, which could be decided in the next few days, is ostensibly a domestic matter, involving a divvying of slots between Japan Airlines Co.—American Airlines' and British Airways' partner—and rival ANA Holdings Inc., 9202.TO +1.40% the parent of All Nippon Airways, and a partner with United Continental Holdings Inc.,UAL +2.93% the parent of United Airlines. Historically, the two carriers were awarded equal numbers of slots, but this time some politicians are lobbying to award JAL fewer, or even none.

Japan's powerful and popular prime minister, Shinzo Abe, has criticized breaks granted JAL in recent years under a previous, rival government, raising concerns among JAL's partners he would try to steer the choice against them.

The attempt by American Airlines and British Airways to influence the allocation shows how intertwined the fates of many global carriers have become, as airlines band together across borders to compete in increasingly cutthroat markets. American Airlines and British Airways not only jointly operate some routes with JAL but also share revenue and set prices together.

The slot allocation "will have a direct impact on not only JAL's profitability, but the profitability of JAL's strategic partners, like American Airlines,'' wrote Tom Horton, chief executive of American Airlines parent AMR Corp., AAMRQ +9.49% in a Sept. 25 letter to Japan's transport minister, Akihiro Ota, that was viewed by The Wall Street Journal.

"Any domestic decisions about the allocation will directly impact on our profitability,''Willie Walsh, CEO of British Airways parent International Consolidated Airlines GroupSA IAG.MC +2.20% wrote in a separate letter to Minister Ota dated Sept. 26, also viewed by the Journal.

The warnings underscore how competition in the global aviation industry is increasingly a battle between networks of carriers vying for the best slots at key international airports. American Airlines, British Airways and JAL are all members of the Oneworld alliance, a 12-member group that competes with the 28-member Star Alliance—which includes United and ANA—as well as the 19-member SkyTeam alliance, with Delta Air Lines Inc. DAL +1.42% That means that, increasingly, what benefits or harms one member also affects its partners throughout the world.

"Anything that would impede our ability to access a market relative to a competitor would be harmful—not only to JAL but to us,'' said American Airlines' Mr. Horton, in an interview in early August. He declined to quantify how much impact an adverse decision could have.

The Oneworld alliance currently has a 31% share of international flights from Tokyo's Haneda airport, versus 40% for the Star Alliance and 17% for SkyTeam. That would shift to 20% for Oneworld and 50% for the Star Alliance if ANA is awarded all 20 available slots, a situation Oneworld members say would be bad for competition.

ANA counters that airlines can change alliances—through mergers, for instance—yet slot allocations remain constant. It also points out that other global airports also have imbalances in the number of slots awarded to various alliances, so it isn't a situation that can be corrected by tweaking allocations at Haneda.

The intense lobbying highlights the stakes for the Japanese government as it works to expand access to Tokyo's major airports, which are some of the most capacity-constrained in the world because of restrictions on slots and landing times, according to a September report on Japanese aviation reform from Washington, D.C.-based think tank Center for a New American Security. Mr. Abe has said he hopes to fix those problems and make Tokyo a major air-traffic hub and gateway to Asia. His success in that endeavor—starting with the controversial slot allocation—is being seen as a litmus test for how well he will make good on pledges to revamp highly regulated industries like aviation to unlock new opportunities for growth.

"If handled correctly, Prime Minister Abe and his team can push Tokyo and wider Japan into the 21st century of aviation and in doing so project a Japanese investment climate that is 'open for business,' '' wrote Patrick Cronin, a senior adviser at CNAS and the author of the aviation report.

At stake are 20 new takeoff-and-landing slots for global travel routes at the airport closest to central Tokyo: Tokyo International Airport, commonly known as Haneda. Japan's transport ministry typically split such slots evenly between JAL and ANA, which are roughly equal in size. But ANA has been asking for preferential treatment ever since Japanese government aid helped revive JAL after a 2010 bankruptcy filing. JAL emerged from bankruptcy a year later, and by 2012 was relisting its shares and logging industry-beating operating-profit margins, which it attributed to a slashing of costs and unprofitable routes.

Now many high-profile politicians from Prime Minister Abe himself to Finance Minister Taro Aso are questioning publicly whether the government—or more precisely, the rival party administration that masterminded JAL's restructuring before it lost power to Mr. Abe's administration—gave the airline too much help. "There were a lot of problems in the rehabilitation of JAL," Mr. Abe said in Parliament in February, promising to "review it carefully."

In November, the transport ministry awarded ANA five more domestic-flight slots from Haneda than JAL, after taking into account the supposed advantage JAL got from government aid. ANA's chief executive, Shinichiro Ito, has been lobbying hard for as many as all 20 of the soon-to-be-allocated international slots as well.

"We are saying that we want as many slots as possible,'' Mr. Ito said at a news conference in August. "This is because we have been asking to correct a [competitive] gap with JAL that was created through the restructuring scheme.''

A transport-ministry official said the ministry still hasn't decided how to determine the allocation of slots.

Further complicating matters are separate tussles between U.S. carriers over flight slots from Haneda set aside for global carriers. Some 20 are available, and the U.S. still must discuss with Japan how many of those its airlines will receive.

United Airlines says it is hoping to serve passengers to San Francisco if it receives one of the U.S.-reserved slots, but has no comment on the way slots are divided between JAL and its own partner, ANA.

Meanwhile, Delta Air Lines, which has no Japanese partner, in July sought 25 new slots at Haneda just for itself—so it could move its base in Japan there from less-convenient Narita Airport.

—Yoshio Takahashi contributed to this article.

Corrections & Amplifications 
Virgin Atlantic Airways isn't a member of the SkyTeam airline alliance. A previous version of this article identified Virgin as a member.


  • Patrick M. Cronin

    Former Senior Advisor and Senior Director, Asia-Pacific Security Program

    Patrick M. Cronin is a former Senior Advisor and Senior Director of the Asia-Pacific Security Program at the Center for a New American Security (CNAS). Previously, he was the ...