Delta ousts American in JAL global alliance

We have learned for industry sources that Delta Air Lines has won the battle  and that Japan Air Lines will be leaving the oneworld alliance to join SkyTeam, reports Ernie Arvai of the AirInsight team of which Leeham Co. is a member.

This is a significant blow to American Airlines, which now lacks a Japanese partner, and boosts both United (Star Alliance partner with ANA) and Delta (with NW Japanese routes and now JAL) that can be well exploited, given the new open skies agreement between the two countries.

This is not unexpected, as if JAL were happy with oneworld, they wouldn’t have considered a switch to SkyTeam and would have quickly ended discussions with Delta, rather than making them public.  JAL was not happy with its oneworld alliance partners, feeling neglected in the alliance.  British Airways, the lead oneworld partner with American, seemed preoccupied with Iberia, and  AA with BA on transatlantic antitrust, and AA and BA paid little attention to JAL’s concerns in the alliance.  They felt ignored, and frankly insulted by their “second class” status within the alliance.  Delta and AirFrance/KLM have clearly indicated a stronger role, and the ability to cooperate with, rather than compete with Korean Air Lines, already a SkyTeam partner.

This story is similar to others we have heard in the past — that entails a fair amount of arrogance from the two key oneworld partners AA and BA.  When the issue of switching an alliance came up, they initially questioned why JAL would leave the “stellar” partners in oneworld, despite a lack of performance and code-share traffic generated by them.  In typical Japanese fashion, they made public their consideration of Delta, both to allow oneworld the opportunity to publicly “save face” and to maximize the potential benefits by playing the alliances against each other.

They key was economics — Delta simply showed the benefits of alliances in a different light.  It highlighted the NW/KLM and DL/AF deals and how their success was superior to the AA-BA alliance and code shares from IB and others.  It all comes down to fundamentals, and this is where two hungry airlines, NW and KL, pioneered code- sharing to an extent not done by others, with their combined “world business class” and true sharing of revenues and expenses across the Atlantic.  With an incentive to feed traffic for both carriers, they were much more successful than more traditional limited code-share partnerships.  AA/BA, who did not gain antitrust immunity, had each carrier feeding traffic to its own flights preferentially, with secondary displays for code-share flights.  The AA-BA alliance only really pushed traffic in markets not served by each carrier.  There was no incentive to maximize revenues and loads on every flight, and guess what – it didn’t happen.  The only counter that AA could provide was that DL and JAL were unlikely to gain antitrust immunity, which would basically provide a status quo.  Delta is pushing the frontier, and JAL recognizes the need to move forward with innovation, rather than stagnation given their weak economic position.

Delta has shown the ability to gain antitrust immunity in several markets, and has cooperated with regulators to reduce capacity if required to ensure competitive balance.  AA and BA have fought regulators at every step, refusing to compromise in markets such as Boston in which they have dominant capacity, such as 80%+ for BOS- LHR.  As a result, the oneworld partner’s track record is poor – and from what we hear, their negotiation strategy was typical for American – stacking the deck in their favor, rather than a more balanced proposition.  While American brought in TPG as an additional investor at the 11th hour, Delta had already offered an equity stake from the airline itself, showing stronger interest.  Delta (and AF/KL and KAL, who haven’t been mentioned much but are also important and involved) have clearly demonstrated that they want JAL in the alliance, and are willing to cooperate to maximize revenues for all parties involved.  AA and BA, after recovering from the shock to their rather large egos that someone may want to actually change partners, have played catch-up and have been a step behind – causing the Japanese to think if you could do this now, why didn’t you previously.  Weren’t you listening.  AA and BA have lost their opportunity to save face.

The key is that Delta will reach an agreement with JAL that makes economic sense, and enables reduction of capacity and higher profitability on code-shared flights.  The old NW routes will be rationalized with JAL service into other DL/AF/KL hubs, and while some cuts in capacity will be made, this will help each carrier become more profitable with higher load factors and higher yields.

While JAL is indicating that a decision has not yet been made, we understand that plans for the unwinding of JAL participation in oneworld have begun internally.  Unless an earth-shattering development occurs that is beyond the control of the airline, this now appears to be a done deal.

Ernie Arvai

5 Comments on “Delta ousts American in JAL global alliance

  1. I am not surprised at this development at all I had figured all along that Delta would get it. What I think hurt AA here was that they have focused all there attention on ATI with BA and Gerard Arpey’s poor presentation as reported in the press earlier in the week. It will be interesting to see how AA/OW follow up. I could see one of 3 things I don’t work in the industry just speculating A. They start several US-Asia routes. B. They try to court one of the unaligned Chinese Airlines into OW or try to get Asiana to leave *A and join OW or C. AA tries to buy UA and sell off various part to other suitors.

  2. Looking good, if for purely personal reasons…

    So are they preparing to start flying to SkyTeam hubs like Detroit/Atlanta/(maybe Memphis, Salt Lake City, some other smaller NW focus cities)?

  3. You guys are going to feel so stupid in two weeks when AMR and JAL announce their hook-up.

  4. Either one is a blow to US airline employees. Codeshares are nothing more but the farming out of US airline jobs.

    Another fine move by US corporations to turn the US middle class into poorly paid third world slaves while Congress sits on their “assets” hoping for another corporate donation.

  5. Delta congrats to winning another co-share partner (AF & KLM) so, it seems. I wonder if they’ll release some of their billion dollar profits back to their workers. Maybe stop charging for baggage fees? Well, all I know is that the CEO, COO, CFO, and the rest of the executives are having a lovely X-mas with the stock options they’ve cashed in after having layoffs this year. As they meet their global domination goals for conquering the airways and sit on piles of money. The consumer and frontline workers will continue to digress to poverty levels never before seen in the states. Just remember Rome didn’t fall in one day so, don’t expect the first “Jumbo Airliner.”

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