American, TPG offer $1.1 billion to JAL to block Delta

TOKYO Thu Dec 3, 2009 5:13am EST

An employee of Japan Airlines walks past its self-ticketing machines at Haneda airport in Tokyo November 13, 2009. REUTERS/Kim Kyung-Hoon

An employee of Japan Airlines walks past its self-ticketing machines at Haneda airport in Tokyo November 13, 2009.

Credit: Reuters/Kim Kyung-Hoon

TOKYO (Reuters) - American Airlines said it and other members of the Oneworld airline alliance along with private equity fund TPG are willing to invest $1.1 billion in Japan Airlines to prevent it defecting to Delta Air Lines and the rival Skyteam group.

Debt-laden JAL faces the risk of bankruptcy unless it undergoes a major restructuring to cut costs and is seeking a capital injection from a state-backed fund on top of any money from American Airlines or Delta.

Delta has said that it and other SkyTeam members are ready to offer JAL a total financial aid package of about $1 billion, including a $500 million equity investment. Delta said on Thursday it may also team with a fund to sweeten its proposal.

Both U.S. airlines are keen to gain access to Japan Airlines' network to fast-growing Asian markets and are eyeing the expected signing this month of an "open skies" treaty that would allow for closer cooperation on routes between the U.S. and Japan.

"Our investment and our proposal would be part of an overall restructuring plan led by the government, which would restore Japan Airlines to financial health," Tom Horton, chief financial officer of American Airlines, told a news conference in Tokyo.

American had said last month it was ready to invest in JAL along with TPG but had not offered an exact figure. It estimated the total benefit to JAL of staying with Oneworld would be $1.8 billion when factoring in a projected $700 million boost from an antitrust immunity pact over 10 years.

Delta and American have both said they would apply for antitrust immunity, a status that allows two airlines to coordinate closely on pricing, scheduling and marketing to increase revenues and lower costs.

"Delta has far more overlapping routes with JAL, and that would mean far more cost benefits from codesharing than with American from eliminating unnecessary routes," Takahiko Kishi, Senior Analyst, Mizuho Investors Securities.

For a graphic on Japan Airlines click: here

OPEN SKIES

In addition to $500 million in capital from SkyTeam members, Delta has said it would offer $300 million in guarantees on any short-term revenue loss from switching alliances and $200 million in asset-backed financing.

Delta has further estimated JAL could gain $400 million in annual revenue by joining hands with the world's biggest carrier given that it transports several times the number of passengers on transpacific routes.

American Airlines, a unit of AMR Corp, has warned JAL could lose $500 million in revenues over a two-year transition period if it left Oneworld.

The two have at the same time used different numbers in the debate over antitrust immunity under open skies.

American Airlines says SkyTeam carriers would control 62 percent of the U.S.-Japan market if JAL and Delta joined hands, while Delta emphasizes a figure closer to 40 percent, excluding routes to and from Hawaii and Guam.

"Many alliances granted antitrust immunity in the past had combined market share much greater than JAL-Delta alliance," Delta's president Edward Bastian told reporters in a separate briefing in Tokyo.

THIRD PARTY

Bastian said Delta was willing to enlist the help of an investment fund to top up its offer of financial support, and that it would consider investing in the airline even if it were restructured in bankruptcy court.

"We of course want to know the form of the restructuring before we make that investment, but the company would need the financing in any event and we are prepared to work with the government in whichever the pattern it wants to pursue," Bastian told Reuters Television in an interview after the briefing.

Underscoring JAL's woes, Standard & Poor's cut its corporate credit rating to a "selective default" on Wednesday, citing a pact with creditors to freeze some loan payments under a mediated debt restructuring called Alternative Dispute Resolution.

The suspension of those debt payments has been agreed to by JAL's major creditors, giving it some breathing room while the state-backed Enterprise Initiative Turnaround Corp deliberates on whether to inject it with public funds.

The ETIC is expected to make a decision in January.

According to a previous government task force estimate, JAL needs 300 billion yen in capital, or three times the offer from Oneworld and six times the offer from SkyTeam.

Shares of JAL closed unchanged at 92 yen, underperforming a 3.8 percent rise in the benchmark Nikkei average.

The stock has lost more than half its value this year while the spread on its 5-year credit default swaps, which are used as insurance against the risk of a company failing, are quoted at distressed levels above 2,300 basis points, having climbed steadily from about 800 in mid-September.

(Additional reporting by Kei Okamura and Mayumi Negishi; Editing by Edwina Gibbs, Michael Watson and Lincoln Feast)

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