Delta Airlines Offers $1 Billion to Compete for Failing Japan Airlines (DAL)

Delta Airlines (DAL)
Delta Airlines Offers $1 Billion to Compete for Failing Japan Airlines

During a recession, as people cut back on unnecessary spending, travel is frequently one of those activities that gets neglected. It is no surprise that the airline industry has been struggling, not just in America, but across the globe. The most recent company to be struggling is Japan Airlines (JAL), who announced last week that the company was in serious trouble, facing a $1.5 loss for the first half of the fiscal year, on top of $10 billion in debt. Although the company has been experiencing losses for a number of years, the situation has worsened over time, with Japan Airlines’ shares at a 7 year low of 98 yen per share. And yet despite this dismal performance, both Delta Airlines and American Airlines (AMR: Charts, News, Offers) are fighting over JAL. Why is Delta trying to get involved with a company that appears to be heading for a crash landing?

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Japan Airlines already has an existing partnership with American Airlines. The two companies have been partnered together since the 1990s, as a way to expand globally, by combining passenger’s frequent flier rewards. Additionally, American Airlines is able to sell tickets on JAL flights and benefit from a portion of the revenue. The partnership surely works out well for American, as it gives them access to the largest airline in all of Asia. However, Japan Airlines is now in a situation where it desperately needs help. There is a possibility the company could be facing bankruptcy if it does not receive help from and government and/or an injection of capital. Private equity firm TPG actually announced last week that it is considering a arrangement with American Airlines to invest up to $1.1 billion in JAL. However, Delta Airlines has recognized JAL’s deep need as well, and has now jumped in with its own offer. Delta Airlines announced this morning that it and its alliance partners were offering $1 billion to JAL if it would leave its partnership with American. Delta currently does not have any partners in Japan, so even though JAL is struggling to stay alive, this still could be a great opportunity for Delta to expand into a new market.

But how is Delta expecting to pull Japan Airlines away from their long-standing partnership with American Airlines, especially with an offer that may be a little smaller monetarily? Well, the President of Delta has been quick to describe the additional benefits he believes that JAL would experience with Delta. President Edward Bastian pointed out that Delta has three times as much traffic from U.S. to Japan than American Airlines does, as well as a higher annual revenue. American, however, has countered with its own statement that JAL could potentially lose $500 million in revenue if they leave the partnership. Each company thinks that they will be the best for JAL, and with similar offers, it is hard to guess which (if any) JAL might choose. But one analyst -Takahiko Kishi – summed it up well when he said that the decision between the two companies may not matter that much, what is more important is if and how Japan Airlines is able to restructure the company, and start making better decisions for the future. The company needs more than $1 billion to be high-flying once more; they need to fundamentally change the company as a whole, be it with Delta, American, or simply on their own.

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