There's much more at stake in the tortuous efforts to shape the future of Japan Airlines than just the solvency of the country's largest carrier.
The course set by the government, company and financial overseers for the airline could alter carrier competition for the region, influence open-skies negotiations between the U.S. and Japan, determine the fate of an international hotel chain and encourage private American investment.
"There are big stakes here," said analyst Vaughn Cordle of consultancy AirlineForecasts. "It has major implications all around."
The immediate concern, of course, is keeping JAL operating through the end of this month and the rest of 2009. The government announced temporary measures last week to do just that, including bridge loans valued at about $1.1 billion.
The Japanese government said it might introduce legislation to cut a pension shortfall that hit $3.7 billion in March. The airline is carrying about $15 billion in debt and is seeking to secure its fourth state bailout since 2001.
In the meantime, JAL detailed plans this month to cut flights on 16 international and domestic routes, ending all service on eight international routes, including a twice-weekly route connecting Narita Airport outside Tokyo with Vancouver and Mexico City.
The carrier is closing its offices in Kobe, Japan; in Mexico City; and in the Chinese cities of Hangzhou, Qingdao and Xiamen. It is also reducing the frequency of its flights to London and Taipei from Narita.
But all those measures are just part of a financial tourniquet designed to keep JAL alive until major surgery can be undertaken. The end game includes a complete restructuring that will likely include, among other things, shedding its hotel management subsidiary and deciding which U.S. airline and alliance it will embrace.
JAL's wholly owned hotel subsidiary, JAL Hotels, operates about 60 properties under the Nikko Hotels International and Hotel JAL City brands, with hotels in Japan, China, Malaysia, Mexico City, London, Guam and the United Arab Emirates.
Twice in the past 10 years, JAL has sought unsuccessfully to sell its hotel subsidiary. The last attempt was in 2007, when it was valued at about $35 million. There are some industry concerns, though, that the hotels could lose some of their customer base if ties to the airline were broken.
Even if the airline proves successful in selling its hotel or other business segments, it still has to make sure it aligns itself with the right aviation partners to stay aloft.
JAL is currently a partner with American in the Oneworld alliance. Delta and its SkyTeam partners are trying to woo JAL away, while American is fighting hard to keep it in the Oneworld fold. Both carriers are citing financial benefits to make their positions more attractive under any potential JAL restructuring plan.
However, JAL President Haruka Nishimatsu said on Friday that it was leaning toward staying with Oneworld.
American said JAL would lose $500 million in revenue within two years if it switches to SkyTeam, assuming Delta initially would only be able to replace about half the revenue-sharing and other revenue that JAL currently gets from Oneworld partners.
Delta has reportedly offered to invest up to $334 million in JAL and has also offered to pay for the alliance transition, which is estimated would cost between $15 million and $20 million.
American, though, has upped the ante, offering to help broker a deal with the private equity firm TPG for a minority investment in JAL.
American's CFO, Thomas Horton, told Reuters last week that TPG, which helped finance Continental's emergence from bankruptcy in 1993 and backed a failed takeover attempt for Australia's Qantas Airways in 2007, has agreed to consider the possibility of investing in JAL as part of any deal with American.
The move could provide Japanese entree for TPG, which has been foiled in its recent efforts to invest in the market, including a bid for a stake in JAL's credit card unit.
Whether JAL executives choose to switch or reinforce their alliance relationship, they must focus on the long term, especially operational benefits the airline could reap from any open-skies treaty negotiated by Japan and the U.S.
As President Obama visited Japan this week, an open-skies agreement was expected by year's end. With an open-skies treaty in hand, the carrier alliances would have an easier time securing antitrust immunity.
"The U.S.-Japan deal under negotiation is being designed so that it will only come into effect after the Japanese receive [antitrust immunity] with their U.S. partners," Cordle said. "JAL's need for restructuring complicates its ability to seek government support in open-sky negotiations."
American said such immunity within Oneworld would yield another $100 million a year in additional revenue for JAL.
Further, American contended, Oneworld with JAL would be more likely to win regulators' approval for immunity than would a JAL-enhanced SkyTeam. Together, Delta and JAL would control about 60% of market share on U.S.-Japan routes, American Airlines officials said, including a stranglehold on Narita.
Still, Cordle said, the best competitive move for JAL would be to align itself with Delta.
"If JAL goes with American, it will be a much weaker competitor against the juggernaut of United and All Nippon Airways and Star Alliance," Cordle said.