Delta Air Lines extends its wings

Courtesy Airbus Industrie

Courtesy Airbus Industrie

The saga of Japan’s bankrupt Skymark Airlines has shifted attention from the plight of the damsel in distress to the competition among prospective white knights in waiting. Delta Air Lines has emerged as the frontrunner to the rescue of the beleaguered carrier, strongly favoured by Skymark’s creditors, Airbus Industrie and aircraft leasing firm Intrepid Aviation Group which have become kingmaker in the game. Of course, much also depends on the Japanese government’s position on a foreign carrier’s investment in the nation’s third largest airline.

Other foreign carriers that are said to have expressed an interest, if not now but in the early days, include American Airlines although it already has an alliance with Japan Airlines (JAL), China’s Hainan Airlines, and Malaysia’s AirAsia which had previously entered into a failed joint venture with ANA, which subsequently bought out AirAsia’s stake in AirAsia Japan and renamed it Vanilla Air.

Early indications pointed to ANA as Skymark’s best bet, but that would mean returning to a duopoly between JAL and ANA, not quite the desired situation preferred by the authorities if competition across the industry is to be encouraged. Airbus and Intrepid are trying to block such an eventuality, fighting a rival plan that would see ANA take up a stake of 16.5 per cent in Skymark. As the major creditors holding more than half of Skymark’s debt of 320 billion yen (US$2.6 billion), they are in a position of influence. The troubled budget carrier may also be handed heavy penalties for its cancelled Airbus order. Airbus and Industrie are proposing that Delta be invited to buy as much as 20 per cent of Skymark.

Intrepid believes the proposal “offers the best opportunity to preserve Skymark as Japan’s third largest independent carrier and is in the best interests of the carrier’s employees, suppliers and creditors.”

But is the issue really about preserving Skymark’s independence? Or even about its survival as prospective buyers take centre stage and observers wait to see how that would change the state of play. That can best be understood in the context of what really is at stake in the game.

For one thing, ANA is more a Boeing operator with a current fleet mix of only 6 per cent Airbus and the rest Boeing. It has also said it is not interested in taking over Skymark’s Airbus A330 leases. Delta on the other hand has shown increasing support of Airbus, favouring the European planemaker over Boeing with an order of 50 jets worth US$14 billion last year. Its current fleet mix is a growing Airbus 20 per cent to Boeing 58 per cent that tells the success story of Airbus penetration into the American market.

Skymark’s initial inclination was to work with JAL but was apparently advised not to exclude ANA. The benefit to any airline succeeding in the bid is Skymark’s 504 weekly slots at Haneda Airport, which is advantaged by its shorter distance to the city compared with Narita Airport. Although these slots are meant for domestic operations, it will add to ANA’s strength and increase its dominance at Haneda over JAL. However, ANA has already established other domestic brands that include Peach Aviation and Vanilla Air, and the likely outcome of such an arrangement may see Skymark being drastically downsized through fleet, route and capacity reduction, opening up opportunities for ANA and its subsidiaries – Skymark’s erstwhile competitors – to grow at Skymark`s expense. The authorities too may not be enthusiastic to see a diminished role for Skymark in the name of competition or some semblance of it for local travellers.

Courtesy Delta Air Lines

Courtesy Delta Air Lines

Delta is more likely to keep the Skymark brand intact, at least in the short term, as the Japanese carrier proffers an opportunity to extend its wings farther into the Japanese market. It is also about competition with compatriot rivals American and United Airlines outside the US. All three of them are mega carriers formed from mergers with fellow home airlines in a period of US aviation history marked by Chapter 11 protection, and consequently lifted by reduced competition at home to expand overseas. Since then, Delta has acquired a 49-oer-cent stake in Virgin Atlantic to strengthen its trans-Atlantic connections. It has also formed an alliance with Virgin Australia. What it needs now is an Asian, if not Japanese, partner, noting that both American and United have already forged alliances with JAL and ANA respectively. Hence Skymark looks like a timely opportunity.

Through Skymark, Delta will be able to gain access to many destinations within Japan, providing the channel for feed from and into Los Angeles (and perhaps other US points in the future). Viewed positively, it means Delta will have a piece of the local domestic market as well, something that is often not open to foreign carriers. Yet one is tempted to ask if Delta’s quest is all about banking on domestic connections, which many foreign carriers are quite happy to work through alliances with local partners. Delta will then be competing with JAL and ANA. Singapore Airlines tried and failed in Australia with the setup of Tigerair, which Virgin Australia as the new owner is trying to sustain as a completely local entity.

US carriers may gripe about Middle East airlines making inroads in the US market, but that too is quite a different story. First, Japan is not like the US. In fact, no single country is quite like the US unless you consider the countries collectively, such as the European Union where flying between member countries is not strictly domestic. Second, carriers such as Emirates Airlines are more interested in opportunities for direct access, connecting US cities with the world outside, operating viable links that US carriers may find eating into the domestic market for transfers.

Delta’s own experience of operating from Seattle to Haneda has not been up to the mark because of the seasonal traffic, a service which it will relinquish before the end of the year, making way for rival American to take up the Haneda slot with a second service to Tokyo in addition to its Narita route but flying from Los Angeles. This increases the competition threefold, American competing with not only Delta but also ANA. While Delta has said that the Seattle-Haneda service was intended to grow Seattle Tacoma Airport a gateway, the corollary challenge is growing the customer’s preference for Haneda, which lacks the international connections of Narita. But with an impending saturation at Narita, staking rights at Haneda is an investment for the future.

In a letter to the Department of Transport, Delta cited two reasons for the failed Seattle-Haneda service: “demand…is highly variable, peaking in the summer and declining in the winter; and Delta lacks a Japan airline partner to provide connectivity beyond Haneda to points in Japan and other countries in Asia.”

Interesting that Delta should attribute the failed service to its lack of a local partner, which therefore supports the case for courting Skymark. So also it seems the carrot is bigger than it looks. In 2010 when Skymark became the first Japanese carrier to negotiate a deal with Airbus for four Airbus A380 plus options for two more, it intended to use the aircraft for international routes from Narita to destinations such as London, Frankfurt, Paris and New York. The story sounds strangely familiar of a growing and ambitious airline, and one of a low-cost carrier that may have become neither sufficiently low-cost when buffeted by new competitors such as Jetstar Japan and Vanilla Air, nor adequately rebranded to attract corporate business and the higher end market. And the question, where Delta is concerned, is it looking a little too far into the future?

This article was first published in Aspire Aviation.

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