AMR Stakes in JAL Bid War too high to lose


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Feb 25, 2006
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US CREDIT-AMR stakes in JAL bid war too high to lose

Wed Nov 25, 2009 4:10pm EST

NEW YORK, Nov 25 (Reuters) By Tom Ryan

The cost of taking a stake in embattled Japan Airlines Corp (JAL) might weaken the credit strength of AMR Corp, but the parent company of American Airlines would have more to lose if it allowed JAL to slip intoan alliance with other carriers. At stake is a share of JAL's lucrative Asian routes. DeltaAir Lines and its SkyTeam partners have offered more than $1billion to persuade JAL to defect from the rival One world alliance.

While both AMR and Delta have recently shored up their liquidity, neither has a "war chest of excess liquidity thatcan be used to fund a bidding war for JAL," said Moody's analyst Jonathan Root. But "with more to lose, we believe American has the incentive to prevail in this bidding contest for JAL's alliance partnership," he said. The risks for Delta are not insignificant either, as a bidding war for the struggling JAL would ultimately be"credit-negative" for the winner, Moody's Investors Servicesaid earlier this week. American Airlines, a leading member of Oneworld, said itand private-equity partner Texas Pacific Group were willing to inject an undisclosed amount of money into JAL, which isundergoing a restructuring after several quarters of losses. Credit markets are skeptical of the situation and some investors already see the potential downside. Since AMR's announcement last week, the company's 2.375 percent notes due in 2014 have eased 5 cents on the dollar to around 83.75 cents as of Tuesday's close, according to MarketAccess.


Delta's bid for Japan's flag carrier puts AMR between arock and a hard place in that if it fails to seal the alliance it cedes JAL's Asian air routes and allows Delta to build on an already strong position in a budding region for air travel.

"Anything is too much for AMR to pay right now, but they can't afford, strategically, to lose out to Delta," said RogerKing, airlines analyst for research firm CreditSights. "I think Delta is seeing an opportunity where it can musclethe industry with its balance sheet," he said. "They have deeper pockets and I don't see it being a credit problem forthem."

Many agree that for Delta, losing out to AMR on the deal would be a non-event for the company while a successful bid would give it a huge strategic asset. Delta is in talks to add more major airlines from China,Asia's most lucrative airline market, to its SkyTeam alliance,said GimmeCredit analyst Vicki Bryan. For AMR, retaining Japan Air "will cement for a longer period greater exposure to Pacific routes," which the company needs in the face of Delta's existing advantage in the region,she said.


Last week, JAL President Haruka Nishimatsu said he wants to choose a partner by the end of this year but thought it wasmore natural to stay in the Oneworld alliance with AMR for the moment. While few doubt that JAL will get the funding it needs to survive, the main question is where it will come from. For JAL, the big question is "'do we want to be another big Asian carrier for SkyTeam, or do we want to be the premier Asian carrier for Oneworld," GimmeCredit's Bryan said.
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