Japan Airlines to merge with Japan Air System

Japan Airlines (JAL), Asia’s largest carrier, said on Monday it would merge with Japan Air System (JAS), the third-largest domestic carrier, to form the world’s sixth-biggest carrier.

The airlines said they would set up a joint holding company next autumn, and complete integration of operations by spring of 2004.

The merger, which analysts say has been a possibility since JAL acquired an 8.25 per cent stake in JAS, was prompted by rapidly deteriorating conditions in the industry.

Recent moves to deregulate the domestic market have led to greater competition and pressure on prices while demand has been hit by the economic slowdown in Japan and the events of September 11.

The merged airline will be seeking to challenge All Nippon Airways’ long-dominant position in domestic routes.

The two airlines reported combined annual sales of ¥2,270bn last year and will have a 48 per cent share of the domestic market, compared to ANA’s 49 per cent. Analysts noted that the merger could fall foul of anti-monopoly concerns, but JAL said it was confident of approval from the regulatory body.

On some domestic routes, particularly between Tokyo and other large cities, the combined airlines will service 60-70 per cent of the traffic. Ogi Chikage, transport minister, said she would be monitoring how the deal would affect competition in the industry.

JAL, with the most exposure to international routes, has been hit hard by the collapse in international traffic, which has fallen as much as 40 per cent since September 11. JAL last month slashed its group net profit for the year ending next March to a record loss of ¥40bn ($332.4m).

Domestic passenger volumes, however, have proved relatively more resilient in the wake of the September 11 attacks. Domestic traffic for the top three Japanese carriers fell just 4 per cent in October.

Competition has been severe for domestic flights in the past decade, and prices have continued to fall following deregulation of the industry in the early 90s, squeezing profitability for the larger carriers.

Analysts expect the consolidation of three to two domestic carriers will help ticket prices to stabilise.

But there were mixed reactions to the deal on Monday.

“It will take time before synergies can be seen. In the airline industry it is far more difficult to achieve cost-reductions than it is in the manufacturing industry,” said Osuke Itazaki, analyst at Credit Suisse First Boston.

Mr Itazaki noted that JAL flew a Boeing fleet, while JAS had a significant portion of Airbus planes – making maintenance costs hard to cut. He also suspected that integration of operations would be made more difficult by the separate unions for pilots and flight attendants from both airlines.

Standard & Poor’s rating agency on Monday placed all Japanese carriers on credit watch for a possible ratings downgrade. The rating agency expressed concerns about the airline’s “ability to contain costs and restore their earnings under harsh market conditions”.

Investors, however, welcomed the news – JAL rose 3.9 per cent to ¥297, JAS gained 3.3 per cent to ¥3,750, and ANA fell 1.9 per cent to ¥311. The broader Nikkei fell 1.3 per cent on Monday.

Financial Times