Should American Airlines take off with Japan Airlines?
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Based in Fort Worth, Texas, American Airlines clearly has no desire to traverse the state of New Mexico to join forces in any manner with US Airways (NYSE: LCC), headquartered in Phoenix, Arizona. Crossing over the Pacific Ocean might result in a more beneficial arrangement with Japan Airlines, which is coming out of reorganization with plans for a $6 billion initial public offering in September.
Japan Airlines is already a partner with American Airlines for many routes. In addition, Japan Airlines and American Airlines "...now jointly set schedules, price tickets and share revenues on flights between the U.S. and Japan." Like American Airlines, Japan Airlines had to file for bankruptcy protection from creditors.
This presents a huge advantage for Japan Airlines over US Airways or other possible contenders such as Delta Airlines (NYSE: DAL), JetBlue (NASDAQ: JBLU) or Republic Airways (NASDAQ: RJET). Both American Airlines and Japan Airlines will be emerging from bankruptcy as more effficient operations with very clean balance sheets. That is not the case with the others. US Airways has a debt-to-equity ratio of 8.77. With a debt-to-equity ratio of 11.86, Delta Airlines owes enough to creditors to choke an A380 Guppy. For Republic Airways, the debt-to-equity ratio is 5.08. JetBlu has a debt-to-equity ratio of 1.86.
Japan Airlines is now one of the most profitable airlines in the world with an operating margin of 17%. By contrast, the operating margin for US Airways is 5.52%. The operating margin for JetBlue Airways is 8.50%. For Delta Airlines, the operating margin is a negative 28.06%. Republic Airways too has a negative operating margin of 2.85%.
For its flights to the United States, Japan Airlines is already planning to assimilate more into the routes served by American Airlines. The planes leaving the island nation will be coming from a much leaner, meaner business as, during reorganization, Japan Airlines lowered its operating costs by one-half, reduced its work force by one third, slashed pensions, and eliminated unprofitable flights.
With more than 170 routes, Japan Airlines would immediately bring American Airlines more meaningfully into an area where it is weakest: Asia. This region will be a major growth market for air travel, along with so many other goods and services. Boeing (NYSE: BA) specifically designed its new 737 Max for regional air service in Asia, particularly China.
American Airlines would add its strength in Latin America and Europe. In its arrangement with British Airways, American Airlines has 13 daily flights on the premium route in the world of JFK-Heathrow, more than any other carrier, by far. Passenger growth forecasts for the next five years are 8% for Latin America South (Brazil and Argentina), 6% for Latin America North (Central America and nations such as Venezuela), 4.4% for Asia, and 3.6% for Europe, further emphasizing the institutional appeal of American Airlines to Japan Airlines.
Both airlines fly many of the same planes. Each has the 737, 747, 767 and 777 from Boeing. Japan Airlines just received its first two Boeing-787 Dreamliners in March. It has 43 more on order with the largest American exporter. Last July, American Airlines ordered 200 of the single aisle 737s from Boeing.
Whatever deepened arrangement is agreed to between Japan Airlines and American Airlines, it would present a more formidable carrier than any deal with US Airways. American Airlines is already working with Japan Airlines, while resisting the emphatic, intensifying overtures of US Airways. That would make the transaction much more amiable and productive from the initial stages, which is critical. In addition, American Airlines has 465 new planes on order, which would help to modernize the fleet of Japan Airlines.
Going abroad to move forward with Japan Airlines would make American Airlines a much stronger carrier in the United States and around the globe, no matter the final configuration of the two companies.
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