Schnurman: American Airlines hopes cash is king, even in Japan

By MITCHELL SCHNURMAN

mschnurman@star-telegram.com

The idea of Japan Airlines seeking a rescue from an American carrier is foreign enough. Throw in a Texas buyout firm as a white knight, and the scenario seems unthinkable.

So is cash the king in any language?

That must be the hope at American Airlines, after it enlisted TPG, formerly Texas Pacific Group, to provide much of the money for a major investment in JAL. With TPG’s war chest, the partners can write a bigger check — probably bigger than the competition’s — without deflating American’s cash cushion.

It’s a risky strategy, though. In a country that doesn’t worship the bottom line, the so-called masters of the universe could stir a backlash, even on a minority stake. Private equity firms have had trouble cracking the Japanese market, because selling to foreign buyers carries a stigma.

The battle royal over JAL crossed a threshold last week, after Delta Air Lines went public with a billion-dollar offer to help the Japanese carrier. The money would net a piece of the company, but that’s not the attraction; the jackpot is luring JAL to Delta’s SkyTeam alliance, a switch that would give the Atlanta-based airline a commanding share of the U.S.-Japan travel market.

American sits on the other side of this zero-sum proposition. JAL is a key member of American’s Oneworld alliance, and its exit would threaten the entire arrangement. American needs to maintain Oneworld to hold on to lucrative accounts that need global connections.

So American has to pony up big-time. Reports from Japan last week said that American and its partners were prepared to bid $1.5 billion, which is where TPG enters the picture.

Since last summer, American has raised $5 billion by selling frequent-flier miles, stock and debt, and refinancing aircraft loans. But it needs a big cushion to ride out the recession. Bringing in a well-heeled partner allows it to bid on JAL without jeopardizing its finances, says airline expert Darryl Jenkins.

"Teaming with a private equity company that has access to capital is definitely strength," Jenkins says.

In Japan, American’s chief financial officer, Tom Horton, touted TPG’s reputation as an investor in airlines and said that American is pleased to have its support.

Private equity firms like TPG have generated enormous profits for their principals and investors, but often at the expense of the target companies and employees. While admired as financial engineers, they’re criticized for short-term thinking and ruthless cost-cutting.

Even in the United States, the capital of capitalism, private equity’s image has been tarnished as leverage became a dirty word in the past couple of years. A new book, The Buyout of America, predicts that hundreds of recent leveraged buyouts will default on their loans and lead to massive layoffs.

TPG was one of the architects of the TXU buyout, which saddled the Texas utility with billions in debt that it appears unable to repay.

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