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Insight: Japan politics looms over ANA's choice between Airbus, Boeing

An All Nippon Airways' (ANA) Boeing 787 Dreamliner aircraft is seen at ANA's maintenance center in Tokyo April 28, 2013. REUTERS/Yuya Shino
An All Nippon Airways' (ANA) Boeing 787 Dreamliner aircraft is seen at ANA's maintenance center in Tokyo April 28, 2013. REUTERS/Yuya Shino

By Tim Kelly, William Mallard and Tim Hepher

TOKYO/PARIS (Reuters) - When Japan Airlines Co broke with decades of tradition by buying long-haul jets from Europe's Airbus rather than U.S. rival Boeing Co, it informed the Japanese government by email without any prior warning.

The deal, worth $9.5 billion at list prices, was a major blow for Boeing, which holds more than 80 percent of Japan's commercial-aviation market and has been intertwined with U.S-Japan diplomatic relations since shortly after World War Two.

But the way JAL communicated the decision - with a curt message delivered to officials' inboxes just as it was publicly announcing the deal, according to Japanese government sources and a person close to the airline - was just as momentous.

For weeks the deal, initially a draft document, had been the most closely held secret in the aerospace business. Now, JAL's decision to focus on cold business logic revealed a new distance between the national flag carrier and the Tokyo government.

It also sharpens the political implications of the choice facing rival ANA Holdings Inc, which in coming months is to make a similar decision on replacing its ageing Boeing long-haul fleet with more fuel-efficient planes.

JAL's October 7 order for 31 wide-body A350 jets was a coup for Airbus, which had never directly sold a jet to the airline.

Analysts say the chances have increased that All Nippon Airways will buy around 30 A350s, Airbus's first mostly carbon-composite jetliner, in preference to Boeing's 777X, for the same business reasons that JAL did. ANA's decision is expected by early 2014.

But shifting political allegiances following JAL's bankruptcy three years ago, which brought a change in company leadership, have meant that the flag carrier is no longer under the same government sway that has guided major aerospace decisions throughout the postwar period, say people close to both airlines. ANA, by contrast, is now close to the ruling party, and may come under greater pressure to buy Boeing.

The head of a prominent leasing company with links to both planemakers told Reuters ANA would probably select the 777X.

The diplomatic picture is complicated by Japan's talks on a free trade deal with the European Union, which Airbus executives believe could exert a countervailing influence in its favor.

HANDS-OFF APPROACH

The government says it is completely hands-off - as World Trade Organization rules demand. Sources with both planemakers however accuse the other of wheeling out diplomatic support.

JAL's choice of Airbus "was a private decision made by a private company, and the government has absolutely no connection to it," Chief Cabinet Secretary Yoshihide Suga said on Tuesday.

"The various airline companies make their decisions on what to buy based on their own management situations."

For decades JAL saw itself as Japan's elite airline, what one person with many years' experience in U.S.-Japan business and governmental affairs called "an appendage of the Japanese government".

ANA was the also-ran, a one-time helicopter service operator that only made its push into international flights in the 1980s.

Boeing dominates the Japanese market partly because of the close U.S.-Japan security and diplomatic alliance.

It also shares the building work widely in Japan, with companies such as Mitsubishi Heavy Industries Ltd and Kawasaki Heavy Industries Ltd making as much of the 787 Dreamliner airframe as Boeing itself does.

A Boeing spokesman said in an emailed statement that the company spent nearly $4 billion on goods and services in Japan in 2012, accounting for around 22,000 jobs or more than 40 percent of the country's aerospace workforce.

"Boeing and Japan are one," the then-president of Boeing Japan told U.S. officials in 2008, while the company was lobbying successfully for ANA to buy its jets, according to an embassy cable to Washington published by Wikileaks.

In the past, "there was pressure by government at the highest levels to buy Boeing", said the U.S.-Japan source.

That relationship changed during the long-ruling Liberal Democratic Party's rare spell in opposition between 2009 and 2012. ANA continued assiduously to court LDP lawmakers, who felt abandoned by JAL executives, people familiar with the process say.

In 2010 JAL collapsed into bankruptcy and was put through a $3.5 billion taxpayer rescue by the Democratic Party of Japan, which brought with it a new CEO appointed by the government.

When Prime Minister Shinzo Abe led the LDP back to power last December, regaining the role the party has held for almost all of the past 60 years, JAL was now seen as the airline of the opposition and ANA enjoyed official favor.

ANA denied it was coming under political pressure to buy Boeing. "There is nothing of the sort," a spokesman for the company said.

LANDING SLOTS

An illustration of that political shift came at the start of this month, when Abe's government granted ANA more than twice as many new landing slots at Tokyo's Haneda airport as it gave JAL.

The government said the unprecedented skew was to redress the competitive advantage JAL had gained from the rescue, which saw creditors forgive 730 billion yen ($7.4 billion) in debt.

Landing slots at the capital's Haneda and Narita airports, which can each mean $20 million a year in operating profit for an airline, had previously always been split evenly.

JAL, which earned an operating profit of 20 billion yen for the three months to June, has appealed against the awarding of more slots to ANA, which lost 5.6 billion yen during the period.

The decision, traditionally handled by the Civil Aviation Bureau, was this time taken over by the Prime Minister's Office, where top executives of both airlines went personally to lobby, according to people familiar with the process.

"It was the wish of the LDP to punish JAL, and ANA leveraged that," said a person close to JAL.

DREAMLINER NIGHTMARE

The frostiness between the government and JAL meant it was not under pressure to buy Boeing, and the airline made its decision based on the merits, said a person close to JAL. People close to Airbus said the post-bankruptcy JAL is, as one of them put it, "more cost-conscious and business-oriented".

JAL President Yoshiharu Ueki said delivery schedules played a big part, and a source close to the airline said it was "totally about timing. Boeing would have been too late".

The Dreamliner debacle also loomed large.

JAL's Ueki said the decision to buy Airbus was not linked to the 3-1/2 years of delays of the Boeing 787 or the self-combusting batteries that grounded the global fleet in January.

But a person close to Boeing said JAL's decision was "in some ways understandable given the hell we have put them through" with the Dreamliner.

ANA, the launch buyer and world's biggest owner of the 787, suffered millions of dollars of losses as a result. The airline will factor the risk of a delay in aircraft delivery into its purchase decision, CEO Shinichiro Ito told Reuters last month.

Boeing and Airbus are wooing ANA, people familiar with the process say, while the airline says it is seeking more information from the makers.

After the JAL setback, ANA is fast becoming a "can't lose at any cost" deal for Boeing, said an industry source close to the U.S. planemaker.

But Tokyo's interests are not unequivocally aligned with Washington's anymore, said a person close to Airbus.

The Japanese government is "very eager" to complete a free-trade agreement with the European Union, especially as rival South Korea has already sealed such a pact, he said.

For years, the EU, which has a formal trade dispute with Japan, has contended that the practice of favoring Boeing over Airbus amounts to a non-tariff trade barrier. Tokyo is keen to prove otherwise, the source said.

"The political environment was favorable because of the discussions to establish a free trade agreement between Japan and the EU," Airbus Chief Executive Fabrice Bregier said of the successful campaign to win over JAL.

"(It) meant the environment would support this kind of partnership or at least would not prevent it," he told Reuters.

The breakthrough followed years of smaller deals and patient lobbying which intensified following a reorganization of the Japanese activities of Airbus parent EADS and the arrival in 2010 of a new salesman, contracts expert Jean-Pierre Stainnack.

For years, the Airbus sales job in Japan was seen as one of the toughest in the industry.

Airbus had struggled to get a foot in the door to present to departments that can create a groundswell inside an airline in favor of one manufacturer, such as maintenance teams.

But JAL's restructuring and new CEO appeared to change all that.

"We used marketing 101. We started small, put in initial aircraft and worked through lessors for many years," Stainnack said of the European company's conquest of Japan. "For JAL, we went in with a clear notion of the market and didn't want any political interference. The airline would have said the same." ($1 = 98.1150 Japanese yen)

(Adds Boeing comment paragraph 18, fixes typo in paragraph 5)

(Additional reporting by Norihiko Shirouzu, Kevin Krolicki, Tetsushi Kajimoto, Yoshifumi Takemoto and Elaine Lies; Writing by William Mallard; Editing by Alex Richardson)

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