Meanwhile, greater network densities and new routes based on connections between relatively small cities eat away at the position of carriers established under these rules. They are not immune from competition.

Smart carriers can thrive within this system, finding new markets for growth.

Look at the expansion of the low cost carrier (LCC) sector. The Centre for Asia Pacific Aviation estimates the LCC share of the seats in the region has risen from just over 1 per cent in 2001 to nearly 16 per cent last year.

Qantas saw the writing on the wall and has been busy reinventing itself, building Jetstar and new relations with Air Asia. Cathay has a complex plan built on China. Others too are making the adjustment, even like Singapore without big domestic markets.

JAL looks like it was undone by moving too slowly on the opportunities in the low cost business. Its traffic continued to be dominated by business travel and freight both of which were more sensitive to global fluctuations. It did not work to build up the LCC sector even inside Japan where LCC carriers have only about 5 per cent of seats.

JAL also carried a variety of domestic routes in Japan to which it has to maintain a commitment at a certain level of service and which eats into its profit. Associated with this strategy has been a significant program of construction of regional airports in Japan, which JAL was then obliged to serve at very low loads.

Then in December the US finally negotiated an Open Skies agreement with Japan and that also opened up airport access slots.

So competition was intensifying in international markets and JAL’s ability to maintain its cross subsidies into loss-making routes at home was diminished.

Apart from its inability to jettison loss-making routes (which a clever LCC strategy in Japan might have helped it achieve, as well as making the regional airport buildings look good at last), a dilemma for JAL is that its options for international adjustment under competitive pressure are limited. This is true for all the old established carriers. They can’t move. It is difficult for them to relocate to a lower cost location. Identity is important in the bilateral market access rules. An airline has to have a home base. Manufacturing companies like Pacific Brands in Australia relocate to serve the home market. This is really hard for an airline to do.

They can’t sell out. In other sectors, an option would be to merge, for example, if these applied in aviation then JAL could maintain a domestic marketing system in Japan, but its merger partner could provide a host of other services at lower prices than available in Japan. Takeovers or mergers are stymied by the ownership rules in the bilateral agreements.

They can’t always easily bond with others. Another option, in other words, is to form alliances with complementary carriers. This is allowed in the regulatory system, and not surprisingly given the common forces of adjustment around the world some big alliance structures have emerged. But then the trouble is the competition regulators, who take a dim view on cooperation, especially in the context of the barriers to entry associated with the bilateral system.

So apparently unable to find a way through these constraints, and hit by the global drop in traffic, JAL has had to be refinanced.

Shareholders bear most of the cost of this and some banks, but debt refinance is available with government support. JAL now has a market value less than the price of a 747.

There has been some reporting that the new Japanese government has established that JAL was not too big to fail, but in fact JAL has not succumbed completely. The commitments in the bilateral agreements no doubt had some force in the decision to retain the brand and operations. A bold move would have been for Japan to lead the reform of the regulatory system and move immediately to much more liberal rules of identity (or ‘origin’) in its bilateral agreements. This would have facilitated a sale or merger.

The global alliances are now squabbling over the remains. It is not clear whether JAL’s existing partners in oneworld will prevail or whether the Delta led Sky group will win the day. Some commentators argue that the latter looks tougher to sell to the competition authorities because there is more overlap on routes across the Pacific within the alliance. But anti-trust immunity is available on routes on which the US has negotiated an Open Skies agreement.

JAL assures us in its press release that it has requested that its travellers’ points be safe but we are not sure where they will be banked! George Clooney’s character in the new movie ‘Up in the Air’ would probably be pleased that his points were all on cocooned domestic operators within the US.

JAL may not be the last to adjust – look at BA’s struggle right now. There is nothing like frustration among incumbents with regulation to drive its reform. So let’s hope that in the fall-out from the global financial crisis on the high-capital-intensity business of air transport, the pressure for reform will be stepped up.