The fall and fall of JAL

Geoff Tudor 

	Japan Airlines: the biggest failure of a non-financial firm in post-war Japan

Down on the ground, a cast of politicians, bureaucrats, bankers and airline executives continued their deliberations about the ailing airline’s fortunes, holding exceptional New Year holiday negotiations to seek a solution for securing the former flag carrier’s future by saving it from collapse.

By January 15, it became clear that the government had agreed a way forward in finalizing JAL’s rehabilitation, a task that in over the past six months had evolved into a massively complex transaction involving three different restructuring teams, foreign suitors wooing JAL with fistfuls of dollars and the prospect of a completely new top management team led by charismatic 78-year-old Kazuo Inamori, founder of Kyocera Corporation.

On January 19, as its shares dropped to as low as three yen apiece, JAL filed with the Tokyo District Court for bankruptcy protection under the Corporate Rehabilitation Law of Japan. The airline’s failure was the biggest in post-war Japan of a non-financial firm, according to the Nihon Keizai newspaper.  JAL was burdened by debts of 2.32 trillion yen (US$25.7 billion). Creditor banks have agreed to waive around 358.5 billion yen.

On the same day, the government-backed Enterprise Turnaround Initiative Corporation (ETIC), formally stepped in to oversee the JAL reconstruction plan and assist the airline’s return to profitability. In the interim, the airline would maintain flight operations and for customers at home and abroad it would be “business as usual”.

Major steps to be taken in the rehabilitation plan included the following.

• Over the next three years, 15,700 of 47,000 JAL Group jobs will go, which is one third of the work force and nearly double the target of an earlier plan.

• The number of Group subsidiaries, including travel companies and hotel operations, will be cut from 110 to 57 through selling off, liquidation and integration.

• Major fleet economies involve acceleration of the retirement of all the 37 remaining 747-400 aircraft by March 2015. Sixteen MD-90s will go, replaced by 50 small and regional jets.

• In addition to existing route cuts, a further 31 routes – 14 domestic and 17 international – face the axe.

• More than 20 overseas offices will be closed.

• While JAL goes through this process, fuel purchases, aircraft leases and other commercial activities necessary to maintain flight operations, such as spare parts purchase and inflight catering will be backed by the ETIC, including airport user fees overseas and insurance premiums.

• Mileage awards will be honoured during the turnaround.

• Scaled down business size and an aim for Group revenues of 1.36 trillion yen in the year ending March 31, 2013, a reduction of 30% on the 2009 financial year.

• De-list JAL stock 100% from the Tokyo Stock Exchange, effective February 20, wiping out all share value.

ETIC’s strategy for JAL’s revival enables the airline to operate as usual through further financial support of up to 600 billion yen in bridge loans from both the turnaround corporation and the Development Bank of Japan. Additionally, ETIC will invest another 300 billion yen in JAL.

Other ETIC plan details include asking commercial lenders for 730 billion yen in debt waivers. Another one trillion yen in roll-over financing and aircraft purchase loans is an extra part of the package in future.

JAL’s liabilities will reportedly exceed assets by more than 800 billion yen at March 31 2010. ETIC will cover this.

One of JAL’s most sensitive measures to save future costs was the reduction of pension payments. Current employees have agree to accept a 50% future pension cut and for retirees, a 30% cut in payments.

Adding to the complexities were approaches by American Airlines and Delta Airlines, both offering cash investments of US$1 billion or more, with the obvious string that in the case of American JAL should remain in the oneworld alliance or, in the case of Delta, JAL should join rival alliance Sky Team.

But the ETIC team felt that accepting foreign investment was inappropriate until the domestic rescue had been settled. A decision on the choice of partner may be decided this month. Delta is regarded as the favourite.

Rival All Nippon Airways said of the bail out: “We are highly concerned that the fair and competitive environment would not be secured under the financial support and injection of public funding”.