Japan Says JAL Can Be Saved, With a Bailout

Legal

Japan Says JAL Can Be Saved, With a Bailout

October 29, 2009, 11:55 am

Japan set the stage for a huge bailout of Japan Airlines on Thursday, telling the struggling carrier to turn to a state-backed body for assistance, a move that ruled out a tougher stance by a new left-leaning government in Tokyo against the country’s powerful corporations, Hiroko Tabuchi of The New York Times reports.

The government said JAL, Japan’s largest carrier by revenue, had been instructed to apply for funds from a state-backed turnaround body, after a special task force said saving the airline was “definitely possible” but would require a “substantial” injection of public money.

The former flagship carrier, which was privatized in 1987, was bailed out three times since 2001 under the previous administration, but it is still reeling from plunging revenues and $15 billion in debt. The airline posted a record quarterly net loss of 99 billion yen ($1.08 billion), in the three months that ended in June, and has forecast a net loss of 63 billion yen for the fiscal year to March.

Some had predicted that Prime Minister Yukio Hatoyama, whose Democratic Party cast the long-dominant Liberal Democratic Party from power in August, could let JAL go under to underline a promise to shift Japan’s resources away from corporations and toward households.

But ultimately, JAL is big to fail, Seiji Maehara, the transportation minister, told reporters Thursday. He said it was too early to say how big the bailout would be, however.

“If JAL were to stop flying, there would be serious repercussions for Japan’s economy,” and it would disrupt travel to and from other countries, Mr. Maehara told reporters Thursday. “It is not your ordinary company,” he said.

Mr. Maehara stressed that JAL would need to make aggressive cutbacks to receive fresh public funds, including rolling back the company’s bloated bureaucracy, downsizing its fleet and slashing so-called legacy costs, which include pension liabilities of about 330 billion yen.

The minister also criticized previous bailouts, calling them mere stop-gap measures, and said his government was committed to bringing about a more comprehensive turnaround.

“Under the previous administration, there was no real due diligence, no real turnaround strategy,” Mr. Maehara said.

JAL had earlier submitted its own draft reconstruction plan, which included cuts of 6,800 jobs, or about 14 percent of its workers, but it failed to get a passing mark from Mr. Maehara.

A government bailout could complicate partnership negotiations between JAL and several other top airlines, including Delta Air Lines, the world’s biggest airline operator; American Airlines; and Air France-KLM, Europe’s biggest airline group.

A partnership could give a foreign airline a firm foothold in Japan’s highly regulated airline sector, as well as a gateway to the fast-growing Asia. Foreign airlines are also vying for access to berths at Haneda Airport in central Tokyo. The airport will add a fourth runway next year that could increase its capacity for domestic and international flights by 40 percent.

Government money could lead JAL to reject foreign capital; on the other hand, a more robust balance sheet would make JAL more attractive to investors. JAL’s main creditor banks had previously balked at requests from JAL to waive loans worth 250 billion yen, according to local media.

JAL will now apply for assistance from the Enterprise Turnaround Initiative Corporation, set up by the government this month to invest in struggling but viable firms. The turnaround body will conduct its own due diligence before formally agreeing to aid JAL, Mr. Maehara said, though government commitment to the airline appeared certain Thursday.

Shares of Japan Airlines, which have plunged in recent weeks, closed Thursday up 2.7 percent at 115 yen, outperforming a 1.8 percent drop in the Nikkei average.

The troubles at JAL, once a symbol of Japan’s emergence in the global economy, stem from years of mismanagement, as well as a more recent plunge in travel amid the global financial crisis.

JAL’s deep problems also stem from stiff regulations that have forced the airline to service many unprofitable routes within Japan to prop up a network of domestic airports built with government money. Flying to these has been a drain on its resources and profitability.

But JAL can be quickly revived with funds and a robust turnaround plan, said Shinjiro Takagi, the government task force chief.

“Reviving JAL will require a substantial amount of money, including public money,” Mr. Takagi said. “Our conclusion, however, is that JAL can most certainly turn itself around, and in a robust way.”

“There is room for great reform at JAL,” said Kazuhiko Toyama, deputy leader of the task force. “There is still great potential for growth,” he said.

The turnaround body, the E.T.I.C., has a mandate to draw up to 1.6 trillion yen in state-guaranteed funds to assist JAL. The government is also considering enacting a new law that would allow the airline to unilaterally slash its pension benefits.