Months of speculation came to an end on Tuesday afternoon as Japan Airlines (JAL), the country's 59-year-old flagship carrier that once symbolized the strength of Japan Inc., filed for bankruptcy with two of its subsidiaries. Weighted by debts estimated at $25.6 billion (2.3 trillion yen), Japan Airlines Corp., Japan Airlines International and JAL Capital made history today as what is perhaps Japan's largest nonfinancial corporate failure. With a long record of unprofitable earnings, the airline has taken a hit from weak travel demand after SARS and H1N1, fuel surcharges and the global recession.
Rather than going belly up, however, Asia's largest airline by revenue is getting the lift it needs to stay in the sky but not without shedding some bulk. With the government keen on keeping Japan's largest carrier in business, JAL is now set to transition into a three-year, state-backed restructuring plan. Before JAL's filing on Tuesday, Transport Minister Seiji Maehara said, "The government wants to continue to support JAL to ensure its continued stable and safe operations." The Enterprise Turnaround Initiative Corp. of Japan (ETIC), a quasi-government entity that buys the debt of troubled Japanese companies and helps turn them around, will support the airline through massive rehabilitation to transform JAL into a leaner operation.
JAL will receive an investment of about 300 billion yen ($3.3 billion) from the ETIC, which the flailing airline approached in October, in addition to hundreds of billions of yen in debt waivers from its main lenders. In addition, the ETIC and the state-backed Development Bank of Japan will extend JAL a credit line of more than $3.5 billion. Key measures of the restructuring plan include cutting more than 15,000 jobs, or about 30% of its workforce, by the end of 2013, paring down to about half of its 110 group firms, and slashing unprofitable international and domestic routes. JAL's shares which hit an all-time low of 3 yen Tuesday afternoon from a high of 213 last March will also be delisted from the Tokyo Stock Exchange. Kazuo Inamori, founder of technology company Kyocera, is expected to take over from JAL's president Haruka Nishimatsu, who resigned on Tuesday.
With its wings clipped, JAL hopes for smooth progress under the ETIC. There will be no disruption in the payment of leasing fees or credits, and the airline will continue to honor frequent-flyer mileage and tickets. But some analysts wonder if JAL can continue to grow as a business during such a massive restructuring. Yasuhiro Matsumoto, senior analyst at Shinsei Securities in Tokyo, says he's split between whether bankruptcy and ETIC help is the best path for the airline. "It's clear that there's government support, but we don't know the future of JAL's business profile," says Matsumoto.
In his view, the government should focus JAL's operations strictly on the domestic market. Japan has only two main carriers for domestic routes, JAL and All Nippon Airways, but both airlines' international routes have to compete with bigger and healthier global carriers. Over the last few years, JAL has continuously cut back on unprofitable international routes, and will continue to do so under its revitalization plan. Today, JAL has roughly three times the number of international routes operated by ANA, but Matsumoto says that if things go according to plan in the next three years, the size of JAL's international business will decrease by about 40%. "There will be no significant difference between these airlines in terms of revenue lines in next two to three years," says Matsumoto.
That all might change, however, if JAL, with ETIC's approval, takes an offer from overseas. Both American Airlines and Delta Air Lines have been courting JAL for months in a bid to expand their Asia networks. American, as a partner to JAL through the Oneworld alliance, and its private equity partner are willing to offer JAL $1.4 billion. Delta, the world's largest airline operator, has offered $1 billion. JAL aimed to make the decision between American or Delta by the end of the month, but Transport Minister Maehara has said the decision will be delayed. Neither airline will be allowed to invest in JAL until new management is in place in February.