Japan Airlines Needs GM-Style Bailout

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Shizuo Kambayashi / AP

Japan Airline President Haruka Nishimatsu answers reporters' questions in Tokyo on Sept. 24, 2009

When Japan Airlines (JAL) switched from glass wine bottles to plastic ones in coach class earlier this year, passengers took it as just another sign of the humbling of the country's once-proud flagship carrier. But far greater humiliations were in store for Asia's largest airline by revenue. Beset by a steady erosion of its customer base, high cost structures and a $15.4 billion debt load, JAL lost about $1 billion last quarter and projects a loss of about $700 million for this fiscal year. With nowhere else to turn, JAL CEO Haruka Nishimatsu this week met with Transport Minister Seiji Maehara to discuss a government bailout, inviting unflattering comparisons between the Japanese airline and American carmaker GM.

Such comparisons are not unfounded. Like GM, JAL is teetering on the brink of failure and has been forced to extract huge concessions from its employees to stay in business. So far, retired workers have been asked to accept half their pension payments; the airline also plans to cut 14% of the workforce (about 6,800 jobs) over the next three years and to suspend or reduce tens of international and domestic routes. That's not enough, however. JAL reportedly needs more than $1 billion just to continue services into next year. So Nishimatsu has been forced to go hat in hand to the government seeking help to meet its financial needs of up to $3 billion in emergency capital.

It's inconceivable that Tokyo will simply allow JAL, which was owned by the government until it was privatized in 1987, to fail. The airline has already been bailed out three times since 2001, and was guaranteed 80% of a 100 billion yen emergency loan by the previous administration. On Thursday, Japan's new Prime Minister, Yukio Hatoyama, said "public support may become necessary" for JAL and that he wants to finalize restructuring plans for the company "as soon as possible," on the sidelines of the G-20 meeting in Pittsburgh. Government officials "definitely don't want Japan's flagship carrier to file for Japan's equivalent of Chapter 11," says Janet Lewis, senior analyst at Macquarie Capital Securities. "Recently, no major [company] in Japan has been allowed to fail."

But a radical corporate makeover, which some have suggested could include forced sale of some assets (as GM was forced to do to get bailed out by Washington), is JAL's possible fate. On Sept. 25, following Nishimatsu's visit to the Transport Ministry, the government announced that a five-member task force will help formulate a restructuring plan, to be finalized by the end of November. Relative to other carriers, JAL has a high portion of revenues coming from non-flying businesses and potential spinoffs could target freight operations and less profitable operations. JAL is also being wooed by foreign carriers that might invest for minority stakes in the airline. "There aren't many solutions for JAL," says JP Morgan Securities airline analyst Hitoshi Hosoya. "What it needs is capital — cash."

Delta Air Lines and JAL's current partner American Airlines, which are looking to expand routes within the Asian market, have recently held talks regarding potential investment in JAL. A deal could be announced within weeks, but whatever it is, it will only be a partial solution. "The problem is that [JAL] is too big to sell and there's no one to buy," Hosoya says.

There's no word yet on whether the government will provide the airline with additional funding in exchange for an ownership stake. Hatoyama's handling of the situation is being watched closely because it could signal whether Japan's new ruling party, the Democratic Party of Japan, will take a harder line on Japan Inc. than the Liberal Democratic Party, which recently lost power in parliamentary elections after nearly 54 years of unbroken rule.

Bankruptcy, though, is not seen as an option because of the harmful ripple effects it could inflict on Japan's struggling economy. "If JAL [significantly] shrinks domestic routes, other political problems might emerge" as prefectural airports lose traffic and money, says Hosoya. In the past, the government has typically propped up airlines to maintain routes and the number of airports — which are often a source of local pride rather than a reflection of traveler demand. "Basically, the country is losing money to save the network," Hosaya says. Soon it may be losing money to save its largest airline.