JAPAN: Investors Sell as JAL Tries to Decide Its Next Step

January 13, 2010

By HIROKO TABUCHI

TOKYO — Investors rushed to sell their shares in Japan Airlines on Tuesday ahead of a bankruptcy filing that could come as early as next week. At the same time, two rival airlines, American and Delta, battled for a stake in JAL, which could still be a strong regional player once restructuring takes place.

American Airlines said Tuesday it had raised its offer of an investment in JAL by $300 million, to $1.4 billion. American, which is making the bid jointly with the private equity firm TPG, also guaranteed a $100 million annual increase in sales for JAL if it stayed with the American-led Oneworld alliance.

Still, shares in JAL, which has $16 billion in liabilities, fell 45 percent on Tuesday to a record low of 37 yen in Tokyo as a bankruptcy filing appeared inevitable.

The sell-off came after Prime Minister Yukio Hatoyama suggested that shareholders of JAL — the recipient of a string of government bailouts — would not be protected in the restructuring process, which would be orchestrated by a state-backed corporate turnaround agency.

The transport minister, Seiji Maehara, confirmed Tuesday that shareholders were at risk, adding that JAL’s main creditor banks supported the government’s plans for a court-led restructuring.

“I think shareholders should also bear responsibility,” Mr. Hatoyama told reporters.

Despite its expected bankruptcy filing, American and Delta are locked in battle over a stake in the Japanese carrier.

The two airlines hope to tap JAL’s routes to the fast-growing Asian market once the carrier is restructured, and strengthen their foothold in Japan. A recent “open skies” agreement between the United States and Japan had led to tie-ups between airlines of the two countries.

Delta is offering JAL $500 million in equity, as well as a substantial increase in passengers and revenue from its SkyTeam alliance.

A state-backed body tasked with JAL’s restructuring could reject both investments, however, and rely instead on a public injection of funds, Japanese news agencies have said. The agency believes that an outside investment will only complicate the restructuring process, according to news reports.

Meanwhile, the Japanese airline appeared to clear a major hurdle to receiving more public money after it said Tuesday that it had persuaded retirees to accept a 30 percent cut in their pensions. The government had demanded that JAL slash its pension payouts in return for an additional 300 billion yen.

The finance minister, Naoto Kan, told reporters that the government would consider increasing its assistance to JAL.

“The government has already expressed support to JAL, but I wonder whether that’s enough,” Mr. Kan said. “If we need to express further support, we will take action as needed.”

The chief financial officer of American Airlines, Thomas W. Horton, urged the Japanese to allow further investment from a commercial partner, saying that it would be to JAL’s advantage.

“While JAL and the Japanese government might decide to address capital requirements internally, and we certainly would understand and respect that, our offer of capital would also be available if this was deemed appropriate,” Mr. Horton said.

“It brings stability and certainty to Japan Airlines at a time when most needed, as it faces turbulent times over the coming weeks and months,” he said.

Mr. Horton made his case alongside other members of the Oneworld alliance, including British Airways, Qantas and Cathay Pacific.

British Airways offered an additional $200 million in revenue to JAL over three years through an expanded code-sharing agreement, while Qantas said it would advise JAL on setting up a low-cost carrier business.

The extent of JAL’s woes have come as a shock to many Japanese.

Initially state-owned, the airline’s rapid growth in the 1960s and ’70s mirrored that of the Japanese economy. The airline was privatized in 1987.

But intense price competition and ill-timed investments, along with soaring personnel and pensions costs, have weighed heavily on JAL. The airline has also suffered from a drop in travel amid the global economic crisis and swine flu epidemic. It lost about $1.5 billion in the six months through September.

The carrier will shed 13,000 jobs — almost a quarter of its work force — through early retirement programs and by spinning off units, according to the Nikkei business daily. The airline’s chief executive, Haruka Nishimatsu, is expected to step down.

Mr. Hatoyama, whose Democratic Party swept to power in September on promises of bold changes to Japan, has said the government is committed to keeping JAL flying throughout the restructuring.

“We are united in our efforts to guarantee JAL’s operations, and that the company’s future revival,” Mr. Hatoyama told reporters. “That is most important.”

Copyright 2010 The New York Times Company