Q+A-Japan Airlines heads for state bailout

Tue Oct 27, 2009 5:31am EDT

TOKYO, Oct 27 (Reuters) - The Japanese government is aiming to come up with a blueprint for bailing out Japan Airlines Corp (9205.T: Quote, Profile, Research, Stock Buzz) as early as this week, but several hurdles stand in the way of a final solution to the carrier's many problems.

Following are questions and answers about JAL's troubles and how the government may go about injecting public funds.

JAL is Asia's largest airline by revenue.

WHAT IS WRONG WITH JAL?

JAL posted a $1 billion loss in the April-June quarter and is headed for its fourth annual loss in five years, weighed down by $15 billion in debt and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways Co (9202.T: Quote, Profile, Research, Stock Buzz).

Bankers have estimated is liabilities exceed its assets by about 250 billion yen ($2.7 billion). A government-led task force in charge of crafting the JAL restructuring plan has estimated that figure could be as high as 800 billion yen in the case of a liquidation.

The task force, which is composed of turnaround specialists and reports to Transport Minister Seiji Maehara, estimates JAL could run out of cash as early as next month and is seeking a 180 billion yen bridging loan to keep it operating. [ID:nT294140]

JAL is saddled with dozens of unprofitable routes, some of them established under pressure from politicians eager to secure flights for their constituencies. The Yomiuri newspaper has estimated that 90 percent of JAL's 151 domestic routes are probably in the red.

WHAT IS THE REVIVAL PLAN? HOW WILL THE STATE INJECT FUNDS?

The task force is asking creditors to agree to 220 billion yen in debt waivers and 30 billion in debt-for-equity swaps, and is seeking a total of 300 billion yen in fresh capital from the government and the private sector.

The 180 billion yen bridging loan is expected to come from the state-owned Development Bank of Japan, JAL's largest creditor, and will serve as a stopgap measure until the airline can secure permanent financing.

The task force is considering tapping a scheme recently introduced in Japan called "Alternative Dispute Resolution" under which a third-party would mediate between the airline and creditors to secure temporary financing and debt relief.

That would pave the way for a government-backed corporate turnaround body, the Enterprise Turnaround Initiative Corporation of Japan (ETIC), to conduct due diligence as a prelude to buying its debt and injecting public funds. [ID:nT128108]

Maehara, Finance Minister Hirohisa Fujii, Prime Minister Yukio Hatoyama and Deputy Prime Minister Naoto Kan are expected to conclude how the government will support JAL this week. Maehara has said the final decision would rest with Hatoyama.

WHAT ARE MAJOR HURDLES?

JAL's top creditors, which include the country's three top private banks, have so far rejected the task force's financial aid requests because they feel they are being asked to carry too much of the burden. [ID:nT221178]

Creditors have also said they need to see a detailed plan on how the state would inject funds and a clear roadmap for dealing with JAL's pension shortfall, which reached 330 billion yen in March and is seen as a major roadblock to its revival.

An announcement on a decision to use the ETIC would potentially clear up the issue of public funds, but finding a solution to the pension problem could prove tricky given that any cuts need the support of two-thirds of retirees and employees.

The government has begun looking into special legislation which would force the airline to reduce pension obligations, the Yomiuri reported last week, but such a move would likely meet fierce opposition from labour groups. [ID:nT289312]

WHAT IS GOING ON WITH AMERICAN AND DELTA TALKS?

Despite its woes, JAL's extensive network in Asia and access to the Chinese market has made it attractive to U.S. airlines.

JAL, a member of the Oneworld airline alliance, has held separate talks about business ties and possible capital injection with AMR Corp's (AMR.N: Quote, Profile, Research, Stock Buzz) American Airlines, also part of Oneworld, and Delta Air Lines (DAL.N: Quote, Profile, Research, Stock Buzz) from the rival SkyTeam group.

AMR Chairman Gerard Arpey and other American Airlines executives met with JAL executives in Tokyo this month, a person with knowledge of the meeting told Reuters.

Any investment from American or Delta would likely account for a small portion of JAL's capital needs and would be agreed to after the government-led bailout and restructuring scheme is firmly in place.

American Airlines is eager to work more closely with JAL on scheduling and sharing revenues, ties that would be conditional upon the enactment of an "open skies" agreement currently under discussion between the U.S. and Japan. (Reporting by Nobuhiro Kubo, Yoshifumi Takemoto and Nathan Layne; Editing by Joseph Radford)