Published: January 19, 2010
By HIROKO TABUCHI
TOKYO — Japan Airlines, the once-mighty flagship carrier and Asia’s biggest airline by revenue, filed for bankruptcy protection Tuesday, setting the stage for a state-led bailout that could bring sweeping changes to this busy corner of the global aviation market.
Junji Kurokawa/Associated Press
Japan Airlines President Haruka Nishimatsu bowed before a press conference where he announced his resignation in Tokyo on Tuesday.
Crippled by years of mismanagement and debts of more than ¥2 trillion, or $25 billion, JAL’s application marks the country’s largest-ever corporate failure outside the financial sector. Though JAL’s planes will keep flying, thanks to a ¥600 billion bailout and protection from creditors, its humbling is seen here as a reminder of how some of postwar Japan’s most prominent corporations have failed to keep up with rapid shifts in the world economy.
“Today marks the starting line for JAL’s revival. JAL lives on,” Transport Minister Seiji Maehara said after the carrier entered a court-led restructuring process, similar to the Chapter 11 filings in the United States that companies like Delta Air Lines and General Motors have undergone. Kazuo Inamori, founder of the electronics company Kyocera and a top management guru here, has been tapped as JAL’s new chief executive, replacing Haruka Nishimatsu, who resigned Tuesday.
The bankruptcy case could also herald an opening up of Japan’s rigid aviation sector.
Delta and American Airlines are vying for a stake in the troubled carrier, with an eye to strengthening their foothold in Japan and the rest of Asia. Though officials say an immediate cash infusion by a U.S. carrier is unlikely, JAL’s woes have provided a rare opportunity for outsiders to start to crack what has been for decades a highly protected industry.
Japanese officials scrambled Tuesday to contain the panic over JAL’s bankruptcy filing. Japanese diplomats have been mobilized in recent weeks to assure Tokyo’s business partners that JAL’s business would not be disrupted by a filing. Japan has also rushed to secure access to fuel to keep JAL’s planes flying. Reservations and frequent-flier mileage points will be honored, the company said.
“Japan Airlines provides the foundation of our country’s future development,” the government said in a statement. “Until its restructuring is complete, the Japanese government stands ready to offer JAL the assistance necessary to maintain stable and reliable operations.”
A year ago, a bankruptcy filing would have been unthinkable for JAL, whose logo of a crane with wings outstretched came to symbolize Japan’s rise as a modern industrial power.
Under the long-governing Liberal Democratic Party, JAL was propped up first as a state-owned airline and then, after the carrier’s privatization in 1987, with generous government bailouts. At the same time, the company was struggling to turn a profit amid intensifying global competition.
“The Japanese government has delayed dealing with JAL for too long,” said Motoshige Itoh, a professor of economics and an aviation expert at Tokyo University. “Responsibility for this outcome lies with JAL, as well as government officials who failed to take any meaningful action.”
Now, a new government in Tokyo has promised to make a break with the past. The Democratic Party, which swept to power in September, has criticized the previous government for pouring state funds into a carrier while allowing problems to fester: huge legacy costs, a bloated work force, mounting pension costs and an aging fleet.
JAL and its investors are being forced to pay the price. The Enterprise Turnaround Initiative Corp., a state-backed body tasked by the court with the carrier’s restructuring, plans to push JAL to eliminate 15,700 jobs — a third of its work force — and slash pension benefits. The body will also eliminate a fifth of its international routes, as well as unprofitable domestic destinations, and downsize its fleet.
Shareholders’ equity will be wiped out in a 100 percent capital reduction that will go toward paying off the airline’s debt. The company’s main creditor banks will be forced to write off as much as ¥350 billion in debt.
Taxpayers are also set to bear part of the burden. Under the turnaround plan, JAL will receive a ¥300 billion injection of public funds and further state-backed loans for another ¥300 billion.
JAL’s president, Mr. Nishimatsu, apologized to the nation on Tuesday, bowing deeply at a televised news conference in Tokyo. “The government, our banks, our investors and the general public has given JAL a final chance,” he said. “I believe JAL can once again become an airline that represents Japan.”
But rising fuel costs, intense price competition and hefty restructuring costs are expected to weigh on JAL’s bottom line, despite the fresh funds. The carrier is headed for its fourth net loss in five years, and last week, it drew on ¥145 billion in emergency funding from a credit line supplied by a state-owned bank.
JAL could emerge from bankruptcy as a smaller, more streamlined airline. Once the owner of the world's largest fleet of Boeing 747 jumbo jets and other big aircraft, JAL will switch to smaller regional jets for better footwork, said Akitoshi Nakamura, a former Citigroup banker at the state turnaround body who will lead the restructuring effort. The airline will also spin off at least a quarter of its 200 subsidiaries.
The carrier will seek to exit domestic routes the government has long forced JAL to serve, part of a longstanding effort to support regions outside the country’s main urban centers. Overseas, JAL intends to cover for the destinations it will no longer serve by bolstering cooperation with global airline alliances. The carrier said it aims for an operating profit of $115.7 billion by 2012.
Still, the turnaround body has asked the airline to hold off accepting investments from Delta or American for now, according to a person briefed on the matter.
Delta has offered JAL $500 million in equity, as well as a substantial increase in passengers and revenue from its SkyTeam alliance, while American has offered $1.4 billion for JAL to stay within its Oneworld group.
Accepting outside capital “would only lead to more stakeholders and complicate the restructuring process,” said the person, who requested anonymity because he was not authorized to speak to the news media. An investment from either of the carriers, preferably after a three-year limit set by the turnaround body for JAL’s restructuring, is still a possibility, he said.
Delta and American both reaffirmed their investment offers on Tuesday. “The bankruptcy will not affect JAL’s relationship with its Oneworld partners,” said Craig Kreeger, senior vice president at American.
“Delta went through a similar restucturing process, and as a result emerged in 2007 as one of the most financially sound and the world’s largest airlines,” Delta said in a statement.
JAL opened its first domestic routes in 1951 and expanded overseas just two years later with a flight linking Tokyo to San Francisco via Honolulu. By 1954, JAL had been entrusted with flying Emperor Hirohito across the country in the first flight for a reigning Japanese monarch.
The airline continued to grow rapidly together with the Japanese economy, and in Japan’s bubble economy of the 1980s helped bring the country’s package-tour travelers overseas.
But ambitious investments in overseas hotels and resorts during the bubble era, coupled with soaring costs and intense price competition with a rival, All Nippon Airlines, started to hurt JAL’s finances. More recently, JAL has suffered from a drop in travel because of the global economic crisis and swine flu epidemic.
JAL’s incoming president, Mr. Inamori, said he had hesitated to accept the post because of his advanced age and his inexperience in the airline industry.
“But I accepted, knowing that a revival will have great meaning for Japan’s economy as a whole,” he said in a statement. “I have no doubt JAL can be revived.”
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