TOKYO - A national icon teetering on the brink of bankruptcy, dragged down by
huge, underfunded legacy costs, a history of mismanagement and a harsh business
climate. A new government determined to bail it out because it is "too big to
fail". General Motors in the US? No, Japan Airlines (JAL), the country's
premier air carrier.
The situation facing the new government headed by Prime Minister Yukio Hatoyama
is somewhat similar to that presented by General Motors when President Barack
Obama took office. Like GM, the Japanese airline is a national icon that has
fallen on hard times, not just buffeted by cruel economic circumstances but by
its own missteps and generous pensions.
To carry the American analogy further, Japan's second carrier, All Nippon
Airlines, like Ford Motor Co, is in better financial shape. The airline even
had the wherewithal to hire Japanese teen golfing
phenomenon, Ryo Ishikawa, as its official spokesman. JAL has suspended all
broadcast advertising. It can't afford the cost.
Even before the new Japanese government took office in mid-October, the former
administration had been taking emergency steps to salvage the airline, which
reported a 96 billion yen (US$1 billion) operating loss for the first half of
2009. The company reported a group net loss of 131.2 billion yen, compared with
a net profit of 36.7 billion yen a year earlier.
In June, the government-owned Development Bank of Japan lent the airline about
100 billion yen to help keep it afloat to the end of the year, one of several
such loans over the past few years.
The Ministry of Lands, Infrastructure, Transportation and Tourism was
orchestrating equity investments from other international airlines, such as
Delta, American Airlines, and British Airways, while the company itself
presented a new plan for cutting costs by layoffs and by cutting back on
unprofitable routes. This was the situation when the newly elected government
took charge.
New Transport Minister Seiji Maehara took a careful look at the restructuring
plan and initially threw it out. He determined that the airline was in too deep
for normal cost-cutting initiatives, even draconian layoffs. Efforts to involve
foreign airlines, especially Delta, were at one point rejected as too little
and too complicated, given the system of airline alliances.
That door, however, is not entirely closed. American Airlines announced late
last week that it might team up with private equity firm TPG to invest some
US$300 million in JAL. The two airlines are members of the Oneworld aviation
alliance; teaming with Delta would require JAL switching to SkyTeam, a costly
and complicated transition. Delta said on Wednesday that it and partners in the
SkyTeam alliance were prepared to offer JAL a support package totaling US$1
billion in investment, revenue guarantees and financing, Reuters reported.
Yet the same day, Maehara, speaking after a parliamentary committee assembled
to discuss how to secure JAL's survival, refused to rule out bankruptcy, saying
he "had never said that we would exclude the option of legal bankruptcy",
TimesOnline reported on Thursday.
Superficially, that might appear an attractive option. After all, many American
airlines have used bankruptcy protection to get their houses in order,
including JAL's presumed rescuer, Delta, in 2005.
JAL, however, is too important to fail. With about 17,000 employees, JAL is not
quite in the General Motors class. Even if every JAL employee was laid off, it
would hardly cause a ripple in the unemployment rate. It buys, not builds,
aircraft so there is no widespread network of suppliers to worry about. There
are other reasons to prop it up.
"We cannot afford to let JAL go under as its flights account for 60% of the
total in Japan," said Maehara. "If its flights stop, the Japanese economy as a
whole, local economies and exchange with foreign countries, will be seriously
hampered."
Under the present government policy, JAL will become, in essence, the ward of a
new government-private sector Enterprise Turnaround Initiative Corporation
(ETIC), with Maehara and other government officials deeply involved. On October
30, the airline announced that it had requested the ETIC to initiate
preliminary consultation to decide whether ETIC would support the restructuring
of the group. The government is prepared to guarantee up to 1.6 trillion yen
that the new corporation borrows to give to JAL and other companies.
The rebuilding of JAL would be based on a 300 billion yen government loan,
financial institutions' forgiveness of debts and conversion of bonds into
company shares, and a 180 billion yen bridge loan to carry the company over the
next perilous few weeks. The bridge loan is needed because the carrier's
business is deteriorating so fast that there was worry it would not survive
past November.
Vast amounts of public money were injected into the major banks during Japan's
financial crisis in the 1990s, but in that case, the government was trying to
prop up an entire sector of the economy. The money destined for JAL would be
the largest amount spent on an individual, private corporation.
The government is also expected to take aim at JAL's huge pension liabilities,
which the government says need to be severely reduced if the airline is to
recover. If the retirees don't approve the cuts (and a two-thirds majority is
required under current law), the government says it will pass a law mandating
it. That would be a big step, considering that the ruling Democratic Party of
Japan is supported by the unions.
Japan Airlines was the nation's flag carrier from 1953 to 1987, when it was
privatized. In many ways, it set the standard for other Asian airlines, such as
Singapore Airlines, Garuda and Thai Airways, that followed. There was a time
when JAL's super gracious passenger service was the standard for all airlines
to emulate.
Although it was privatized in 1987, in many ways it remained Japan's flag
carrier, and that contributed to its current difficulties. The previous
government was famous for sprinkling public works projects around the country,
including airports for every one-horse town. JAL was obliged to serve those
routes, even though many were unprofitable. As part of its reorganization, JAL
has been cutting back drastically on both domestic and international routes.
Japan Airlines has been buffeted by many of the ill winds that have hurt the
bottom lines of all the world's airlines, such as the global recession, rising
petroleum prices and the swine flu epidemic. But it has also suffered from
other problems particular to Japan.
Landing fees at Narita International Airport and other international and
domestic airports in Japan are among the highest in the world, and they eat
into profits. The new government is on record as favoring lowering such fees.
Similarly, taxes and jet fuel charges in Japan are comparatively high.
Despite its dire straits, JAL has had no trouble attracting foreign companies,
such as American and Delta, to prop up the company. Changes in aviation policy
and the impending reconfiguration of Japan's main airports make an alliance
with JAL still an attractive proposition.
On October 26, US and Japanese aviation officials started talks in Tokyo to
reach an agreement, perhaps by year's end, on an open-skies accord. That would
allow airlines more flexibility in determining flight routes and numbers,
acting more at their own discretion rather than through government fiat. That
could be coupled with the expansion of departure and arrival slots at the two
main Tokyo-area airports, Narita and Haneda.
Minister Maehara is on record as wanting to turn Haneda, which now serves
mostly domestic flights, into an Asian aviation hub competing with such new
aviation portals as Inchon in South Korea and Shanghai for Asian traffic.
Todd Crowell is a correspondent based in Tokyo.
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