Restructuring looms as clock ticks on JAL bankruptcy
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Last Updated: Tuesday, January 19, 2010, 13:10
  
Tokyo: Japan Airlines Corp is set to file for a bankruptcy on Tuesday that will see it slash 15,000 jobs and replace ageing planes in an effort to survive an industry beset by volatile fuel costs and fickle flyers.

JAL, Asia's largest airline by revenues, will remain in the skies under a state-backed restructuring plan but cut unprofitable routes, non-core businesses and pension payouts and as it tries to free itself from about $16 billion in debt, sources have said.

JAL, which has been bailed out by the Japanese government three times in the past 10 years, must now look to reinvent itself through painful operational cuts and tough decisions about foreign capital and alliances.

"I am not worried about the future of the carrier as I believe the government will strongly support it," said Yasuhiro Matsumoto, credit analyst at Shinsei Securities.

"But whether it will be able to grow as a business is unclear. I can't see how JAL is going to build its network domestically and internationally."

The airline is expected to file for bankruptcy around 0800 to 0830 GMT, two sources familiar with the matter said.

The move could make rival All Nippon Airways Co Japan's new flagship carrier, some analysts said. Shares in ANA fell 4.2 percent after rallying to a six-month high last week.

Shares of JAL closed flat at 5 yen, having fallen as low as 3 yen The airline has lost more than 90 percent of its market capitalisation since the start of the month.

With a market value of about $150 million, JAL is now smaller than minor carriers Croatia Airlines and Jazeera Airways and is worth less than a Boeing 747.

JAL bonds maturing in 2013 traded at the equivalent of just 27.8 cents on the dollar, versus around 70 cents last month.

Debt-laden

JAL was saddled with 1.5 trillion yen ($16.6 billion) in total liabilities as of the end of September. That level of debt would make it the sixth-largest bankruptcy in Japan's history, ranking just below the 2001 collapse of retailer Mycal.

Following similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines, JAL plans to cut about a third of its 47,000 workforce and erase about two dozen unprofitable routes, sources said.

JAL is expected to file for protection from creditors using a procedure that will allow it to continue operations and seek to rebuild itself, similar to Chapter 11 in the United States.

In return, the state-backed Enterprise Turnaround Initiative Corp of Japan (ETIC) will support the carrier with about 300 billion yen in capital and creditors will be asked to forgive about 350 billion yen of loans, sources said.

Units including Japan Airlines International, which handles domestic and overseas flights and JAL Capital, which raises operational funds, will also file for bankruptcy, one source said.

But that will only be the beginning for an airline with depleted capital, facing headwinds such as rising fuel prices and shrinking passenger numbers, on top of hefty restructuring costs.

Fuel hedging contracts may also be affected by a bankruptcy filing. JAL uses mostly in Brent forward contracts and about 40 billion yen is estimated to be exposed in the event of an automatic termination, a source familiar with the matter said.

JAL needs to do what it has long put off: Focus on its main business and cut operations it doesn't need, said Andrew Miller, chief executive officer of CAPA Consulting.

"I would have a fire sale -- get rid of the family silver, sell everything that is non-core and focus in on the core and make that work efficiently," he said.

Alliance in question

JAL will also need to make a decision about competing aid offers from Oneworld alliance partner American Airlines and rival Delta, which wants to woo JAL to its SkyTeam group.

The carrier has spent two decades trying to recover public trust following a 1985 crash that became the world's worst single aircraft disaster in history, claiming 520 lives.

JAL, headed for its fourth net loss in five years, last week drew down on the 145 billion yen in emergency funding left from a 200 billion yen credit line supplied by the state-owned Development Bank of Japan.

The state-backed ETIC can draw on government-backed funding to support ailing Japanese companies. The fund has said it would guarantee payment for fuel and other commercial transactions to ensure JAL can maintain its operations.

Kazuo Inamori, the 77-year-old founder of electronics maker Kyocera Corp, was tapped last week to become JAL's new chief executive officer to oversee its restructuring.

JAL's restructuring plan also calls for increasing the fuel efficiency of its fleet, replacing 53 bigger jets with 33 small jets and 17 regional ones.

"I think a revival of JAL will be good for manufacturers such as Mitsubishi Heavy industries which is developing new regional jets," said Shinsei's Matsumoto.

Bureau Report


First Published: Tuesday, January 19, 2010, 13:10


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