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Japan Airlines strikes back: CEO seeks to clear the air – favours Delta switch?

4-Jan-2010

The controversy and confusion surrounding Japan Airlines has intensified over the New Year period, with the state-owned Development Bank of Japan committing to double its credit line for the beleaguered airline to JPY200 billion (USD2.2 billion) in a bid to stabilise the carrier while a rescue plan is sorted out. JAL’s stock plunged in the last days of 2009, as investors speculated the airline was heading for bankruptcy proceedings.

Amid the confusion, the airline’s CEO, Haruka Nishimatsu, has put forward the embattled airline’s view on proceedings. The Asahi Shimbun published an interview with Mr Nishimatsu on Sunday (03-Jan-2010). The following is a brief synopsis of that interview.

With the Enterprise Turnaround Initiative Corporation (ETIC) in discussion with JAL’s creditors, Nishimatsu urged caution in dealing with the issue by legal liquidation while the airline continues operations, as it may damage the company’s image further and lead to more customer loss.

Nishimatsu stated JAL is working very hard to resolve its own problems, through reducing pension payments and conducting a wide-ranging business rationalisation programme.

In reality, noted the Asahi, JAL has a huge debt problem – but if the ETIC wants to reach a settlement, they will need the positive cooperation of JAL. (ETIC is slated to decide on a financial package for the carrier during January). Nishimura expects discussions will go on until the very last minute.

The government is said to be split over how to rescue the carrier. Kan, who oversees ETIC, and some other Cabinet ministers favour court-backed bankruptcy proceedings, while Transport Minister Maehara opposes it for fear such a move would hinder JAL's operations.

Asahi Shimbun - Conversation with Haruka Nishimatsu, CEO, Japan Airlines

01-JAN-2010 INTERVIEW, PUBLISHED 03-JAN-2010 - NOTE, NOT AN OFFICIAL TRANSLATION

Q: Many people think that the JAL problem will be solved by the ETIC (Enterprise Turnaround Initiative Corporation through a court-managed legal liquidation - what do you say about that?

Nishimatsu: I don’t see why ETIC have to be involved with a legal liquidation. We are thinking of reducing our pension payments on our own and we are also saying that we will go ahead with restructuring ourselves. What we are doing is equally as effective as the legal settlement (proposed by ETIC). So I feel - Why are they putting such stress on that way?

We’re trying our best - why do they think we need this sort of help from ETIC? I want you to understand that I consider we can deal with the problem without the help of such a settlement.

A legal liquidation gives the people the image of bankruptcy - and that will deter customers. If the company is not evaluated highly by its customers, reconstruction will not work and that would mean trouble for the ETIC.

Q: What is the cause of JAL’s current management crisis?

NISHIMATSU: After the global financial collapse last September business travelers have drastically cut back on international flights. International business is half what it used to be. The situation today is much worse than the oil shock or burst of the bubble economy.

Q: Wasn’t the reason because JAL was way behind in management rationalization?

NISHIMATSU: The speed of developments was too fast. We could not catch up (with events) by restructuring and re-equipping our fleet. We should have started to work on these issues seven or eight years before. Additionally, the relationship between the company management and employees was awkward. However, in the world of business, results count. I therefore feel very sorry about what has happened.

Q: What would you say about JAL’s pulling out of international flights altogether?

NISHIMATSU: Simply not possible. In particular, traffic demand in Asia is increasing strongly. There’s a huge business chance. If JAL were to stop operating international flights, it would be “Japan Airlines” anymore.

The ETIC understand that point.

When we look back we can see that the sales ratio of our international flights and our domestic operations was about 50/50.

By comparison with many other world airlines, JAL had rather high international revenues (in the past).

(CAPA note: In 1997, JAL’s domestic passenger revenue was 24.1% of all revenue. International passenger revenue accounted for 52.1%. In 2008, JAL’s domestic passenger revenue was 33.3% of all revenue. International passenger revenue was 35.0%. So roughly 50:50. This reflects the increase in domestic revenue ratio after the merger with JAS)

Of course there is a future in international business however, that can give management instability (due to demand volatility) so therefore we are working to decrease our international flight routes and use smaller aircraft - and by doing so reduce our scale of operations. But we want to maintain international services.

All Nippon Airways (ANA) currently has an international operation that is just about 40% of JAL’s international business. Even if we cut our international flights by 30%, we can still be competitive with ANA.

Q: On the issue of international alliances, which one are you going to favour?

NISHIMATSU: If we join SKYTEAM, which is led by Delta, we will have a huge task in changing our systems. What I would like to study is how important does Delta think about transpacific and routes in Asia. In future there will be more “Open Skies”in Asia and in that regard, SKYTEAM has many Asian members.

Q: It has been said that you will resign soon - can you say when? Will it be after the resolution of the ETIC decision?

NISHIMATSU: I’m not thinking clearly (about a specific date), but not too far away.


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