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American raising JAL offer, Delta could follow; JAL may post USD13.3 bln full year loss

8-Jan-2010 11:15 AM

Japan Airlines (JAL) and the Japan Government reported the following developments on 07-Jan-2010:

  • Turnaround plan: Japan's new Finance Minister, Naoto Kan, stated he expected the Enterprise Turnaround Initiative Corp of Japan (ETIC) to support Japan Airlines, adding to growing expectations of a state-funded bailout of the carrier (Yomiuri Shinbun, 07-Jan-2010). ETIC is reportedly considering investing approximately USD3.3 billion into JAL if it files for bankruptcy and its banks write off loans. JAL may also reportedly eliminate 10,000 positions over the next three years under the ETIC plan (Nikkei, 07-Jan-2010). Further debt waivers and a reduction in pension obligations would reportedly result in a JPY730 billion (USD7.9 billion) boost for the carrier. The ETIC is expected to make a final decision whether to support JAL in the week commencing 18-Jan-2010, with a bankruptcy filing reportedly likely at the same time;
  • Financial position: JAL is reportedly likely to post a net loss of JPY1.23 trillion (USD13.3 bllion) in the current financial year, due to a large restructuring charge (Nikkei, 07-Jan-2010). The airline currently has debts of approximately USD16 billion;
  • Restructuring charge: ETIC reportedly plans to write down the value of the carrier’s fleet, resulting in a special charge of JPY1.13 trillion (USD12.1 billion) in the 12 months ended Mar-2010 (Bloomberg/The Nikkei, 07-Jan-2010). Due to the charge, the ETIC expects the carrier's liabilities to exceed its assets by JPY840 billion;
  • Creditors: Japan’s three private creditor banks, Mizuho Corporate Bank, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp, have reportedly compiled their own out-of-court restructuring plan for JAL in hopes of averting bankruptcy proceedings (Kyodo News, 08-Jan-2010). The scheme reportedly calls for the three creditors to forgive over JPY300 billion (USD3.3 billion) in loans and request shareholders to accept a reduction in ownership stakes. The banks have reportedly submitted the plan to the Transport Ministry and the ETIC;
  • International partners: American Airlines has reportedly raised its offer to invest in JAL by USD300 million to USD1.4 billion (Wall Street Journal, 07-Jan-2010). The US carrier, which is partnering with TPG and other oneworld members, reportedly presented the offer to JAL on 07-Jan-2010. Earlier, Delta Air Lines and its SkyTeam partners offered JAL a USD1 billion package (USD500 million equity investment, USD200 million in financing and USD300 million to offset revenue JAL might lose in the transition from American to Delta), although Delta’s President, Ed Bastian, reportedly stated the carrier is "willing and able" to raise additional capital through third-party resources. Delta separately stated it would proceed with a JAL investment even if the carrier files for bankruptcy, as the airline “provides great opportunities” (Bloomberg, 07-Jan-2010). JAL is expected to select a new international partner as early as next week;
  • Opposition of Delta tie up: Business Travel Coalition Chairman, Kevin Mitchell, expressed opposition regarding a proposed tie up between Delta and JAL, stating such a move would be bad for competition (AP, 07-Jan-2010). Mr Mitchell stated the proposed SkyTeam linkage would control a 62% market share on routes between Japan and the US, up from a third currently.