19-Oct-2009 10:30 AM

Government to bail out JAL, JAL seeking tie-up with LCCs; to sell units and aircraft

Japan Airlines Corp is reportedly considering the following measures, as part of its new turnaround plan, which is expected to be finalised by the end of Nov-2009 (Kyodo News/Bloomberg/AFP/Dow Jones/Reuters/ Yomiuri Shimbun, 16-19-Oct-2009):

  • Financial outlook: Anticipating a second consecutive year of operating losses in FY2009 (to Mar-2010) of approximately JPY59 billion (USD648 million). Following the restructure, the carrier is reportedly expected to be able to achieve an operating profit of JPY50 billion (USD500 million) p/a, according to the Mainichi Newspaper;
  • Restructure plan concerns: Japan’s three largest banks, Mitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc, have reportedly rejected the Transport Ministry’s rehabilitation plan for JAL, according to the Nikkei Business Daily. The banks have reportedly determined that the plan “lacks a robust business strategy” and fails to resolve uncertainty about public fund injections and debt guarantees. The Ministry of Finance and the Development Bank of Japan have also reportedly stated the restructuring plan may not be feasible and have expressed concerns about approving the latest restructuring plans. The government agencies have reportedly determined the plan may be difficult to implement, with key concerns involving the planned reduction of JAL’s JPY330 billion (USD3.6 billion) in pension liabilities to JPY100 billion (USD1.1 billion) and a reduction in staffing levels of 9,000-10,000;
  • Government bailout: The Japan Government will reportedly provide financial support to the carrier, with a new quasi-public agency, entitled The Enterprise Turnaround Initiative Corporation of Japan, which was launched on 16-Oct-2009 to take a majority stake in JAL and rebuild the airline, according to the Sankei Shimbun. ETIC has the ability to tap up to JPY1.6 trillion in state-guaranteed funding in the current Fiscal Year. Its mandate runs for five years;
  • Ratings: Standard & Poor's downgraded the carrier by two levels into junk status (from 'B+' to 'B-') on concern it may issue new shares to pare debts. It added that a bankruptcy filing was less likely, but possible. Moody’s Investors Service also downgraded the long-term debt rating and issuer rating of Japan Airlines International by one notch, from 'Ba3' to a speculative grade of 'B1'. The agency has also placed the ratings on review for further possible downgrade;
  • LCCs: Reportedly seeking a tie-up with LCCs for its Asian operations. The carrier is reportedly planning to expand codesharing operations with LCCs in Asia, replacing its less profitable services for tourist destinations, such as Hawaii, Thailand and Indonesia, according to The Asahi. The move would enable JAL to focus on more profitable services to North America, Europe and China
  • Mid-term Plan: Will reportedly release a midterm business plan by the end of Oct-2009, a month earlier than planned. The plan will cover a five-year period and reportedly aims to raise operating profit at the carrier to JPY50 billion (USD550 million); 
  • Job cuts: Under the turnaround plan, JAL will increase the number of job cuts by more than 30% from the previously stated 6,800 to more than 9,000 employees. This figure represents a nearly 20% cut from its total staff strength of 47,500. Corporate pension benefits will also be reduced;
  • Subsidiaries: Reportedly reconsidering earlier plans to sell some of its shares in three group firms, including JALways Co, TFK Corp and JAL Ground Services, to raise approximately JPY90 billion. In separate reports in the Mainichi Newspaper, it has been reported that the carrier is considering plans to sell approximately 30% of its subsidiaries;
  • Fleet: Reportedly considering plans to sell ten of its larger aircraft, and to move to smaller aircraft to reduce operating costs and employee levels, according to the Mainichi;
  • Executive appointment: The carrier’s rehabilitation task force is reportedly considering the establishment of the post of chief restructuring officer (CRO) in the company, according to The Yomiuri Shimbun. The task force is also reportedly planning to select a chief operating officer under the supervision of the new CRO after requesting President Haruka Nishimatsu and his management team to resign;
  • International partners: Reportedly ready to restart negotiating with Delta Air Lines  and American Airlines;
  • Route rationalisation: Under the draft turnaround plans, approximately 40 international and domestic routes will be eliminated, fewer than the originally planned 50 routes.

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