1-Sep-2010 8:09 AM

JAL reorganisation plan cuts more routes

Japan Airlines Corporation, Japan Airlines International Co Ltd and JAL Capital Co Ltd filed (31-Aug-2010) its proposed reorganisation plan with the Tokyo District Court on 31-Aug-2010, and on that same day, the Court rendered an order to put the reorganisation plan to a creditors' vote. As part of the plan, the carrier will eliminate approximately a quarter of its debt, 40% of its fleet, 30% of its global workforce, and one in eight international routes and a quarter of its domestic routes (the route reduction is more than expected), creating further opportunities for ANA, which is now larger than JAL traffic-wise (and also Skymark to a lesser degree) in the Japanese market. Chairman and CEO, Kazuo Inamori, stated: "JAL's flop has caused a lot of trouble to shareholders and financial institutions. Today is a new start for us" (Reuters, 31-Aug-2010). Details include:

  • Fleet: The carrier will retire 103 aircraft, including all B747-400, A300-600, MD-81 and MD-90 equipment, out of a fleet of 258 aircraft. The carrier will reduce its fleet through early retirement of inefficient models, a reduction in aircraft size through deployment of new small and medium-sized aircraft with a focus on B737-800, E170 and B787 equipment;
  • Domestic network: The carrier will eliminate 39 domestic routes, for a network of 109 domestic destinations, and focus on more frequent service routes using smaller aircraft. The carrier will maintain its network centreing on Haneda Airport routes; 
  • International network: Will eliminate 10 international services for an international network of 65, focused on major cities in the US, Europe and Asia. The carrier will also direct initiatives towards the strengthening of its network, including the utilisation of bilateral alliances with other airlines as part of which the carrier has applied for antitrust immunity with American Airlines;
  • LCC: JAL President Masaru Onishi stated the carrier would consider the creation of an LCC although nothing concrete has been decided. “There is a lot of interest in low-cost carriers and we will research the issue and decide how to proceed" (Kyodo/Bloomberg/Financial Times, 31-Aug-2010). As previously reported, Qantas Airways will advise the carrier on the potential LCC establishment. Meanwhile, Transport Minister Seiji Maehara said, in reference to the potential LCC: "If we don’t create this new company inside the group, it will become more fragile";
  • Merger of three debtor companies/renaming of airline: Japan Airlines Corporation, Japan Airlines International Co Ltd and JAL Capital Co Ltd will be merged into one entity: Japan Airlines International Co Ltd, to be named Nihon Koukuu Kabushi Kaisha (English name: Japan Airlines Co Ltd). This company will also absorb and merge with JALways and JAL LIVRE, its subsidiary handling the accounting divisions of the group;
  • Profitability: The carrier plans to be profitable from the first year of the plan, with operating profit of JPYD64.1 billion in the 12 months to 31-Mar-2011. It was separately reported that JAL's operating profit is expected to improve to JPY117.5 billion in the fiscal year through Mar-2013 from an operating loss of JPY133.7 billion in the last fiscal year ended Mar-2010 (Nikkei, 01-Sep-2010). However, its revenue is projected to decline 15% to JPY1.273 trillion from JPY1.5 trillion over the same period;
  • Debt waiver: Banks including Bank of Tokyo-Mitsubishi UFJ Financial and Mizuho Financial will waive JPY521 billion (USD6.16 billion) in debt;
  • Re-listing: The carrier stated it may relist by 2013;
  • "Aggressive" utilisation of alliances: The carrier stated it would "aggressively" utilise the intangible assets of alliance partners to maximise the alliance effect, particularly in the areas of facilities, IT systems and managerial know-how, with the carrier to also strengthen its bilateral partners with other airlines;
  • Cargo: Freighters will be taken out of service, and the service will focus on cargo service using passenger bellyhold;
  • Cost reductions: Through reform of airport cost structures, reform of facilities, and review of wage and benefit systems. The carrier will also direct efforts towards making fixed costs variable;
  • Airport and tax reductions: The carrier plans to downsize self-operated airport facilities, with office space to be reviewed, airport terminal space to be partially returned and the carrier to request fee reductions in airport-related services. The carrier is also seeking to reduce aviation fuel taxes, landing fees and other taxes and public charges;
  • Management: CEO Kazuo Inamori stated he would resign in Feb-2012, a year earlier than previously agreed, stating: "Initially, I said I would stay at my post for around three years, but I would like to be relieved in two years" (Japan Times, 01-Sep-2010). The carrier will also restructure the carrier's business plan, adding that the multi-layer management structure and "redundant" functions of the organisation will be eliminated. The carrier added that new departments will be created that will be responsible for cash flow on individual routes;
  • Job reductions: The carrier plans to reduce its workforce by approximately one third from 48,712 at the end of FY2009 to approximately 32,600 by FY2010 by Mar-2011. The carrier will also overhaul its wage and benefit systems;
  • IT upgrade: The carrier will update its IT infrastructure, which is expected to have a flow-on effect into the carrier's efficiency and productivity improvements;
  • Subsidiaries: Plans to sell or liquidate subsidiaries, including selling its hotel business, and concentrate managerial resources on air transport business. [more - Full Documentation] [more - Brief Announcement]

The carrier also outlined the following issues:

  • Elimination of excessive debt: The carrier stated it had JPY959 billion in liabilities at the end of Mar-2010;
  • Addressing event risk: Plans to implement risk management and planning strategies;
  • Securing a proper managerial structure: Seeking to implement a structure that will include clarification of responsibility for numerical results;
  • Initiatives addressing changes in the competitive environment: To better react to competitive environment with new fleet and network structure.

Other details include:

  • Basic policy and reorganisation claims: The carrier also provided details on handling of overlapping claims and reorganisation claims (secured and unsecured), provision of collateral assets and preferred reorganisation claims (including taxes and labour claims) and provisions concerning JAL Corporate Pension Fund claims [more - Full Documentation];
  • Capital injection: Enterprise Turnaround Initiative Corporation of Japan (ETIC) resolved (31-Aug-2010) to implement a capital injection at the JAL Companies, subject to approval of the business revitalisation plan. The injection involves a new share issue by Japan Airlines International Co Ltd, covering 175 million ordinary shares, with a pay-in amount of JPY350 billion, with a pay-in date scheduled for 01-Dec-2010 (the day after resolution to implement the business plan);
  • Tokyo District Court: Confirmed the receipt of the plan and outlined the voting plan period of 10-Sep-2010 to 19-Nov-2010; [more - PDF 2
  • Compliance Investigation Committee: Confirmed that the Trustees received a report on the results of investigation from the Compliance Investigation Committee; [more - PDF 3]
  • Reactions: Japan’s Transport Minister, Seiji Maehara, stated he met with relevant Cabinet ministers and they were positive about the plan (Kyodo, 31-Aug-2010).  He commented: "I believe that JAL can implement (the revival plan) in terms of changing its aircraft and pulling out from unprofitable routes ... What is very important is for JAL to firmly carry on personnel cuts as scheduled." PATA, meanwhile, commented (31-Aug-2010) that the carrier "may have a second lease on livelihood" under its USD10 billion restructuring plan.  [more - PATA] [more - ETIC]

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