26-Oct-2009 11:40 AM

Japan Government-backed body to oversee JAL turnaround: report

Japan Airlines (JAL) and its Government-appointed rehabilitation Task Force are reportedly considering the following measures, as part of its restructuring efforts (Reuters/Bloomberg/AFP/Kyodo/Yomiuri Shimbun/Asahi Shimbun, 23-25-Oct-2009):

  • International partners: American Airlines CEO, Gerard Arpey, urged JAL to continue its partnership with the carrier, saying JAL could "end up as a junior partner and a feeder carrier" if it goes elsewhere (ie to Delta and the SkyTeam alliance). Mr Arpey stated oneworld membership and a codeshare agreement with American produces hundreds of millions of dollars of value for JAL p/a. He added that no other arrangement would be as beneficial for JAL, while "an alliance switch would be burdened by excessive financial and execution risk during the critical initial phase of its restructuring." Additionally, if Japan and the US reach an open skies agreement, "JAL is more likely to realise the benefits of an immunized relationship" if it remains an American partner,  according to Mr Arpey;
  • Government involvement: The Japanese Government is reportedly planning to put newly-formed state-backed turnaround body, the Enterprise Turnaround Initiative Corporation of Japan, in charge of the overhaul of the carrier, according to the Nikkei Business Daily;
  • Financial State: Liabilities could reportedly exceed its assets by as much as USD8.8 billion if JAL was liquidated. Under the restructuring, JAL will reportedly reduce its debt under the Government’s guidance, according to Nikkei Business Daily;
  • Pension payouts: The Government is reportedly considering implementing a special law to reduce the carrier’s pension payouts, according to The Yomiuri Shimbun. JAL’s shortfall of pension reserves has reportedly reached approximately JPY330 billion. If the law is enacted, debt write-offs by financial institutions and the injection of public funds would be able to proceed more smoothly, which could accelerate the airline's rehabilitation. The Finance, Construction and Transport, and Health, Labor and Welfare Ministries reportedly plan to submit a jointly drafted bill this week;
  • Job cuts: Plans to increase the number of planned job cuts by 44% to 13,000 jobs by Mar-2015, 4,000 more than originally planned, reducing its total workforce to approximately 35,000, according to Kyodo. The majority of the job reduction will be at Japan Airlines International Co, the unit in charge of JAL's flight operations;
  • Subsidiaries: Plans to reduce the number of its subsidiaries by more than half (from approximately 120 to 50). Included in this, the company plans to sell part of its stake in JAL Hotels Co and consolidate the overseas units of travel agency JALPAK Co
  • Loans: Seeking a bridge loan of approximately JPY180 billion (USD2 billion) and a total capital increase of JPY300 billion (USD3.3 billion) from both the government and the private sector;
  • Public funds: Government is reportedly considering an injection of public funds after the restructure plan is finalised, according to the Nikkei Business Daily;
  • Creditors: Some creditors have reportedly requested JAL reduce its capital, according to the Nikkei Business Daily. One suggestion reportedly involves the Government retiring approximately 99% of JAL’s common shares, which would require a special resolution by two-thirds of its shareholders;
  • Loans: The state-backed Enterprise Turnaround Initiative Corp of Japan may guarantee loans extended by the Development Bank of Japan and other JAL creditors, or it may lend to the company directly, according to Nikkei Business Daily. Separately, the Yomiuri Shumbun stated the Task Force has requested creditors to give up JPY250 billion (USD2.7 billion) worth of debts or convert them into stock;
  • Decision: Reportedly expected to be made by the end of this week. The final decision will be made by Prime Minister, Yukio Hatoyama.

Japan Government: "The reality is that 60 percent of the flights flying over Japan are JAL flights. If the situation becomes such that these don't fly, then that would make things difficult. We need to understand that," Yukio Hatoyama, Prime Minister. Source: Reuters, 23-Oct-2009.

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