It has been a long, fraught slide for Japan Airlines (JAL) from Asia's largest airline to literal junk in the eyes of investors as it filed for bankruptcy last night.
In a statement released by the airline, JAL confirmed that it had filed for bankruptcy in the Tokyo District Court with the Enterprise Turnaround Initiative Corporation (ETIC) appointed as trustee and that its shares will be delisted from the Tokyo Stock Exchange effective today. While not elaborating on the details of its restructuring, the airline did apologise to shareholders, customers and anyone "inconvenienced" by the filing and affirmed that it would continue "safe flight operations" uninterrupted.
Representatives of the airline were unavailable for questioning, but JAL said it will receive "sufficient" financing from the ETIC and the Development Bank of Japan (DBJ) to continue operations. According to reports, the ETIC will inject ¥300 billion ($3.3 billion) into the airline and the ETIC and DBJ will provide another ¥600 billion in loans. The airline's main creditors, including Japan's three mega-banks -- Mizuho Corporate Bank, the Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation -- will forgive as much as ¥350 billion in debt.
The future shape of the airline remains unclear. JAL said in the statement it will shift to smaller aircraft and consolidate underperforming routes. It didn't specify, but reports suggested it will shed all 37 of its Boeing 747-400 jets and cut 34 routes. In addition, over 15,000 employees -- about a third of its total workforce -- could be cut from the airline's payroll and it also intends to significantly reduce pension payments.
Most analysts predict the bankruptcy will revive the Japanese flag carrier. Nomura senior analyst Makoto Murayama said he believes the restructuring will be successful and allow JAL to "rehabilitate" itself.
Kazuo Inamori, the 77-year-old founder of electronic equipment manufacturer Kyocera, will take over as chairman and chief executive of the airline on February 1. He currently serves as honorary chairman of Kyocera.
The bankruptcy comes after years of government bailouts that have allowed the Japanese flag carrier to delay addressing some of its biggest structural issues -- a bloated, inefficient bureaucracy, an unprofitable route network and a burdensome pension plan. Indeed, the decision by the Democratic Party of Japan-led government of prime minister Yukio Hatoyama to allow JAL to file for bankruptcy is a marked departure from that of his Liberal Democratic Party of Japan predecessors. The move could be read as Hatoyama taking a firmer pro-free market stance in a country well known for bailing out its largest corporate entities.
It is also one of Japan Inc's largest bankruptcies. With ¥2.32 trillion ($25.5 billion) in liabilities at the end of September, JAL comes in behind Kyoei Life Insurance's bankruptcy in 2000 that involved ¥4.53 trillion of debt.
The airline reported a ¥95.7 billion operating loss for the six months ending in September 2009, which compares with an operating profit of ¥30.2 billion in the same period a year earlier.
The delisting is the last blow to shareholders who have seen the value of their investment disintegrate over the past year. JAL's share price has fallen nearly 99% from its peak in March 2009 to ¥3 yesterday. Its market capitalisation was $151 million -- less than the list price of one Boeing 787 aircraft, a model the airline has 35 orders for, according to the manufacturer.
The airline's debt was downgraded by rating agency Moody's to Caa1 last week. The agency cited a greatly increased chance that JAL would default on some of its debt in addition to renegotiating payments with its creditors.
According to a Citi research report, in bankruptcy the airline will renegotiate ¥700 billion in debt, have ¥350 billion forgiven and default on ¥47 billion worth of bonds.
JAL is the latest -- and largest -- casualty of the continuing slump in global air travel demand. But while a number of small carriers have closed their doors over the past two years, there has not been a bankruptcy on the size or scale of JAL since US-based Northwest Airlines' chapter 11 filing in September 2005.
The International Air Transport Association (IATA) estimates that airlines will lose a combined $5.6 billion this year, though only $700 million of that is supposed to come from the Asia-Pacific region. The trade group also predicts that global passenger traffic will increase by 5.2% in 2010 after falling 6.7% last year; Asia-Pacific is expected to see a 6.6% rise.
Immediate beneficiaries of the bankruptcy are Japan's other domestic airlines, including network carrier All Nippon Airways (ANA) and low-cost carrier Skymark. However, ANA's share price fell 4.2% to ¥273 yesterday while Skymark rose 1.2% to ¥420. The Centre for Asia-Pacific Aviation (CAPA), a consultancy firm, predicted that international airlines with a large number of flights to Japan will also benefit, mentioning Korean Air specifically.
While these benefits will likely play out in the short-run, it is unclear what impact JAL's bankruptcy will have on air travel -- both domestically and internationally -- over the longer term. One possibility proposed by some industry experts is that it could mark the beginning of an era of growth for Japan's nascent low-cost carriers (LCCs).
"There is a chance that low-cost carriers will get additional take-off and landing slots at Haneda [Airport]," said Murayama. "But I do not see them becoming dominant carriers in Japan."
He continued: "If you compare Japan to a market like Europe or North America, LCCs have increased their market share because they successfully differentiate themselves from network carriers by flying point-to-point instead of hub-and-spoke routes and serving secondary airports. In Japan, network carriers fly point-to-point and there is no secondary airport in Tokyo. There is no way for LCCs to differentiate themselves from network carriers."
LCCs have gained significant market share elsewhere in Asia-Pacific, especially in Southeast Asia and Australia. Singapore-based Tiger Airways has just raised $178 million through an initial public offering and is due to start trading on the Singapore Exchange on Friday and earlier this month Malaysia-based AirAsia and Australia's Jetstar inked an agreement to reduce costs and work together on aircraft procurement.
While domestically, the ANA and JAL duopoly looks set to continue, international service to Japan is prepping for a shake-up. Currently a member of the global Oneworld alliance, which includes American Airlines, JAL has been at the centre of a bidding war between the US carrier and its rival Delta Air Lines from the Skyteam alliance, which are fighting for its loyalty. At stake are lucrative passenger flows between the US and Japan, as well as to the rest of Asia, for which Tokyo is a major transit point.
American, joined by other Oneworld carriers and private equity firm TPG, has offered to make a $1.4 billion equity investment in JAL plus $2 billion in commercial benefits. Delta and its Skyteam partners have offered the airline $1 billion, split between a $500 million capital infusion and $500 million in compensation for switching alliances.
Current reports suggest that Delta's offer is preferred over that made by American. "It has been no secret that both the MLITT [ministry of land, infrastructure, transport and tourism] and the national lending authority, the ETIC, favour Delta over American, mainly on the grounds that biggest is best," Peter Harbison, executive chairman of CAPA, wrote in a report. "But Tokyo bureaucrats are not the right ones to take that decision; ironically it will probably be Washington's bureaucrats who do."
Harbison refers to the issue of getting US department of justice antitrust immunity for a Delta-JAL joint venture on flights between the US and Japan. Always concerned about decreasing competition, the department has repeatedly blocked joint ventures across the Atlantic where the partner airlines would control more than half of the flights on a particular route. In addition, James Oberstar, the current chairman of the US House of Representatives' transportation and infrastructure committee, has spoken out repeatedly about the negative effects of international airline alliances and gone so far as to introduce legislation in February 2009 to investigate their impact on customers.
Currently, traffic between the US and Japan is split almost evenly between the three major global alliances -- Oneworld, Skyteam and Star -- but if JAL were to join Delta, their combined traffic numbers would constitute more than 60% of the market. Without antitrust immunity, the partners would be at a disadvantage when competing with the tie-up between Star's Continental Airlines, United Airlines and ANA. Those three carriers filed for immunity earlier this month.
As JAL's bankruptcy plays out, it is unlikely to go as smoothly as those elsewhere. While the Japanese government has moved decidedly pro-market, it will likely receive a lot of flack resulting from the thousands of lost jobs and reduced pension benefits. On the other hand, for Japanese citizens, the filing could be a positive step in making conservative Japan more competitive in the global marketplace.
