Japan Airlines bankruptcy is good for Japan

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.