JAL Files For USD$25 Billion Bankruptcy

January 19, 2010

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Japan Airlines filed for bankruptcy protection on Tuesday owing more than USD$25 billion and vowed to cut 15,700 jobs and unprofitable routes as part of a plan to survive an industry beset by volatile fuel costs and fickle flyers.

JAL will remain in the skies thanks to almost JPY1 trillion yen (USD$11 billion) in support from a state-backed fund, but must go through a sweeping restructuring under a new board and management.

Shareholders will be wiped out and lenders will forgive a larger-than-expected JPY730 billion debt as part of the deal with the Enterprise Turnaround Initiative Corporation of Japan (ETIC).

Bankruptcy will only be the beginning for an airline with depleted capital, facing headwinds such as rising fuel prices and shrinking passenger numbers, on top of hefty restructuring costs.

JAL, which has been bailed out by the Japanese government three times in the past 10 years, will replace many of its older, larger and less fuel-efficient planes. It also faces tough decisions about foreign capital and alliances.

"I have a little bit of a sense that we're now finding out that things were a bit worse than expected," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "What this has shown is that the nation won't just take total care of a company, that they've now said they'll let badly-run companies fail.

JAL's bankruptcy listing JPY2.3 trillion in total debts as of September 30 ranks as Japan's fourth-largest ever.

Shares of JAL, which have fallen more than 90 percent since the start of the month, closed flat at 5 yen after trading down 2 yen to 3 yen. They will be de-listed on February 20, according to the stock exchange.

With a market value of about USD$150 million, JAL is now smaller than minor carriers Croatia Airlines and Jazeera Airways and is worth less than a Boeing 747.

"I thought that there was no way that JAL would fail," said Akiko Saito, a 63-year-old retiree returning from Sydney to Tokyo. "Even when the value of my JAL shares fell from JPY800,000 to below JPY120,000, I was convinced that it would recover, and I held on to my stock."

DEBT-LADEN

The "tough love" for JAL by Prime Minister Yukio Hatoyama's four-month-old Democratic Party-led government signals a shift from previous governments under the long-dominant Liberal Democratic Party, which had authored the previous JAL bailouts.

Hatoyama's government said it would provide the necessary support for JAL during its restructuring.

Following similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines, JAL plans to cut about a third of its 47,000 workforce and drop about two dozen unprofitable routes, sources said.

The ETIC will support the carrier with about JPY300 billion in capital and a JPY600 billion credit facility.

Fuel hedging contracts may also be affected by a bankruptcy filing. JAL uses mostly Brent forward contracts and about JPY40 billion is estimated to be exposed in the event of an automatic termination, a source familiar with the matter said.

JAL will also need to make a decision about competing aid offers from Oneworld alliance partner American Airlines and rival Delta, which wants to woo JAL to its SkyTeam group.

(Reuters)