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The Honolulu Advertiser
Posted on: Tuesday, January 19, 2010

Japan Airlines files for bankruptcy


Associated Press

TOKYO Japan Airlines has filed for bankruptcy protection in one of the biggest corporate failures in Japanese history.

A state-backed corporate turnaround agency said today it received confirmation from the carrier that it had applied for protection from creditors under the Corporate Rehabilitation Law Japan's version of Chapter 11.

The widely expected move culminates a process that began in October when Asia's biggest airline first turned to the Enterprise Turnaround Initiative Corp. of Japan for help. It was saddled with debts of $16.5 billion, falling passenger traffic and swelling pension costs.

JAL will now embark on a massive overhaul under a prepackaged restructuring plan to shed the fat and inefficiency that undermined its finances.

The move would mean no disruption in the airline's flights to Hawai'i, where Japanese visitors are a major contributor to the state's tourism industry, spending about $2 billion a year.

JAL's access to Asia, however, is a mouthwatering prize for foreign airlines seeking to partner with the company. The tug-of-war between Delta Air Lines and American Airlines intensified even as bankruptcy loomed, with the latest media reports pointing to Delta as the eventual winner.

In the bankruptcy procedure, President Haruka Nishimatsu is expected to resign.

Leadership of the company will be handed over to Kazuo Inamori, a Buddhist monk and founder of electronic components behemoth Kyocera Corp. and Japan's No. 2 mobile carrier KDDI Corp.

GOVERNMENT BACKING

The government will also offer assurances that it backs the company's rehabilitation and intends to keep JAL flying.

"The government wants to continue to support JAL to ensure its continued stable and safe operations," said Transport Minister Seiji Maehara hours before the filing, according to Kyodo News agency.

The day's events cap a process that began in October when JAL first turned to the Enterprise Turnaround Initiative Corp. for help.

Geoffrey Tudor, a principal analyst at Japan Aviation Management Research and former JAL employee, said the airline needs to be leaner and meaner. "It wasn't commercially brutal enough in dealing with the facts of economic life," said Tudor, who spent 38 years at the Japanese carrier.

The plan calls for about 15,600 job cuts, or a third of JAL's workforce, by March 2013 and will require the airline to halve the number of its subsidiaries, which span everything from hotels to credit cards, according to Kyodo.

The company's stock tumbled today, dropping as low as 3 yen, the equivalent of 3 cents, as worries about delisting caused investors to dump the shares. Those moves accounted for almost 20 percent of all trading in the morning session. The company is now essentially worthless, with a market capitalization of about $100 million less than the price of one Boeing 787 jet.

AMBITION HURT COMPANY

It's a humbling outcome for Japan's once-proud flagship carrier, called JAL for short, which was founded in 1951 and spent its early years owned by the state. Along with Japan's economy, it expanded quickly in the decades after World War II and was privatized in 1987.

But it soon became the victim of its own ambitions.

When Japan's property and stock bubble of the 1980s burst, risky investments in foreign resorts and hotels undermined its bottom line. JAL also shouldered growing pension and payroll costs, as well as a big network of unprofitable domestic routes it was politically obligated to maintain.

More recently, JAL's passenger traffic has slowed amid the global economic downturn, swine flu fears, competition from Japanese rival All Nippon Airways Co. and a spate of safety lapses that tarnished its image. It lost $1.4 billion in the six months through September.

Its four government bailouts since 2001 only exacerbated JAL's problems, officials now say. Maehara last week blamed previous administrations, controlled by the opposition Liberal Democrats, for propping up an ailing JAL for years without reforming the company.

Passengers seemed to agree.

"I guess they did not work in earnest and so fell into this situation," said Isao Sasaki, 72, in line at a JAL check-in counter at Tokyo's Haneda Airport. "Weren't they spoiled as they always had protection from the government?"

JAL'S 'UNRIVALED ACCESS'

Delta Air Lines the world's biggest airline operator and rival American Airlines are courting JAL with massive financial offers as the U.S. carriers seek to expand their Asian networks.

JAL's core value is its "unrivaled access" to Japan, a top Asian market, according to the Centre for Asia Pacific Aviation, a Sydney-based aviation market research firm.

Japan's international air market people flying in and out of the country is 48 percent bigger than in South Korea, and twice as large as Hong Kong or India, it said in a recent report. Narita International Airport remains a key hub, and Tokyo's Haneda Airport is set to expand its role when it opens a new runway and international terminal later this year.

"For U.S. airlines, the bilateral access rights available for regional services are unparalleled in international aviation," the report said.

Delta and its SkyTeam partners have offered $1 billion, including $500 million in cash, to lure JAL away from American's oneworld alliance.

American Airlines and its partners say they are ready to inject $1.4 billion cash into the Japanese airline, up from a previous $1.1 billion offer.

As of March, JAL's fleet consisted of 279 aircraft, mainly from Boeing Co. It served 220 airports in 35 countries and territories, including 59 domestic airports.