Japan Airlines Files for Bankruptcy

By MARIKO SANCHANTA TOKYO -- Japan Airlines Corp launches Wednesday a painful three-year restructuring that will significantly shrink its operations to make it a viable financial concern, after the former flag carrier suffered the ignominy of filing one of the country's largest-ever bankruptcy protection petitions. A pillar of Japan Inc. founded in 1951 to help the country rise out of the ashes of World War II, JAL Tuesday sought court protection for help in handling a crushing debt load of $25 billion, a level well above its cash flow. The company will be aided by a $10 billion lifeline from the government in the form of capital injections and credit. Bureaucrats also strong-armed Japan's banks into forgiving more than $8 billion in outstanding loans, while retirees and employees accepted more than $11 billion in pension cuts. Shareholders will be formally wiped out when the stock -- once considered one of Japan's bluest of blue chips -- is delisted from trading on the Tokyo Stock Exchange on Feb. 20. A passenger boards a Japan Airlines' flight to Tokyo at New Chitose airport in Chitose, northern Japan January 19, 2010. AMR Corp's American Airlines and Delta Air Lines Inc. are embroiled in a high-stakes battle to tie up with JAL, primarily to cement control of the lucrative Asian market. Delta is offering JAL a total package of $1 billion, while American and private equity house TPG have offered $1.4 billion in equity investment. Some transport ministry officials favor a tie-up with Delta on the grounds that it has a more robust Asian and trans-Pacific network. But the move would be unprecedented, since JAL is currently part of American's Oneworld program, and no airline has ever pried away a company from a rival's alliance. Heard: Japanese Travelers' Seoul Train Opinion: JAL Hits Turbulence Maehara is a Man on the Go Japan's 10 Largest Postwar Bankruptcies An alliance decision will only be made after JAL's new management is in place, according to people familiar with the matter. Kazuo Inamori, the founder of components maker Kyocera Corp. and a Buddhist monk, will become JAL's new chairman and CEO on February 1. Haruka Nishimatsu, its current CEO, resigned on Tuesday as expected. Delta issued a statement shortly after the JAL filing saying: "Delta and SkyTeam fully support Japan Airlines and stand ready to provide assistance and support in any way possible." JAL's outstanding debts make it the fourth largest corporate bankruptcy in Japanese history, a list topped by Kyoei Life Insurance Co's filing in 2000. JAL became the country's largest non-financial firm to file for court protection, eclipsing the 2001 filing by Mycal Corp., a supermarket operator. JAL's filing was in part the result of the recent change in government in Japan. The company was closely tied to the long-ruling Liberal Democratic Party and the Transport Ministry bureaucrats. The recently elected Democratic Party of Japan seemed more willing than its predecessor to let the company go into a transparent, court-led restructuring, rather than a more opaque government bailout. Though financial profligacy was one cause of JAL's demise, its close ties with the government -- even after it was privatized in 1987 -- effectively crippled the carrier. Pork-barrel aviation policies drawn up by transport bureaucrats caused JAL to fly loss-making routes for decades. JAL officials fiercely resisted the filing for months, and its disgraceful fate has been unfathomable to most Japanese. When Japan Inc. rose to glory in the late 1980s, gobbling up trophy icons such as New York's Rockefeller Center, JAL also spread its tentacles around the world by buying the Essex House in New York and setting up resorts in Hawaii. For millions of Japanese who have taken JAL flights throughout their lives, the carrier's fall from grace touches a deep chord. JAL was known for its impeccable service and its stunning flight attendants, playing a big role in Japanese pop culture. A popular sitcom called "Attention Please!" revolved around a woman achieving her dream of becoming a JAL cabin attendant. Whether JAL will be able to emerge, phoenix-like, from its arduous three-year restructuring program remains to be seen. The stigma of filing for bankruptcy protection under Japan's corporate rehabilitation law, which is similar to a Chapter 11 filing in the U.S., could undermine consumer sentiment about JAL. Takahiko Itoh, a lawyer at Freshfields Bruckhaus Deringer LLP in Tokyo, said consumers in Japan were largely unfamiliar with the corporate rehabilitation law, as it is so rarely invoked. "The consumer may receive the message that because JAL has entered into corporate rehabilitation it cannot receive full services," he said. Officials Tuesday stressed that JAL would continue to operate as usual during its restructuring and the carrier would meet all of its leasing and fuel purchase obligations. Customers with JAL mileage plans will have their accounts honored. Agents from JAL and also Japanese embassies around the world have been reaching out to JAL's global suppliers, assuring them that the airline's operations will continue as normal. JAL is set to cut 15,700 employees, or about a third of its workforce, and slash a total of 34 loss-making international and domestic routes. JAL will reduce the number of its sprawling group companies -- such as a credit operation and smaller airlines based in rural Japan -- which total over a 100, by around a quarter. The Enterprise Turnaround Initiative Corp of Japan, a quasi-state run body, is set to be named the corporate trustee of JAL and will oversee its rehabilitation. ETIC is set to inject 300 billion yen into JAL to provide the carrier with immediate liquidity, about $3.3 billion by current exchange rates. The Development Bank of Japan, JAL's leading lender, and ETIC will provide debtor-in-possession financing to JAL via a 600 billion yen credit line. The Japanese carrier's main banks will also forgive 730 billion yen in outstanding loans. The treatment of bondholders will be decided by the Tokyo District Court, though they are likely to take a significant haircut on their holdings. Within three years, ETIC said it aims to reduce JAL's ratio of interest-bearing debt to cash flow to 2.2 times. The carrier will aim to retire all 37 of its Boeing jumbo 747-400s under its three-year restructuring plan. JAL currently has 35 787 "Dreamliner" Boeing planes on order, with the option to purchase 20 more. The airline planes to proceed with those purchases. While JAL's workforce shrinks, ETIC expects to double its employees assigned to work on JAL's restructuring to 60, once it hires a law firm and an accountancy to aid it. The agency said Tuesday that JAL was dogged by four main problems: excessive ownership of large aircraft; maintaining loss-making routes; excess workforce and rigid organizational structure; and delays in decision-making. The complete restructuring of JAL by ETIC will take three years, while the court-led process is expected to take less than a year.