Japan Brief/FPCJ, No. 0967
November 5, 2009


JAL to Be Rehabilitated Under Government Control

The Japanese government has decided to rehabilitate the ailing Japan Airlines by placing the carrier under its control and injecting taxpayers’ money into the company. In declaring the decision on October 29, Transport Minister Seiji Maehara said, “We cannot afford to let JAL go under as its flights account for about 60 percent of the total in Japan. If its flights stop, the Japanese economy as a whole, local economies, and exchange with foreign countries will be seriously hampered” (Yomiuri Shimbun, October 30).

Transport Minister Maehara had initially been trying to craft a rehabilitation plan through his own handpicked task force, but he was forced to abandon that policy because of strong resistance from commercial banks, which, as creditors of huge amounts of funds to the airline, demanded a government-backed rescue.

Under the new policy, the Enterprise Turnaround Initiative Corporation will take charge, with Maehara and other high-caliber officials deeply involved. The corporation was launched on October 16 jointly by the government and the private sector, each putting up 10 billion yen in capital. It is aimed at helping debt-ridden companies rebuild themselves by providing loans and investment. The government is set to guarantee up to 1.6 trillion yen if funds that the corporation borrows from financial institutions go bad.

The rebuilding of Japan Airlines is expected to be based on (1) capital reinforcement of 300 billion yen, including government money; (2) financial institutions’ forgiveness of debts and conversion of bonds into company shares (250 billion yen in total); (3) government guarantee for bridge financing of 200 billion yen; (4) cutbacks of pension benefits for retired employees (a reduction of the deficiency in the pension fund from 330 billion yen to 100 billion yen); (5) restructuring of operations, including the elimination of about 9,000 jobs and scrapping of 45-50 domestic and international routes; and (6) the reassessment of assets (which is expected to result in a net debt excess of up to 270 billion yen). The bridge financing of 200 billion yen is deemed urgent as the carrier’s business is deteriorating so rapidly that it needs to secure this amount of cash by the end of November to stay afloat.

The rehabilitation programs are expected to be finalized in January 2010 and to rehabilitate JAL within three years. One key issue that is emerging as the most difficult hurdle to be cleared is pension cuts, which require the agreement of at least two-thirds of both about 9,000 retired and 17,000 current employees. JAL’s pension benefits are higher than those of other companies in general, including its competitor, All Nippon Airways, and (as reported by the Mainichi Shimbun, October 30) the deficiency in its pension fund amounts to 330 billion yen. This sum needs to be reduced to 100 billion yen for corporate rehabilitation. Views are divided with regard to the legitimacy of legal action to achieve this.

Japan Airlines, once the national flag-carrier, was launched in 1951 as a government-run company. In 1983 it was ranked top in the world in scheduled flight operations, and in 1987 it went private with the repeal of the special law backing it as a national enterprise. In 2002 JAL merged with Japan Air System, a domestic flight operator. According to Japanese media reports, the airline’s business has slumped since around the turn of the century. Since 2000 emergency lending extended by governmental financial institutions to the company on four occasions has amounted to 340 billion yen. JAL reportedly is saddled with interest-paying debts of 800 billion yen. However, as the media and industry circles see it, the carrier alone is not to be held responsible for its plight. Politicians and local governments that pressured the airline to open and keep money-losing routes going, as well as the government’s past civil aviation policy, also bear responsibility (as reported in the Asahi Shimbun on October 21 and The Nikkei on October 30).

Meanwhile, an experts’ group checking the safety system of JAL reported to the JAL management at a meeting that “Though business is not in good shape, those concerned with the safety of flights are highly motivated.” It was reconfirmed in the meeting that JAL had the philosophy of putting top priority on the safety of flights despite its business conditions (Asahi Shimbun, November 3).

Newspaper Editorials Raise Questions

Understandably, newspaper editorial comments were harsh on JAL and largely unsympathetic to its woes. Some also questioned the government’s decision to infuse taxpayers’ money into a non-banking enterprise. “What’s so special about JAL?” was their question. The Sankei Shimbun (October 31), for one, argued that use of the Civil Rehabilitation Law (the equivalent of Chapter 11 of the US Federal Bankruptcy Law) should have been the choice. But the Yomiuri (October 30) argued that “it was inevitable that the government would resort to extending support, such as the infusion of public funds” given the adverse effects on national life that the airline’s failure would likely cause.

Saying it is “unusual” for the government to get so deeply involved in the bailout of a private company, The Nikkei and Asahi on October 30 demanded that the government should give a full explanation to the public and taxpayers as to why JAL deserves this special treatment. The Mainichi (October 31) called on the airline “to thoroughly wean itself from its tendency to turn to the government for help whenever in trouble.”

Toward the end of its editorial, the Asahi tried to be more hopeful, commenting, “Restoring JAL’s financial health and management stability will lead to the enhancement of the nation’s air traffic network and improved services over the long term. It will push up JAL stock, allowing the government to recover the injected money. The government has an obligation to present such a promising vision.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


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