JAL near fail

Note: further JAL-related developments in this post.

Japan Airlines (JAL/日本航空) is facing one of its biggest financial obstacles in its 22 year history as a privatised airline.

For the first time in its privatised history, the airline will not pay its employees and executives winter bonuses in order to keep the company afloat. Without a major cash injection or bridging loans from its major creditors, JAL may only remain solvent until the end of November. An obstacle is that the banks want state guarantees against these bridge loans.

The government backed corporate turnaround/rehabilitation body, the Enterprise Turnaround Initiative Corp. of Japan (ETIC), began the task of managing the airline’s restructure in October. This involved placing experts into JAL  to oversee the due diligence of its procedures. The ETIC ultimately aims to reduce the financial burden on the airline, by reducing the level of JAL corporate pension benefits, non-profiting flight routes and older airplanes.

JAL’s problem predominantly resides with its expensive corporate pension for past employees. Some past employees receive up to ¥400,000 (AUD 4900) a month on this scheme (including public pensions), compared to ANA’s highest allowance of ¥310,000. The government has established a team aimed specifically at assisting the airline better manage its pension system.

The Japanese pension system in its simple form consists of a public (government) pension, and should a company offer, a company pension. Most large companies offer such corporate retirement allowances as either a lump sum or an annuity to its staff. This is in addition to the superannuation that is collected over the course of one’s working life.

In order to faciliate its corporate pension scheme, JAL needs to allocate ¥801 billion (AUD 9.8b) to enable full payment of these entitlements to all past and present employees. The airline is currently short by ¥300 billion (AUD 3.7b). Any reduction in pensions will need to be approved by two-thirds of the employee and retiree population (26,000) and may contravene the Japanese Constitution’s property right protection. Nonetheless, the ETIC in conjunction with the government is seeking to draft legislation to enforce cuts in the corporate pension system. This is also being done to amass public support, so a public bailout of JAL can be done with minimal political ramification for the incumbent government. No taxpayer wants to see their taxes go into a company laden with out of control liabilities.

In order to save ¥7.1 billion, JAL management decided on 6 November 2009 to scrap 16 loss-making domestic and international routes by May 2010. Traditionally, JAL was forced by the government to fly on loss-making routes to smaller airports like Kobe (which JAL will now pull out of).

An ETIC formulated rescue plan is not expected until after January 2010. To survive until such time, the airline desperately needs to finance ¥180 billion in order to maintain its everyday operations.

I hope to see JAL continue flying into the future: Dream Skyward.

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