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Japan Airlines, lenders consider bankruptcy

Yoshio Takahashi  Dec 29, 2009

TOKYO—Japan Airlines Corp., its major lenders and a quasigovernmental investment fund are studying a bankruptcy filing for the carrier if it doesn't win concessions from retirees, according to a person familiar with the matter.

The airline, known as JAL, is still considering an out-of-court restructuring, as it indicated last month, the person said. But the prospect of a court-led turnaround procedure is likely to add pressure on the company's retirees to accept a proposed cut in their pension allowances.

JAL is seeking to persuade more than two-thirds of about 8,800 retirees—the necessary ratio to change its corporate pension system under the current law—to accept a benefits-reduction plan.

One group, the Japan Cabin Crew Union, said it wouldn't comment unless it had confirmed the discussions with company management. Other unions couldn't be reached.

JAL shares dropped 8.3% to 88 yen (about 96 U.S. cents) after falling to their lowest level for the year of 85 yen during the day.

"Investors are selling on fears that the rights of existing shareholders won't be protected" if JAL files for bankruptcy protection, said Mitsuru Miyazaki, an analyst at SMBC Friend Research Center.

JAL retirees are in the process of voting whether to accept a 30% reduction in their benefits proposed by the carrier. The voting on the pension reduction will end on Jan. 12.

The desired agreement on the revised pension program will be crucial for JAL's revival, as it aims to slash its net debt and legacy pension costs of more than one trillion yen, or roughly $11 billion.

The airline said two weeks ago that it expects to obtain approval of the proposal, since a survey conducted by the company showed 65% of its retirees agreed to the plan. A court-led revival plan is adding pressure, as it would force them to accept reduced benefits, anyway.

Transport Minister Seiji Maehara reiterated earlier this month that the government is still considering a bill to allow JAL to change its pension plan to reduce its obligations.

JAL's fate was clouded last week when Finance Minister Hirohisa Fujii said the government has no plans to guarantee loans to the struggling companyfrom its budget despite earlier agreement by five key ministers that the government would consider the guarantees.

The finance minister's remark could be a warning to the airline's retirees, since he has repeatedly cautioned that the government wouldn't provide the guarantees unless JAL reduces its retiree benefits.

Delta Air Lines Inc. and AMR Corp.'s American Airlines are also closely watching developments of JAL's restructuring process. The two big U.S. airlines are battling to cement a partnership with their Japanese peer to gain access to its lucrative network of flights to Asia.

JAL is seeking an out-of-court mediation on loans, as planned, in a procedure known as "alternative dispute resolution." Under the arrangement, it is discussing with its lenders the possibility of delaying loan repayments so it can continue daily operations until it has drawn up a restructuring plan.

JAL in October asked quasigovernmental investment fund Enterprise Turnaround Initiative Corp. for support in restoring its operations. ETIC, which has access to as much as 1.6 trillion yen in state-guaranteed funds and the ability to purchase the debts of beleaguered companies, is now assessing JAL's assets to gauge its level of support and will decide whether to help JAL's turnaround next month.

Buffeted by a business- and leisure-travel slowdown triggered by the global economic downturn, JAL reported its fourth straight quarter of net losses in the July-September period. It scrapped its earlier earnings forecast for the current fiscal year through March, saying it couldn't gauge its future course as it compiles a revival plan. Major creditors, including state-backed Development Bank of Japan; Mizuho Financial Group Inc.'s wholesale banking unit, Mizuho Corporate Bank; and ETIC declined to comment on whether they are studying bankruptcy protection for JAL's restructuring.

Japan Airlines, lenders consider bankruptcy
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