TOKYO (Reuters) – Shares in Japan Airlines Corp, Asia’s biggest airline by revenue, plunged to an all-time low on Tuesday on fears it will file for bankruptcy protection as part of a restructuring plan being hammered out by a state-backed fund.
Saddled with about $16 billion in debts, a JAL bankruptcy would be one of the largest in Japanese history and could trigger a shake-up in the country’s airline industry.
Delta Air Lines and American Airlines are both courting JAL with offers of capital and close cooperation on international routes.
Following are some questions and answers about JAL’s restructuring:
WHAT IS THE LIKELY PLAN TO RESTRUCTURE JAL?
JAL applied in October for help from the Enterprise Turnaround Initiative Corp of Japan (ETIC), a body of specialists which can draw on state-backed funding to invest in and buy ailing firms’ debt. ETIC has effectively said it will back JAL as long as the carrier files for bankruptcy protection — similar to Chapter 11 in the United States — and its banks waive loans.
After some posturing that JAL should be restructured outside of bankruptcy court, the banks have since come around. Sources say they see no other option — if they don’t agree with the ETIC’s plan JAL would collapse, causing chaos and killing any chance of recovering what is left of the value of their loans.
The ETIC is planning for JAL to file for bankruptcy some time between January 19 and 22. The ETIC would announce its plan to support the carrier on the same day as the bankruptcy filing.
WHO WOULD BE HURT BY A JAL BANKRUPTCY, WHO MIGHT GAIN?
JAL’s top creditors are the state-owned Development Bank of Japan (DBJ) and units of Japan’s top-three lenders, Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG).
At end-September, DBJ had 276 billion yen worth of debt extended to JAL. MUFG had 73.5 billion yen, Mizuho 76 billion yen and SMFG 23 billion yen, according to a government-appointed task force.
ETIC has asked creditors to forgive about 350 billion yen in debt, 70 percent of which would be shouldered by the main banks. ETIC reckons the total debt reduction could total more than 700 billion yen including bonds, pension obligations and other liabilities set to be cut in the plan. The big banks have probably set aside funds to cover some if not all of the losses on their JAL exposure.
The ETIC is leaning toward a complete reduction of capital and delisting of JAL to hold shareholders accountable. The prospect of that helped drive JAL shares down 45 percent on Tuesday, leaving it with a market value of $1.1 billion.
Domestic rival All Nippon Airways (ANA) is the likely winner from a JAL bankruptcy. ETIC estimates JAL’s revenues could drop 10 percent in the year from April and another 5 percent the following year after a bankruptcy filing. ANA is well placed to pick up that lost business.
WHAT HAPPENS TO TALKS WITH AMERICAN, DELTA?
ETIC predicts JAL could post a net loss of about $13 billion in the year to March to pay for restructuring and other charges, leaving it with a negative net worth of more than 800 billion yen. Even so, Delta and American have stepped up their courtship, eyeing JAL’s Asia network and a stronger foothold in Japan ahead of the expansion of Tokyo’s Haneda airport.
Both would seek anti-trust immunity with JAL under an “open skies” treaty to liberalize air travel between the U.S. and Japan, allowing them to boost revenues and save costs by cooperating on pricing and scheduling.
JAL had said it would decide this month on whether to remain with American in the Oneworld alliance or switch to rival SkyTeam with Delta. The CEOs of both U.S. carriers have pitched in person to Japan’s transport minister. But Seiji Maehara said on Friday the deadline would be tough. A decision may have to wait until JAL names a new chief executive to replace Haruka Nishimatsu, who has said he’ll stand down once a restructuring plan is in place.
American on Tuesday sweetened Oneworld’s investment offer by $300 million to $1.4 billion, the bulk of which would come from private equity firm TPG. That’s nearly three times the $500 million in equity offered by Delta, whose total financial aid package is around $1 billion including guarantees and loans.
JAL and some officials in the transport ministry are said to favor Delta given that it has a solid presence in Asia and operates more flights between Japan and the U.S. than American, offering a greater opportunity to bolster sales and cut costs.
WHERE’S THE SOFT LANDING?
The ETIC is planning to put about 300 billion yen in fresh capital into JAL, while also preparing a credit line of more than 600 billion yen along with the DBJ to provide loans to keep JAL flying while it works through bankruptcy.
The fund would also guarantee payment on fuel, parts and other commercial deals to reassure JAL’s suppliers and partners. ETIC also wants to speed up, through some opt-outs, the Corporate Rehabilitation Law process, which can under normal circumstances take several years. — Reuters