Money Matters, Simplified.
Bankruptcy option mooted for Japan Airlines
by Jamie Anderson - December 28, 2009 - comments
Bankruptcy has been proposed by a state-backed fund as an option in the restructuring of Japan Airlines. JAL's stock has lost more than half its value this year amid growing worries that it could face insolvency
Tokyo, December 28 -- Going through the bankruptcy court may well be an option for Japan Airlines Corp (9205.T) if it goes in for a state-backed turnaround fund.
Japan Airlines Corp (JAL), Asia's leading airline by revenue, had, in October this year, applied for help from the Enterprise Turnaround Initiative Corp of Japan (ETIC).
The latter is a competent body of turnaround specialists established particularly to rescue corporations with state-guaranteed funding.
Bankruptcy would create chaos
Sources familiar with the matter state that the ETIC has discussed, at length, the issue of restructuring at JAL with the carrier’s creditors.
As of now, both the options, that of using a Chapter 11-style bankruptcy procedure or a restructuring outside of bankruptcy court, have been kept open.
Kotaro Toriumi, an airline analyst and professor at Josai International University noted, "If JAL really were to file for bankruptcy that would cause chaos. At this moment I think the chance of a JAL bankruptcy is still quite small."
The state-owned Development Bank of Japan and the country's three private mega banks; Mitsubishi UFJ Financial Group (8306.T), Mizuho Financial Group (8411.T), and Sumitomo Mitsui Financial Group (8316.T) are JAL's main creditors.
"The market consensus seems to be they will never let JAL go bust, and the impact of JAL's problems on the overall economy has already largely been factored in," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
The other options
Two American airlines, Delta Air Lines (DAL.N) and American Airlines (AMR.N) have also made offers of financial aid to the besieged airliner. In lieu of the funds, the U.S. carriers will get a bigger toehold in Japan and the access to JAL's set-up in the rest of Asia.
The final decision as to whether ETIC will support JAL with loans and investments is expected to come next month only.
Should the ETIC choose to lend a hand to JAL in its revival; the latter will file for protection from creditors under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the U.S and employed in large, complicated cases in Japan.
Under this scheme, ETIC will become a prospective sponsor of the airline, lenders will be expected to waive debt and JAL's pension commitments will be abridged.
Till something concrete emerges for the carrier, Japan Airlines will put in abeyance, its plans of integration with Nippon. Earlier the two companies had planned to merge their air cargo businesses.
Those plans put on the backburner at least till July of next year; JAL intends to increase rates on regular cargo flights serving the U.S. and Europe by 10 percent to 15 percent immediately.