The Times, London:
US rivals circle as loss-making Japan Airlines flies into peril
Japan Airlines (JAL), which may have only enough cash to fund ten more days of operation, could be allowed to go bankrupt if a rescue package does not emerge quickly, the Government hinted yesterday.
The scramble to secure a viable future for JAL is primed to trigger turmoil throughout the global airline industry as rival alliances lunge for its extensive collection of international routes. For carriers in the United States, JAL’s crisis represents a rare opportunity to extend their foothold in the Asian market. Two cash-injection offers, each worth more than $1 billion (£596 million), are now on the table for JAL as American Airlines and Delta Airlines vie to buy the critical partnership. If Delta could lure JAL to the SkyTeam alliance, analysts said that the move would deal a heavy blow to British Airways and other members of the OneWorld grouping.
Despite the offers, however, the market remained focused on the risk of bankruptcy. Yesterday’s surprise change of position by the Japanese Transport Minister could herald something most Japanese thought they would never live to witness: the Government allowing a national flag carrier to fail, exactly 22 years since it was privatised amid a great fanfare.
Recent days have revealed the spectacularly poor shape of JAL’s business. Last Friday, it announced a record first-half loss of 131 billion yen (£875 million) and, humiliatingly, said that it was unable to make a forecast for the full year. The company has also been heavily criticised for the way in which it calculates its net worth. A recently disbanded rehabilitation task force composed of government and private sector experts concluded that JAL had a negative net worth of Y250 billion. JAL itself states its net assets at Y159 billion.
This year has dragged JAL dangerously closer to collapse as it struggles to recover from decades of bad management, a disastrous 2002 merger with JAS, a smaller rival, and years of running unprofitable routes. In latter years, pension deficits and the weight of debt-servicing have crushed JAL’s ability to compete. Yet throughout that time, the assumption has always been that when financial troubles really became unbearable, the State would always step in with a rescue package, as it has done before.
Speaking after a parliamentary committee assembled to discuss how to secure JAL’s survival, Seiji Maehara, the Transport Minister, said that he “had never said that we would exclude the option of legal bankruptcy”. With its future looking bleaker by the minute, shares in JAL sagged below the Y100 mark for the first time.
With a decision now likely to be forced on JAL, two deals have been laid before it. TPG, the private equity firm, is offering to invest Y100 billion via a private placement of stock. That money would effectively support a Y30 billion cash injection offer from American, which says that it could also offer practical support to JAL’s recovery. That deal would keep JAL in the OneWorld alliance, which American believes brings in about $500 million a year in revenues for JAL.
The proposal from Delta and SkyTeam matches the TPG offer and comprises direct cash injection, asset-backed funding and a sizeable revenue guarantee. Edward Bastian, Delta’s president, arrived in Tokyo this week to push his alliance as the best solution to JAL’s crisis. Mr Bastian, issuing lavish revenue projections should JAL choose to defect, said that Delta carried 3.7 million customers a year from the US to Japan, many more than the 700,000 customers he claimed that American carried.