Tags: JAL | Japan | airline | business

JAL Bankruptcy Rocks Japanese Business Stature

Thursday, 21 Jan 2010 10:28 AM

 

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TOKYO, Japan — It will take some time for the dust to settle on one of the biggest collapses in Japan’s corporate history.

Twenty-four hours after it filed for bankruptcy with debts totaling $25.6 billion dollars, JAL now begins the arduous task of transforming itself from a fortress of inefficiency and profligacy into a leaner, humbler version capable of competing in a global airline industry beset by turmoil.

That recovery promises to be every bit as painful as the indignities it has suffered while the country’s new government lurched to a decision on the flagship carrier’s future.

Under the restructuring regime agreed Jan. 19, JAL will cut about 30 percent of its workforce and slash 31 unprofitable routes, lose more than 50 aircraft and offload about half of its affiliates. JAL investors, meanwhile, will see their shares obliterated when they are delisted from the Tokyo stock exchange next month.

In return, the airline will receive about $10 billion in state-backed support and its creditors will forgive 730 billion yen in debt.

There will be less sympathy for another potential victim of the JAL fiasco: the collusion that allowed a debt-laden corporate icon limp on with impunity, safe in the knowledge that a government bailout was always in the offing.

Once a potent symbol of Japan’s rise to the status of economic superpower, JAL’s long-standing acceptance of the unsustainable demands of the state bureaucracy contributed to its undoing.

Despite being privatized in 1987, JAL rarely behaved like a genuinely independent entity. Under decades of near-uninterrupted rule by the Liberal Democratic Party [LDP], the airline’s dozens of domestic airports included those built for no other reason than to create construction jobs in the regions.

While JAL continued to fly unprofitable routes at the behest of successive LDP administrations, the wider problems of falling passenger numbers, huge pension and salary burdens and volatile fuel costs were left to fester until it was too late.

Akitoshi Nakamura, executive director of the state-backed body responsible for overseeing JAL’s recovery, acknowledged as much when he said: "JAL lacked strong governance and was unable to keep up with changing times. In a sense JAL encapsulates what is a typical problem and hurdle for Japan as a whole."

It is safe to say that bankruptcy would have been unimaginable while the LDP was in power. The Democratic Party of Japan [DPJ], by contrast, took office in September vowing to end the wasteful ways of the past.

Its decision late last year to rule out a fourth unconditional state bailout in the space of a decade sent clear signal that JAL would have to exit its comfort zone.

Yet given that JAL is still with us, the DPJ’s commitment to change only runs so deep. There was never the slightest possibility that the administration of prime minister Yukio Hatoyama would allow the carrier to fail.

"Today is the beginning of a process to keep JAL alive,” the transport minister, Seiji Maehara, said yesterday. “It plays a key role in our nation's aviation network, which is a development base of our nation, so the necessary support will be provided until it is rebuilt.”

Yoshitomo Aoki, an aviation expert, echoed the generally positive response to the move. “Some people have said JAL should have been fazed out, but Japan needs two major airlines [the other is All Nippon Airways] to encourage competition,” he said.

“I’m not surprised the DPJ has acted in this way. They promised to change Japan in every way, so it wasn’t difficult to see that the transport ministry would opt for bankruptcy.”

Martin Schulz, an economist at the Fujitsu Research Institute in Tokyo, agreed that the airline was one dinosaur worth saving from extinction, but added: “JAL’s creditors will have to swallow a big bankruptcy, which is a major break from the survival-at-all-costs approach of the past.

“The DPJ has sent a message to smaller corporations who have survived crises until now because of government support.”

Despite the magnitude of JAL’s woes, Schulz doubts they will add much to growing public angst over the health of "Japan Inc."

“Sentiment is already at the lowest levels imaginable,” he said. “Confidence among the public is almost non-existent after 20 years of seeing their economy slip in and out of crisis. JAL is a symbol of something that has already been lost.

“All the ingredients are now there for a successful company, but it depends on how the restructuring proceeds and whether politicians start interfering again. JAL will only recover if it respects its customers and starts to act like a genuinely private company.”

Amid the turmoil it is easy to forget that the airline is being courted by foreign counterparts eager to gain access to its extensive network of routes across Asia.

American Airlines is part of a $1.4 billion offer to keep JAL as a member of the Oneworld Alliance, while Delta is attempting to lure it to the Sky team group with promises of $1 billion in fresh investment.

Delta has said that defection could earn JAL an extra $400 million a year in revenue and give the two companies a 43 percent share of the market between Japan and North America, nearly double that of the JAL-American partnership.

“JAL won’t have much scope to expand if it stays with American,” Aoki said. “A deal with Delta would be high risk, but with potentially high returns.”


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