JAL downfall not just its own doing

Cozy relations with government, politicians led to massive red ink

by Kazuaki Nagata

With Cabinet ministers indicating Japan Airlines Corp. may get an injection of public funds, a transport ministry task force is in the final stages of compiling a rehabilitation plan for the struggling carrier.

Although in other countries, particularly the United States, it’s not unusual for an airline to fail and then start court-initiated rehabilitation, this option appears unlikely for JAL.

But taxpayers here may wonder why they have to shoulder the huge amount JAL would receive.

A key reason, even transport minister Seiji Maehara admits, is that JAL has enjoyed a cozy relationship with the government and politicians, and all sides have benefited.

“One of the reasons for JAL’s worsening business is that politicians and the government used the special account and arranged for unprofitable airports to be built, and then subsequently served by Japan Airlines,” Maehara said in September.

Between the time JAL was established in 1951 and 1985, it enjoyed a government-sanctioned monopoly on international flights, in the process becoming one of the world’s top airlines.

Politicians, looking to appeal to voters, meanwhile pressured the government to splurge on construction of pork-barrel regional airports nationwide, many of which never attracted users.

To appease these lawmakers, namely members of the Liberal Democratic Party, the government pressed JAL to fly to those deserted airports and pay the expensive landing fees to boot.

This longtime arrangement leaves the government reluctant to allow JAL to fail. Even though the LDP is out of power and the Democratic Party of Japan is now calling the shots, this stance has not apparently changed.

“We must avoid a situation in which airplanes are not able to fly,” Maehara has repeatedly said, indicating the government will lend a hand in the end.

But the cozy ties have also weakened JAL’s competitiveness. The carrier did not have a free hand in determining its fate, said Hirotaka Yamauchi, a professor at Hitotsubashi University and an expert on transport policy.

Because of pressure from lawmakers and the government, “the company was not able to have the freedom to make business decisions,” said Yamauchi, who was on a transport ministry panel to review JAL’s rehabilitation plan when the LDP-New Komeito government was in charge.

Critics also have often pointed out that JAL has lacked a sense of crisis and failed to carry out drastic, timely reforms because in the end it felt it could rely on the government to come to the rescue.

Because the domestic aviation industry was strictly regulated, JAL “could not get used to competition with rivals,” Yamauchi said.

“The same thing can be applied to (All Nippon Airways), but ANA was in the position of trying to catch up with JAL,” he said. “As opposed to JAL, which was close to the government, ANA could pursue more efficient business strategies.”

This isn’t JAL’s first financial crisis. It logged losses in four of the last seven business years.

In 2007, it got ¥140 billion to strengthen its capital through a public stock offering. It also issued ¥150 billion worth of new shares to a third party in 2008.

JAL had to ask for a ¥100 billion special loan last June, only to post a record April-June group net loss of ¥99.04 billion this year.

This was because a large portion of the carrier’s profits come from international fights, and thus were stung by various incidents abroad, including the Sept. 11, 2001, terrorist attack in the U.S., the invasion on Iraq and the spread of swine flu.

Last month, JAL’s reconstruction task force under the transport ministry said all options are on the table.

However, it is unlikely the government will resort to the corporate rehabilitation law or similar measures.

Katsuyuki Nakai, associate director of corporate and government ratings of Standard & Poor’s in Japan, said too much time would be needed to regroup under the corporate rehabilitation law, because the process goes through a court.

“I think a big factor will be how quickly measures are applied,” Nakai said.

Time is of the essence. If it takes a year or two to start the rehabilitation, JAL’s brand image would suffer, and this would complicate any reconstruction, he said.

For JAL to be able to stage a comeback, any rehabilitation plan must first be feasible and second expeditious, experts said.

On Sept. 15, JAL proposed a plan to the panel Yamauchi was on that included cutting 6,800 workers in three years and axing 50 routes.

Yamauchi said he doubted the plan would lead to the carrier’s revival. Maehara also rejected the plan because it lacked specifics and feasibility.

Yamauchi mentioned that while JAL reportedly plans to sell some of its assets, including subsidiaries, they may not fetch the prices expected.

It would be difficult to drastically cut retiree pensions, which have often been deemed as too generous, he added.

While Maehara said Tuesday that “nothing has been officially decided,” rumors are rife that the government will utilize the Enterprise Turnaround Initiative Corp. of Japan, which is jointly funded by the public and private sectors, and solicit ¥200 billion in loans from major banks by offering a government guarantee.