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The government has decided to seek reconstruction of struggling Japan Airlines Corp. through filing for court-backed bankruptcy protection under the Corporate Rehabilitation Law. Divided opinion within the Hatoyama administration saw its position zigzag before reaching this conclusion. Opting for a reconstruction procedure involving the courts is aimed at ensuring greater transparency, which is essential given that the government plans to use a massive amount of public funds. The path to reconstruction will not be easy for any of the parties involved.

Under a plan put forward by the state-backed Enterprise Turnaround Initiative Corp., which is in charge of JAL’s reconstruction, the JAL group must shed 15,600 workers, or about 30 percent of its labor force. Estimating that JAL’s liabilities exceed its assets by more than ¥860 billion, ETIC plans to eliminate ¥730 billion of JAL debt, invest ¥300 billion and extend a credit line of some ¥450 billion. Creditor banks will need to forgive a large amount of debt.

The government and creditor banks had called on JAL to reduce pension-plan benefits to avoid using public funds to maintain the plan. To make the reduction, though, JAL needed the consent of two-thirds of retired and current workers combined. More than two-thirds of current workers gave their consent, but retired workers declined to do so until the deadline Tuesday.

Management at first told retired workers that their consent was necessary to avoid reconstruction under the rehabilitation law. After the government opted to file for bankruptcy protection, ETIC threatened to abolish the company pension scheme altogether if JAL failed to get the consent of enough workers. Due to the government’s flip-flopping, mutual distrust between JAL management, retired workers and the government has deepened.

Some airlines, including Delta Air Lines, have succeeded in reconstructing themselves after financial failure. But the bankruptcy filing could stigmatize JAL. The government and JAL need to properly handle any confusion resulting from business transactions and avoid further tarnishing the airline’s image.

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