Summary
Nikkei reports that four main creditors of Japan Airlines Corporation (JAL) soundly rejected the latest rehabilitation plan crafted by top management of the now defunct Industrial Revitalization Corporation of Japan (IRCJ), suggesting the need for a massive injection of public funds in the JPY 500 billion to JPY 1 trillion range.
Analysis
During his first week in office, Japan Transportation Minister Hon. Seiji Maehara thrashed a draft rehabilitation plan for Japan Airlines crafted under his predecessor which he deemed to be vague and inadequate. The Minister later declared that rehabilitation of JAL would require government support and sent in his own team of former IRCJ management, sending the company's shares in a protracted slide toto Friday's all-time intraday low of 100 yen. Rejection of the most recent rehabilitation plan by the Ministry of Finance (MOF), Development Bank of Japan (DBJ) and Japan's three mega-banks suggest that creditors view the current proposal, which includes a massive reduction in staff, discontinuation of domestic and international routes and a broad operational restructuring, as both unrealistic and inadequate - suggesting that a massive injection of public funds will be required to ensure the longtime viability of the carrier.
In response to a longstanding request by creditors, the Ministry team re-examined the airline's balance sheet and determined that total liabilities exceed total assets by at least 250 billion yen. Left unrectified, this situation would impact debt covenants and possibly force exchanges in Japan to delist the company's stock. Now that creditors have already balked at the most expedient option for correcting the situation, debt forgiveness and/or a debt-for-equity swap totalling around 300 billion yen range, an injection of public funds remains the only viable option. This raises two questions: how much and from where?
Nearly 500 billion yen would be required to erase 250 billion yen in net worth and bring pension liabilities down to the stated target of 100 billion yen without protracted labor negotiations. A figure approaching 1-trillion yen would seem more realistic given the company's steep operating losses over the past two years and its stark earnings forecast for the coming year.
Without a doubt, Japan Airlines is too big to fail. The carrier provides exclusive service on more than a handful of domestic routes and supports a broader food chain encompassing more than one hundred affiliates and partners worldwide. Moreover, the Transport Ministry is complicit in creating the privatized carrier's bloated labor and pension cost structure and preserving its unprofitable domestic route schedules and fare structure. to the extent that forcing JAL into bankruptcy would be political suicide for the Hatoyama Government. Stay tuned for more details...
Daniel Lintz consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
