Summary
JAL has been said to be a potential Japanese GM; does the comparison stand out?
Analysis
As far as I can remember JAL has always been a fund manager’s long-term play favourite targeting the company breakdown value. Let’s have a closer look at recent developments.
When large industrial corporations face a difficult situation they usually revert to crown jewel sale. This is precisely what JAL is facing now, said in other words a classic fund manager’s dream may become true. Among the crown jewels are JAL credit card operations (sale to MUFJ Bank?), JALways the profitable charter flight subsidiary etc.
Looking at actual JAL’s balance sheet may explain how desperate is the situation; by 30th March 2008 cash and deposits totalled Y354.977b but by 30th March 2009 cash at hand balance collapsed to Y163.686b and by June 2009 had decreased to Y112.220b. Said in other words in just 15 months net cash balance collapsed Y240b.
JAL is now begging for Y250b funding, it is unclear if that money is requested to
fill-up the cash lost during last 15 months but key point is JAL net cash balance decreased by Y240b.
Net cash/average monthly sales ratio gives another clue:
Cash/average monthly sales ratio (%)
30th March 2008 1.91 (means JAL had 2 months sales cash at hand)
30th June 2009 1.01 (means JAL has 1 month sales cash at hand)
Usually it becomes very difficult for a company to keep operating when cash at hand equals only 1-month average monthly sales.
In March 2008 JAL registered Y90b operating profit however by March 2009 JAL suffered Y50b loss and net loss rose to Y63b. At fiscal year 2009 Q1 end net loss increased to Y99b and probably stands around Y100b as I speak. Depreciation expenses are included therefore net loss does not necessarily equals cash outflows, said in other words JAL’s funding needs do not appear in financial statements.
Short-term interest bearing debt part needs repayment within one year; if the bank does not accept rollover then it must be repaid through asset sales or working capital.
JAL’s administrative expenses totalled Y63b by 2009 Q1 end (June), project expenses (expenditure and sales costs with labour costs included) reached Y357.399b during same period. Considering JAL’s Q1 loss may be around Y100b it becomes impossible to cover operating expenses. Even worse Q1 operating profit (sales) was Y334.895b, not enough to cover Y357.399b project expenses.
In addition JAL has a severe underfunded pension fund problem and no less than 8 labour unions. JAL’s pension fund has the highest monthly payout ratio in the industry (Y250,000/month) which explain that JAL’s pension and retirement money liabilities represent Y800b out of which Y330b are unfunded. Pension provision are defined by Japanese labour contractual laws and cannot be changed at will however JAL’s management warned that should JAL goes bankrupt pension provision would obviously fall to zero.
It is highly improbable Japanese government allows the old symbol national carrier go bust, there is national pride involved too. JAL pension problem epitomizes Japan as a whole. To maintain the Japanese welfare system up and running public contribution level has been kept low, private sector has been left to bear the burden on the private sector, this led many Japanese corporate pension funds severely underfunded. To rebuild JAL first step would be revising existing laws governing labour and management, which is highly improbable in the short run.
These said not a few major airline companies went bankrupt worldwide but are still flying under debt adjustment schemes.
Considering above mentioned liabilities and a fair valuation of the crown jewels means we can estimate JAL’s breakdown value. This level would represent a very attractive buying price
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
