Government Bailout Unlikely To Rescue JAL From Turbulence

TOKYO (Nikkei)--The government has come to the rescue of Japan Airlines Corp., offering a guarantee to the ailing carrier's 100 billion yen loan, but many view the latest move as a stopgap measure that would do little to alleviate the company's financial woes.

The Development Bank of Japan and three megabanks plan to extend a syndicated loan of around 100 billion yen to JAL this month. The government will guarantee 80% of the DBJ's loan portion and will oversee JAL's restructuring efforts.

It is highly unusual for the government to guarantee a loan to a big company. But even with such government intervention, JAL is unlikely to succeed in extricating itself from the dire financial straits.

JAL raised roughly 150 billion yen by issuing preferred stock to the DBJ and other buyers last spring. In business plans back then, JAL calculated that it needed around 200 billion yen for capital spending and bond redemptions in fiscal 2009. It had planned to finance them mostly with bank loans and passenger revenue.

But falling passenger traffic amid the souring global economy and the new influenza pandemic hit hard. Industry observers had predicted JAL would run out of operating funds as early as summer.

The airline is forecast to report a net loss of 63 billion yen for the year ending March 2010. Even with such unusual moves such as generating an extraordinary profit of 88 billion yen by lowering company pension payments, JAL will inevitably hemorrhage massive red ink on par with that in fiscal 2008.

JAL also plans to slash more than 60 billion yen in annual costs by cutting workers' wages 5%, shrinking administrative operations at the head office, and consolidating maintenance subsidiaries. But even if steady progress is made, such steps will not be enough to generate the funds JAL needs.

JAL has had little success in its previous attempts to restructure.

Since being fully privatized in 1987, JAL has aggressively expanded its operations. It decided to merge with Japan Air System Co. in 2001, and the duo fully integrated in 2006. But the move saddled JAL with many floundering regional routes operated by Japan Air System.

Reorganization of the services has not gone as hoped, due partly to resistance from regional governments and politicians. Some say even after the privatization, JAL management and its employees still have not fully shaken off the sense of entitlement that comes with being a government-backed entity.

The success of this latest round of restructuring will ultimately be measured by whether JAL can end its reliance on the government and try to stand on its own.

(The Nikkei June 23 morning edition)