Oppressive Legacy Costs Put JAL In GM's Shoes

TOKYO (Nikkei)--Japan Airlines Corp.'s reconstruction prospects do not look promising. The company has come under government supervision in exchange for loans to stay in business, but if it cannot convince employees and retirees to accept pension cuts, its legacy costs will overwhelm it, a scenario also faced by General Motors Corp.

At the carrier's shareholders meeting Tuesday, pension reform was a major concern among the 3,413 shareholders attending, sparking a heated exchange. "Do you intend to steal our pensions?" asked one shareholder. Management replied, "That would be legally impossible."

On Monday, the government set the specifics for its assistance to JAL. The Development Bank of Japan and three megabanks will offer a syndicated loan worth about 100 billion yen this month. The government will guarantee the Development Bank portion of 60-80 billion yen and guarantee 80% of any losses JAL might incur.

Before the decision, Chief Cabinet Secretary Takeo Kawamura, Finance Minister Kaoru Yosano and Transport Minister Kazuyoshi Kaneko met to confirm policy allowing the government to guide and supervise the airline as preconditions for the funding.

JAL needs 200 billion yen for equipment and to redeem bonds in fiscal 2009. It planned to cover that with refinanced bank loans and business income. Business was good up through last summer, but it fell off with the global recession in autumn. Early in the new year, JAL President Haruka Nishimatsu and other executives began visiting the Transport Ministry, banks and others seeking financial help.

By March they had won support from the ministry and influential politicians, who are demanding that the carrier maintain its regional routes, but they still faced strong resistance from the Development Bank and the megabanks, which feared an expensive default. The four demanded "fundamental restructuring in exchange for additional assistance."

Shareholders meeting held on Tuesday

Then the new strain of influenza began to affect passenger traffic, and JAL was heading for an acute fiscal crisis by summer, leading to a compromise in which JAL will receive a 100 billion yen government-underwritten loan, half the amount it needs, on condition that it submit a fundamental reconstruction plan by summer.

A pillar of the plan was reform of the pension system. This year, JAL plans to maintain its net loss at the 2008 level of 68 billion yen. By logging a special profit of 88 billion yen by compressing its estimated yield of pension funds to that for national bonds, it will reduce payment obligations to retirees. Without doing so, JAL would otherwise have to report a net loss of over 150 billion yen.

That move will be felt by about 17,000 employees and 9,000 retirees on the corporate pension plan. According to a letter signed by Nishimatsu in early May, pension payments will likely fall by more than half.

This revision will require a "yes" vote of two-thirds of employees and retirees. JAL will enlist union help to convince employees of the need for the move, but retirees might be harder to win over.

This is especially true for retirees in their 50s who left JAL in and after 2007 on an early retirement program as part of the restructuring. "Management promised me a good pension so I can work somewhere else until I reach 60," said one.

JAL has been receiving a flood of inquiries from concerned retirees since it announced the reconstruction plan on May 12. It held seminars in seven locations starting June 15, where Vice Presidents Tetsuya Takanaka and Kiyoshi Kishida spoke about the airline's financial difficulties. The talks were not well received, and some retirees demanded that Nishimatsu resign before asking them to sacrifice.

By August, the carrier will release specific figures on pension cuts, seek to win agreement in November and apply for government approval of its pension reform in December. If it fails to win full agreement, "The banks will lose confidence in us and won't lend the money," Kishida said.

As with GM, legacy costs are one of the major burdens among its structural problems, including money-losing routes, eight union divisions and high indirect costs.

--Translated from an article by Nikkei staff writer Fumihito Ishizuka

(The Nikkei Business Daily June 24 edition)