Struggling JAL May Need To Downsize

TOKYO (Nikkei)--With demand for international flights dismal amid the global recession and new-flu fears, Japan Airlines Corp.'s government-supervised turnaround push is preparing for takeoff at a less-than-ideal time.

Still, Japan's flag carrier will at least be able to avoid fundraising difficulties for the time being now that the government has agreed to guarantee a large portion of the 100 billion yen syndicated loan it is set to receive.

The process of arranging the government guarantee for the emergency lending was a humiliating experience for top JAL executives, as they were not even involved in the deliberations.

On June 19, at the request of the Transport Ministry, JAL released a report outlining the "basic direction" of its medium-term management plan.

After receiving the report, Transport Minister Kazuyoshi Kaneko told the airline that it needs to draw up bold cost-cutting plans, adding that the ministry will closely supervise the carrier's work in preparing such plans.

On Monday, Kaneko, Chief Cabinet Secretary Takeo Kawamura and Finance Minister Kaoru Yosano decided that the state-backed Development Bank of Japan and the nation's three megabanks will extend the loan to JAL by the end of June.

Although the decision was crucially important for JAL, the company was generally quiet about the development, merely issuing a message of thanks through its public relations section. President Haruka Nishimatsu and other senior JAL executives remained in the background throughout the entire process.

In fact, JAL had already lost its management capacity two and a half months earlier.

Although the company raised 150 billion yen in capital by issuing preferred shares in spring 2008, it began seeing its cash holdings shrink toward the end of the year due to a plunge in flight demand. The company feared it would not be able to meet its funding needs in the year through March 2010 if it did not raise about 200 billion yen.

To address the funding problem, Nishimatsu and other executives held negotiations with parties concerned early this year. But the DBJ and other financial institutions declined to extend loans to JAL.

In April, Transport Ministry officials eventually started talks with financial institutions and the Finance Ministry. "We practically got on our knees before getting the nod for (the syndicated) loan," said a senior Transport Ministry official.

The official complained about JAL's lack of determination to turn its operations around and said it needs to restructure operations "for real" this time.

When told about this, a JAL executive sighed, saying, "We have done everything we could."

To address its high-cost structure, JAL has introduced measures over the past three years to reduce labor expenses, such as an early retirement program that cut 1,200 jobs, a 10% reduction in retirement benefits and a 5% pay cut for rank-and-file employees. The company thus slashed costs by more than 170 billion yen.

While high pay for pilots is often criticized, those at JAL received an average 18.3 million yen in annual pay in fiscal 2008, compared with 21 million yen for pilots at rival All Nippon Airways.

JAL began stepping up companywide cost-cutting efforts last autumn, including turning off heaters in hangars in winter. For the current fiscal year, it plans to achieve cost cuts of more than 600 billion yen by scaling down the administrative section at its corporate headquarters and integrating aircraft maintenance service subsidiaries and flight support units.

"There is limited room left for cost reductions. Almost all the assets that could have been sold were sold by last business year," a JAL corporate officer said.

If JAL has indeed carried out streamlining measures to the maximum possible extent, it then needs to reduce the scale of operations.

An analyst at a foreign brokerage said "the best way" for JAL to improve its earnings is to stop operating international flights out of Kansai International Airport in Osaka and Central Japan International Airport near Nagoya, as they are the carrier's biggest money-losers.

After that, JAL should then end unprofitable domestic flight services, the analyst added.

Managers at the airline are well aware of the need to pull the plug on unprofitable operations. But they are so proud of their position as Japan's flag carrier that they are reluctant to scale back.

If JAL is to return to its days as a high flier, it needs to drastically change its way of thinking.

(The Nikkei Business Daily June 25 edition)