A JAL Boeing 787.(Michael Dwyer/AP)

Final judgment was entered today by the Civil 8th Division of Tokyo District Court sealing Japan Air Lines bankruptcy restructuring phase that was initiated in October 2009 as the debt ridden airline was struggling to continue operations. The final judgment emphasized that with the debtor had complied to the lump sum debt repayment option stipulated in the November 30th 2010 restructuring plan by discharging of 2/3 of monetary claims to creditors.

The court-supervised corporate restructuring of Japan Air Lines was ended.

JAL has been the latest example of legacy airline foray into bankruptcy restructuring proceedings as a way to regain control of its costly infrastructure. Legacy airlines can be characterized by their inability to operate a cost effective organization on par with low cost carriers. Their fleet would be significantly larger with expensive planes to re-pay and operate. Their network of routes would seemingly be inherited from the carrier position as a de-facto national airline with large home bases and significant presence at many foreign destination. Such network would have grown out of control with profitability being remote to maintaining a sizable presence as a way to stifle markets (lack of commercial drivers in the strategy). Labor cost structure, with highly unionized environments would also have guaranteed the welfare benefits whose premium would become endemically underfunded in times of stress in the industry.

In the end the JAL behemoth seems to have been able to shed all the impediments that separate legacy airlines from low-cost in favor of an optimal cost structure that can generally allow low cost carriers to keep capturing market share even in difficult industry economic cycles. In fact we will see that JAL has been able to orchestrate its turn around on new low unit cost and has already shown profitability through March 2011 with a projection of 180 Yen billion net profits accumulated by March 2013.

Liquidity question

The Enterprise Turnaround Initiative Corporation of Japan (a 50% owned Japanese Government company investing in distressed companies of significant national value) has been the liquidity provider of last resort whose intervention has prevented the airline from altogether ceasing operations in January of 2010. Operating against a consolidated debt of 959.2 Billion Yen ($11.74 Billion), the quasi-government agency has stepped forward early in the bankruptcy proceeding by arranging a line of credit with the Development Bank of Japan inc. valued at 600 Billion Yen ($7.34 Billion) made available by January 2010. With the list of primary creditors such as Development Bank of Japan Inc.

Japan Bank for International Cooperation, Mizuho Corporate Bank Ltd, The Bank of Tokyo-Mitsubishi UFJ Ltd., Sumitomo Mitsui Banking Corporation, it seems ETIC was acting with the full faith of the government of japan to save the symbolic and probably too-big-to-fail debt ridden JAL.

Fleet haircut; dismantling costly pieces

The first victim of the restructuring phase was the rationalization process initiated within the fleet. The more costly Boeing 747-400, A300-600 and MD-81/-90 were sold or withdrawn from use. Reduction of capacity has been the sole way of diminishing cost for carriers with difficult to negotiate labor contract. Aircraft with high rents or less efficient would also be prime targets for storage. As a result, a highly rationalized fleet using only 4 different aircraft type would remain in service after 103 airplanes were cut from the main fleet. Retained for use were the Boeing 737-800 for medium markets, the Embraer 170 for small/regional operation. The long haul fleet would be held by the 777-200/300ER supported by 767-300. However the airline has made the 787 the core of its strategy of growth and low cost operation with order for 35 of the type with manufacturer Boeing (30 ordered in 2005 and 5 added in 2007). But more dramatically has been the airline elimination of its dedicated cargo aircraft ( comprising at least 2 Boeing 747-400F ) opting instead for cargo transportation directly on passenger flights cargo holds.

Operating along the lines of a low cost, the airline is betting that more frequencies on the domestic network built around Haneda base can deliver higher yield.

International routes in need of a balanced network supported by better alliances (JAL has applied to operate in partnership with American Airlines across the Pacific using the antitrust immunity clause approved by Department Of Transportation). This measure builds a very close partnership allowing increased commercial opportunities between both airlines. Overall network route reduction will also be conducted wholesale in an effort to eliminate unprofitable destination but the airline intends to cling on major European and North American destinations as well seeking opportunities in the growing Asian market.

Recapitalization

has been undertaken by consolidating debt from 3 major entities into a single one for liquidation purpose. Japan Airlines corporation (JALS) and JAL Capital (JLC) have become merged with entity Japan airlines International Co. Ltd (JALI). Under the recapitalization envisioned by ETIC, the infusion of 350 Billion Yen ($4.28 Billion) will be conducted with 175 Billion Yen ($2.14 Billion)  for stated capital and another 175 Billion Yen held as capital reserves. Under this final capital structure JALI is set to assume its new trade name under which the airline will begin operating on April 1st 2011 as Japan Airlines Co.,Ltd

Debt Repayment

The court has issued a debt discharge window of 7 years allowing 100% repayment to secured lenders with unsecured lenders recovering 87.5% of their initial claim. Taking advantage of a lump sum payment option has allowed the airline a court-approved discharge of 2/3 of its obligations as part of the bankruptcy exit plan.

A new business

The new Japan Air Line business whose official re-birth is planned for April 1st 2011 will see a revamped business structure which had spun off non-transportation subsidiary in order to focus on core activities. A compliance investigation committee August 31st, 2010 report had established that the monumental losses accumulated by the company in the period leading up to the bankruptcy were the result of breakdown of corporate culture, weak corporate finances, lack of initiative and risk awareness. With these findings in mind the airline is strengthening its risk management practice in order to effectively monitor future events that can affect its growth. The airline will actively manage fuel related risks (which had contributed significantly to the previous problems). Already reduction of more than 16,000 in workforce (from 48,714 to 32,600), renegotiation of labor contract and welfare/benefits plans, downsizing of airport facility and real estate, The airline has achieved the overall cost savings that would permit it to operate profitably while gaining market share. Although various report have indicated a 25% traffic loss subsequent to the recent earthquake and Tsunami, the long term prospect remain strong given the current positive outlooks for air transport in Asia.

 

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