JAL Turnaround Still Shaky Despite Y100bn Loan

TOKYO (Nikkei)–Japan Airlines Corp. this week will receive a much-needed 100 billion yen loan from the Development Bank of Japan and three megabanks, but given that these lenders and various government parties have differing views on what the firm’s priorities should be, the path to recovery may be rocky.

The syndicated loan is partially backed by the government, but “banks cannot shake off concerns that the airline will default,” said a DBJ executive.

In particular, the megabanks seem to believe that JAL has not fully committed to restructuring. Concerned, they are urging the airline to take steps like dropping unprofitable domestic and foreign routes and laying off pilots and flight attendants. While such moves would not allow the firm to “pay off its huge amount of interest-bearing debt right away, (they would help it) return to a net profit soon,” according to an official at one megabank.

Meanwhile, the Transport Ministry maintains that a major route restructuring would run counter to national interests, saying that the top priority should be maintaining flights to remote islands and between regional airports and foreign cities. “The government has come to the rescue precisely because JAL has this critical responsibility,” said one ministry official.

The ministry is suggesting job and wage cuts, but only to the extent that they do not impact existing routes. However, even if these measures are carried out effectively, profits may not recover to an adequate level, given that the number of flying customers is trending downward.

JAL President Haruka Nishimatsu

There is one measure that may help JAL achieve major cost reductions while keeping its route network. That is to slash certain taxes and government charges, such as airport landing fees — now much higher than the international average — as well as the airplane fuel tax, which is 25 times more expensive than in the U.S.

Such expenses put Japanese airlines in a difficult competitive position against foreign rivals — they account for 12% of JAL’s operating costs and 10% of All Nippon Airways Co.’s, far above the international average of 6.5%.

Some months ago, the wobbling airlines embarked on a campaign to have landing fees reduced. Such charges are one of the key funding sources in airport maintenance budgets; the shortfall resulting from a cut would need to be covered by general revenues. In other words, the airlines would have to seek the blessing of the Finance Ministry.

As such, on Feb. 4, JAL President Haruka Nishimatsu and Shinichiro Ito, then ANA vice president and now president, visited Transport Minister Kazuyoshi Kaneko to ask for his help in securing emergency financial support.

Kaneko said his ministry would compile a rescue package by the end of March. With Kaneko’s backing, Transport Ministry officials in charge of the airline industry began negotiations with the Finance Ministry. The hope was to cut landing fees by 80-90 billion yen.

However, the talks failed to secure such a reduction, as the Finance Ministry chose to place priority on fiscal health. The aid package that was unveiled on April 10 reduced landing fees by only 5 billion yen, a major disappointment to the airlines.

If the government truly wants to help JAL, it must first iron out the differences between the relevant ministries.

— Translated from an article by Nikkei staff writer Fumihito Ishizuka

(The Nikkei Business Daily June 29 edition)

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