JAL comeback iffy prospect for banks

Shoichi Shirahaze and Masataka Morita / Yomiuri Shimbun Staff Writers

Japan Airlines' efforts to turn around its failed business will depend on the flagship carrier's ability to secure new loans from its creditor banks, which have reacted cautiously to the airline's requests.

Having submitted its rehabilitation plan on Tuesday, the struggling airline's next step will be to start negotiations with the banks over the loans needed to enact the plan.

To obtain loans from the banks, which are dubious about JAL's chances of getting back on its feet, the carrier will have to make steady progress in its rehabilitation program, observers said.

"[The plan] mustn't end up as pie in the sky," JAL Chairman Kazuo Inamori said.

Assistance to JAL from the Enterprise Turnaround Initiative Corporation is limited to a maximum duration of three years.

There are concerns the airline's recovery efforts could be adversely affected by unexpected events, such as an economic slump, natural disasters or terrorist attacks.

On Tuesday, JAL reported 23.1 billion yen in consolidated operating profits for July, largely due to rises in the number of passengers on international flights and freight handled by the airline.

JAL's profits in the April-July period totaled 39.5 billion yen, exceeding the carrier's target of 25.3 billion yen for the current fiscal year.

"Backbreaking efforts by our employees to cut costs have produced fruit," Inamori said at a press conference Tuesday.

JAL expects to make a 64.1 billion yen profit for the current fiscal year, which will conclude at the end of March.

Nevertheless, the company fell short of creditor banks' expectations by failing to achieve certain other targets.

For each fiscal year since the one beginning April 2003, JAL has forecast an operating profit, but for three of those periods the airline's books were in the red.

Unexpected events, including the outbreak of SARS, the Iraq war and the so-called Lehman shock, were main factors in the negative results.

The turnaround body has noted that JAL's rehabilitation plan does not allow for the possibility of similar surprises occurring.

"We'd like to include [unexpected situations] in consideration of capital injection, financing and guarantees," said Hideo Seto, committee chairman of the government-backed turnaround body.

However, there is a limit on how much support the turnaround initiative corporation can provide JAL, as it uses public funds--a cause of anxiety to the banks.

"Whether the company will be able to carry out personnel cuts as it has planned is extremely important," Land, Infrastructure, Transport and Tourism Minister Seiji Maehara said at a press conference after a Cabinet meeting Tuesday.

He strongly urged JAL to carry out its plan to reduce its workforce by 16,000 by the end of fiscal 2010.

"We've already arranged for 8,000 people to be cut from our workforce. Our plan to cut personnel is progressing satisfactorily," JAL President Masaru Onishi said.

However, the company said fewer pilots than expected had applied for its early-retirement program.

"If we can't carry out the plan, it's likely that we'll have to lay some [pilots] off," a senior JAL official said.

Labor-management negotiations toward cuts to personnel numbers and salaries are likely to be major issues in the airline's recovery efforts.

JAL and the turnaround body hope to repay all of the airline's about 319 billion yen in debt by the end of March 2011, by way of having banks forgive some debts and extend new loans.

The new loans are essential for the procurement of new equipment, among other needs.

JAL hopes the banks will approve the new loans by the end of this year.

"I think [the banks] will cooperate with JAL on various matters," Seto said at a press conference.

However, skepticism among banks is clear. "It's not easy to extend new loans to a company that has failed to meet performance targets," an official of one bank said. Another said, "There's a definite possibility that unexpected situations will cause the plan to fail."