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Wednesday, Jan. 20, 2010

ANALYSIS

Path ahead unclear as carrier enters into new chapter


Staff writer

Now that it has filed for bankruptcy under the Corporate Rehabilitation Law, Japan Airlines Corp. closes a chapter in its history and opens a new one — a mission to turn itself around under court-led rehabilitation.

It will be good for JAL to drastically cut costs and start fresh. Its rehabilitation under Enterprise Turnaround Initiative Corp. of Japan should progress carefully and follow a sound growth strategy, industry observers said, although the strategy remains unclear at this point.

Bankruptcy not only signals a turning point for JAL but also for Japan's aviation policy, as JAL management was heavily intertwined with the government, the observers said.

"JAL's bankruptcy symbolizes the failure of Japan's aviation policy," said Mitsuru Miyazaki, chief analyst at SMBC Friend Research Center. "(JAL) was a very unusual company" due to the government's involvement.

Japan's postwar aviation policy has often drawn criticism for not being concrete. The government allowed rampant regional airport construction and required airlines to serve the facilities, even if the routes were unprofitable.

"If the overall transport structure is reformed in conjunction with JAL's reform, I think it will bring many benefits to Japan," said Hajime Tozaki, a professor at Waseda University and a former JAL employee.

One major task will be for JAL to streamline its employee roster and operational structure, which is often considered too expensive to maintain. But this rehab process must be carefully applied, experts said.

ETIC plans to cut 15,661 jobs, or about 30 percent of JAL's workforce, by the business year ending in March 2013. It also wants to ax 31 routes and sell JAL's affiliate firms that are not engaged in core aviation business.

Miyazaki said a route reorganization is crucial because JAL currently has too many that are unprofitable, especially in the domestic market.

"It shouldn't be just a simple reduction in routes, as the company needs to ensure it keeps profitable routes," he said.

Eliminating a large number of employees in a short period would also harm morale, and that could put flight safety at risk, Miyazaki said.

ETIC aims to complete JAL's reconstruction in three years, but the process must not be carried hastily, Tozaki said.

"If cost-cutting is overdone, the company would not be able to keep up operations when the economy improves," he said.

Eiji Shiomi, a professor of transport economics at Chuo University, said a cost-cutting plan must include a growth strategy.

He warned against operating costs and number rationalization being the only factors considered. "That would be troubling," he said.

Meanwhile, ruling bloc lawmakers have argued that Japan does not need two international carriers, with All Nippon Airways being the other one. But experts disagree on this point.

Shiomi said that even though having just one international airline may have merit in terms of global competitiveness, having more than one airline is better, considering various factors, including consumer benefits and diplomacy.

Tozaki noted, "It would be too much for one company to take all the international routes."

Until the dust settles and the reconstruction timetable is in place, JAL's future will remain a question mark.

Tuesday's bankruptcy filing is just a formal start. It is unclear how long it will take for the court to approve the reconstruction plan, and some say it may take from six months to more than a year.

Although JAL will receive a large loan from the Development Bank of Japan to keep aloft, its monthly operating costs reach about ¥100 billion.

ETIC officials said the turnaround body is planning on getting the court's approval for the reconstruction plan in August.

Even if JAL's reconstruction goes smoothly, the airline still has the daunting task of staying in business.

JAL may experience a big loss in passengers because the carrier has repeatedly failed to improve its business and waited until it was crushed by its debts.

JAL's liabilities are believed to have exceeded its assets by more than ¥800 billion.

The airline will "still have to make great marketing efforts to attract customers," Shiomi said.

"I know there are many talented workers, but the company did not take full advantage of these talents" due to its dated corporate culture, Tozaki said, adding however that at least it may be in a fortunate position for revival under ETIC.

If JAL can emerge as an effective team, the company can stage a comeback, he said.


Related links

Affiliates brace for impact from JAL's failure

By TAKAHIRO FUKADA and NATSUKO FUKUE


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