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Wednesday, Sep. 19, 2012
Relisting just starting point for rejuvenated JAL
Back from bankruptcy, airline faces budget carriers, restoring brand
By MIZUHO AOKI
Japan Airlines Co. will return to the Tokyo Stock Exchange's first section Wednesday, two years and eight months after filing for bankruptcy in one of the country's biggest corporate failures.
Starting with a market value of ¥687.3 billion, JAL's relisting will be the world's second biggest initial public offering this year following Facebook Inc.
The airline's parent, the government-backed Enterprise Turnaround Initiative Corp. of Japan, is selling 175 million shares, or 97 percent of the total available. The ETIC is expected to nearly double the ¥350 billion in taxpayer money it invested in the carrier.
The return to the stock market, however, is merely a starting point for the former national flag carrier, experts say. The real challenge will be when JAL flies solo as a publicly traded company amid rising competition with the emergence in Japan of low-cost carriers.
They also say that the recent criticism from its longtime rival All Nippon Airways Co. as well as the Liberal Democratic Party over JAL's rehabilitation process, which they argue was unfair to rival carriers, could be a drag on its growth.
"There is no doubt that JAL became a profitable company after its rehabilitation. . . . But the real question is whether it can maintain the sense of crisis it had during the restructuring process," Mitsuru Miyazaki, chief analyst at SMBC Friend Research Center, told The Japan Times. "Especially after Kazuo Inamori (a charismatic entrepreneur and founder of Kyocera Corp.) leaves the company."
If JAL can continue to respond to the severity of the situation in the airline industry and keep up its cost-cutting efforts, the once-ailing carrier is likely to be able to turn a steady profit in the years ahead, Miyazaki said.
JAL filed for bankruptcy under the Corporate Rehabilitation Law on Jan. 19, 2010, in the biggest failure of a nonfinancial company in Japan since World War II, leaving combined liabilities of ¥2.32 trillion.
However, under the powerful leadership of Inamori, 80, the carrier made a sharp turnaround in a short period of time, logging a record operating profit of ¥188.4 billion in fiscal 2010 after going through a drastic rehabilitation process that included slashing about 16,000 personnel, or about 30 percent of its workforce, cutting unprofitable routes and retiring large fuel-guzzling planes.
In fiscal 2011, JAL posted operating profits of ¥204.9 billion, topping the previous record.
In recent months, JAL's stunning recovery has drawn criticism from ANA — whose operating profit for fiscal 2011 stood at ¥97 billion — as well as the LDP. They claim that the rehabilitation process gave JAL unfair advantages, such as a debt waiver of more than ¥500 billion and tax breaks, which distorted the competitive environment in the aviation industry.
An LDP team adopted a resolution in July saying that JAL should not be allowed to relist its shares until the government takes steps to secure fair competition with other airlines.
In an attempt to fairly balance competition in Japan's cutthroat airline industry, ANA argues that JAL should not be given new highly profitable domestic slots at Tokyo's Haneda airport, which are scheduled to increase by 25 a day next March. Currently JAL utilizes approximately 41 percent of the total available domestic slots at Haneda, while ANA has about 37 percent.
Some LDP members, apparently out of consideration for voters in rural areas, also urged JAL to reopen unprofitable domestic routes it axed in exchange for relisting of its shares on the stock market.
Experts, however, warned against political intervention in what is supposed to be a purely business matter.
Hajime Tozaki, a professor at Waseda University who specializes in transportation policy, said JAL's remarkable turnaround will backfire if politicians are allowed to intervene.
"One of the biggest reasons behind JAL's bankruptcy was the intervention of politics. If such intervention comes back due to the recent argument over unfairness (of JAL's rehabilitation process), the carrier will return to its old self," Tozaki said. "That would be a huge loss for Japan's economy."
If the government wants JAL to reopen an unprofitable domestic route to benefit the public, then it should extend subsidies, Tozaki said.
"As long as JAL is a private company, it should establish routes based on profitability. If the government wants the carrier to open a new route for public benefit, then it should establish a system to guarantee (its profitability)," he added.
As for slots at Haneda airport, they should be allocated to airlines based purely on consumer benefits, said Hirotaka Yamauchi, a professor at Hitotsubashi University and an expert on transportation policy.
"I do understand to some extent (what ANA is saying). But that argument should be separated from slot allocation," Yamauchi said. "Slots should be allocated based on objective standards to meet the benefit of consumers."
Meanwhile, JAL released a medium-term management plan in February covering the fiscal years 2012 to 2016.
According to the plan, the carrier aims to expand its international transportation capacity by 25 percent by the end of 2016, while decreasing its domestic capacity by 3 percent.
It plans to purchase a total of 29 Boeing 787 Dreamliners by the end of 2016 and is scheduled to open new international routes connecting Narita International Airport with Boston, San Diego and Helsinki this year and next.
Considering the emergence in Japan of new low-cost carriers and extensions of shinkansen lines, as well as the country's shrinking population, JAL is heading in the right direction with its plans to expand international flights and target businesspeople from emerging Asian economies, experts say.
But to attract first- or business-class passengers, both in Japan and overseas, the carrier needs to re-establish its corporate image that was severely damaged by the bankruptcy, Yamauchi of Hitotsubashi said.
"JAL's brand value has declined over the past two to three years, while ANA's brand image has strengthened. How JAL handles that loss is crucial," Yamauchi said.
"This is the beginning (of JAL's true reconstruction). It is not the exit," Yamauchi said. "JAL should not forget the fact that its former stockholders and creditors suffered a great loss, and also the fact that many employees left the carrier (due to the bankruptcy). JAL has succeeded because of these facts and that should not be forgotten."