JAL faces $8.8 billion excess debt if liquidated: source

By Yoshifumi Takemoto

TOKYO (Reuters) - Liabilities at Japan Airlines Corp would exceed its assets by as much as $8.8 billion if Asia's largest airline by revenues were liquidated, a source with direct knowledge of the matter said on Friday.

The estimate of JAL's negative net worth, calculated by a government-led task force in charge of its restructuring, underscores the depth of the problems facing the airline as it seeks aid from banks and the state to avoid bankruptcy.

Shares of JAL, which are down more than 40 percent this year and hit a record low last week, slid 6.6 percent, extending losses after the Nikkei newspaper said some creditors wanted JAL to cut its capital to hold shareholders accountable.

The task force, which is led by turnaround specialists and reports to Transport Minister Seiji Maehara, is seeking a bridge loan of about 180 billion yen to prevent JAL from running out of cash next month and a total capital boost of 300 billion yen from both the government and the private sector, said the source, who spoke on condition of anonymity.

"It's a 'national flag' kind of thing and allowing it to fail would damage trust in Japan," said Koichi Ogawa, chief portfolio manager Daiwa SB Investments. "It's even more symbolic than GM, and an airline is essential. They'll inject public funds."

JAL is headed for its fourth annual loss in five years, weighed down by roughly $15 billion in debt and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways Co.

Maehara told a news conference he met Prime Minister Yukio Hatoyama and Finance Minister Hirohisa Fujii earlier on Friday to discuss the state's role in supporting JAL, and that a final decision on the matter would fall to Hatoyama.

"The reality is that 60 percent of the flights flying over Japan are JAL flights. If the situation becomes such that these don't fly, then that would make things difficult. We need to understand that," Hatoyama told reporters.

A JAL spokesman said: "We have not decided anything. We are crafting a revival plan from various viewpoints."

NEW SCHEME

The task force also wants to use a scheme recently introduced in Japan called "Alternative Dispute Resolution" under which a third party would mediate between JAL and its creditors on an out-of-court debt restructuring, according to the source.

But creditors, which include the country's top three lenders and the state-owned Development Bank of Japan, have so far rebuffed the plans presented by the task force, arguing they are being asked to carry too much of the burden to revive JAL.

The task force, which has asked creditors for 250 billion yen in loan waivers and debt-for equity swaps, needs to offer details on the use of public funds and map out a better plan to cut pension obligations and boost margins, bankers have said.

JAL's two likely options for a public fund injection would be to tap a revised law used earlier this year to prop up struggling chipmaker Elpida Memory or a government-backed corporate turnaround organization established this month to buy the debt of and invest in struggling but viable firms.

Some creditors have suggested that JAL be forced to reduce its capital to clarify the responsibility of shareholders. One idea being floated is for JAL retire about 99 percent of its common shares but remain listed, the Nikkei newspaper said.