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Japan's new finance minister endorses JAL bailout
January 7, 2010 / 3:29 AM / 8 years ago

Japan's new finance minister endorses JAL bailout

TOKYO (Reuters) - Japan’s new finance minister, Naoto Kan, said he expected a state-backed fund to support Japan Airlines 9205.T, fuelling growing expectations that Asia’s largest carrier by revenue will be bailed out with public money.

The airline, weighed down by $16 billion of debt and mired in losses, has applied for financial aid from a turnaround fund established to recapitalize ailing companies with state-guaranteed funding and help them restructure.

The Enterprise Turnaround Initiative Corp of Japan is considering investing about $3.3 billion in JAL if it files for bankruptcy and its banks write off loans, a source familiar with the matter said on Wednesday.

“I expect the turnaround body to support JAL,” Kan told a news conference, his first since being named to replace Hirohisa Fujii, who stepped down for health reasons.

Kan’s comments will add to speculation the ETIC will make a decision soon to support JAL, providing capital and loans in return for its filing for bankruptcy proceedings similar to Chapter 11 in the U.S. and debt forgiveness from its banks.

A bankruptcy could complicate JAL’s talks with Delta Air Lines Inc (DAL.N) and American Airlines AMR.N, both which are wooing the Japanese carrier with offers of investment and close ties on overseas routes.

TRANSPORT MINISTRY WILD CARD

The ETIC has asked creditors, which include the state-owned Development Bank of Japan and the country’s three-largest private lenders, to waive about 350 billion yen in debts as part of its revival plan, sources told Reuters on Wednesday.

The fund continues to negotiate with creditors and the government and there is still a chance it will not be able to reach a consensus, putting JAL at risk of liquidation.

The transport ministry is seen as a wild card in the decision process.

Seiji Maehara, who heads the ministry, rattled investors in late November when he said bankruptcy was a possibility for JAL, in a seeming reversal of his previous stance.

“For Kan to make these remarks at this timing, I have to think the government is leaning toward supporting JAL,” said Kotaro Toriumi, an airline analyst and professor at Josai International University.

“But you can’t make any predictions until the final moment. The Democrats have changed their attitude toward JAL again and again.”

BIG LOSS LOOMING

The ETIC is expected to make a final decision on whether to support JAL in the week starting January 18, with a filing for bankruptcy likely on the same day, sources have said.

Underscoring the depth of JAL’s problems, the ETIC has estimated JAL would could post a net loss of 1.23 trillion yen ($13.3 billion) this financial year due to charges for job cuts and other restructuring, a source told Reuters.

An earlier report on the loss in the Nikkei business daily contributed to knocking JAL's shares down 9.5 percent to 76 yen. The benchmark Nikkei average .N225 fell 0.5 percent.

JAL’s stock has lost about two thirds of its value in the past year while the spread on its five-year credit default swaps, used to insure against default, have been quoted at extremely distressed levels above 7,000 basis points.

“JAL’s stock has begun factoring in the possibility of bankruptcy,” said Mizuho Investors Securities senior analyst Takahiko Kishi, adding that he thought the share price was still too high.

JAL, which has not given an earnings forecast due to uncertainties over its business outlook, said in a statement the reported earnings were not something it had disclosed.

The turnaround body’s plan calls for the carrier to slash more than 10,000 jobs over three years, a source said.

Hit by the heavy losses, the ETIC has estimated the carrier’s liabilities would exceed its assets by 840 billion yen, said the source, asking not to be named because he was not authorized to speak on the record about the matter.

The ETIC declined to comment.

PARTNER PARADE

Undeterred by the precarious state of JAL’s finances, Delta and American have been stepping up their efforts to court the carrier, eyeing close cooperation under the recently signed “open skies” treaty between the U.S. and Japan.

Both U.S. carriers have said they would seek antitrust immunity under the treaty, which would allow them to cooperate closely on pricing and scheduling with the aim of boosting revenues and cutting costs.

A lobby representing corporate travel customers said on Thursday that Delta and JAL would not be able to get regulatory approval for antitrust immunity and warned an alliance between the two carriers would lead to higher fares.

JAL currently partners American in the Oneworld alliance. A defection to Delta’s SkyTeam would create a virtual duopoly on U.S.-Japan routes, giving SkyTeam and the rival Star Alliance control over 90 percent of that market.

Delta Air President Edward Bastian expressed confidence at a separate briefing that a Delta and JAL partnership would be blessed by regulators and said it stood ready to invest in JAL.

(Additional reporting by Taiga Uranaka, Tetsushi Kajimoto and Nathan Layne; Editing by Lincoln Feast, John Stonestreet)

$1=92.34 Yen

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