Japan Airlines Corp filed for bankruptcy protection on Tuesday owing more than $25-billion (U.S.), and vowed to slash 15,700 jobs in an effort to survive in an industry hit by volatile fuel costs and fickle flyers.
JAL, Asia's largest airline by revenues, will remain in the skies thanks to nearly 1-trillion yen in support from a state-backed fund and must go through a sweeping restructuring under a new board and management.
Shareholders will be wiped out and lenders will forgive a larger-than-expected 730-billion yen in debt as part of the deal with the fund, the Enterprise Turnaround Initiative Corp of Japan (ETIC).
Bankruptcy will only be the beginning for an airline with depleted capital, facing headwinds such as rising fuel prices and shrinking passenger numbers, on top of hefty restructuring costs.
JAL, which has now been bailed out by the Japanese government four times in the past 10 years, will cut 31 routes and replace many of its older and less fuel-efficient planes. It also faces tough decisions about foreign capital and alliances.
"I have a little bit of a sense that we're now finding out that things were a bit worse than expected," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "What this has shown is that the nation won't just take total care of a company, that they've now said they'll let badly run companies fail.
JAL's 2.3-trillion yen bankruptcy ranks as Japan's fourth-largest ever and its biggest by a non-financial firm.
The airline's debt figure was as of the end of September, meaning the actual number could considerably higher. Its core airline business had at least 1.5-trillion yen in debt as of the same period.
Shareholders Wiped Out
Shares of JAL, which have fallen more than 90 per cent since the start of the month, closed flat at 5 yen after trading down 2 yen to 3 yen. They will be delisted on Feb. 20, according to the stock exchange.
JAL's market value had shrunk to about $150-million, making it smaller than minor carriers Croatia Airlines and Jazeera Airways and worth less than one Boeing 747.
"I thought that there was no way that JAL would fail," said Akiko Saito, a 63-year-old retiree returning from Sydney to Tokyo's Haneda Airport. "Even when the value of my JAL shares fell from 800,000 yen to below 120,000 yen, I was convinced that it would recover, and I held on to my stock."
JAL bonds maturing in 2013 were priced at the equivalent of just 27.8 cents on the U.S. dollar, versus around 70 cents last month, but traders said there was little trading appetite for the bonds on Tuesday.
The U.S. dollar fell to its session low against the yen on the news.
The move could make rival All Nippon Airways Co Japan's new flagship carrier, according to some analysts. Shares in ANA fell 4.2 per cent after rallying to a six-month high last week.
The "tough love" for JAL by Prime Minister Yukio Hatoyama's four-month-old Democratic Party-led government signals a shift from previous governments under the long-dominant Liberal Democratic Party, which had authored the previous JAL bailouts.
Mr. Hatoyama's government said it would provide the necessary support for JAL during its restructuring, which follows similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines.
The ETIC will support JAL with about 300-billion yen in capital, while the ETIC and the Development Bank of Japan will together provide a 600-billion yen credit line.
Fuel hedging contracts may also be affected by the bankruptcy filing. JAL uses mostly Brent forward contracts and about 40 billion yen is estimated to be exposed in the event of an automatic termination, a source familiar with the matter said.
JAL needs to do what it has long put off: Focus on its main business and cut operations it doesn't need, said Andrew Miller, chief executive officer of CAPA Consulting.
"I would have a fire sale - get rid of the family silver, sell everything that is non-core and focus in on the core and make that work efficiently," he said.
Alliance in Question
JAL's restructuring plan calls for slashing its 51,862 workforce to 36,201 and cutting 14 international routes and 17 domestic routes in three years, the government said.
JAL will also need to make a decision about competing aid offers from Oneworld alliance partner American Airlines and rival Delta , which wants to woo JAL to its SkyTeam group.
The carrier has spent two decades trying to recover public trust following a 1985 crash that became the world's worst single aircraft disaster in history, claiming 520 lives.
It also calls for increasing the fuel efficiency of its fleet, replacing all 37 of its B747-400 jets and 16 MD90s, both supplied by Boeing, with 33 small jets and 17 regional ones.
"I think a revival of JAL will be good for manufacturers such as Mitsubishi Heavy industries which is developing new regional jets," said Shinsei's Matsumoto.
Kazuo Inamori, the 77-year-old founder of electronics maker Kyocera Corp, was tapped last week to become JAL's new chief executive officer to oversee its restructuring.