Sunday, January 17, 2010 - Osaka, Japan

Nikkei, Japan's leading newspaper specialized in economy/business and politics, reported January 13 through 15 2009 that long-discussed turnaround of JAL (Japan Air Line) is finally to start. On condition that Corporate Reorganization Act is to be adopted, hurdles to accept support from public institution of "Company Turnaround Aid Institution" have been finally overcome, and the new CEO is appointed. JAL, which had tried to reinvent before in vain, will try again with full support from the government as its last chance.

1. What has been happening until now？

JAL's turnaround has been under discussion for a long time and it was decided to be done under the Japanese government's control as explained in the previous article JAL to be GM of Japan - Turnaround under Government's Control. However, stakeholders (financial institutions, government, JAL employees retired and currently working, etc.) could not come to a consensus the methodology of the turnaround, especially financing, and revision of turnaround plan and negotiation had been ongoing even after the policy of government's interference was announced on October 24.

2. What had been the hurdles to proceed with the turnaround?

In short, there were the following 4 topics that had been under discussion.

1) What the framework of turnaround methodology to be?

There are a number of methodologies of turnaround of a company, including usage of Chapter 11 equivalent law/Corporate Reorganization Act, or other options, which would determine action plan. It took a while to finalize this point.

Stakeholders finally agreed to adopt Corporate Reorganization Act, which is to be the perquisite to gain support from public institution of "Company Turnaround Aid Institution".

2) Which turnaround strategy/option to adopt?

3 turnaround strategies/options were proposed, each with different amount or capital needed for turnaround depending on the degree and details of restructuring. The biggest issue under discussion was review of unprofitable international flights. The most drastic option was integrating international flight with ANA (All Nippon Airways), which required minimum capital investment for turnaround.

JAL having been the primary international flight company of Japan, the most drastic option was neglected and was agreed to minimize investment for turnaround by improving cost structure with measures including cutting some affiliates, flights, jobs and pensions, and replacing half the jumbo jet engine airplanes with smaller, more energy-saving airplanes.

3) Will current and (especially) retired employees agree to reduction in pension benefit?

Reduction in pension has been another hot topic for discussion. Reserved amount of JAL's corporate pension (including post-receipt of retirement allowance by installation, interest rate much higher than average bank interest rate) is insufficient by approximately 450 billion yen at present, and has been requesting 15,700 employees and 8,900 retired employees to accept reduction in pension. If they agree to accept the reduction, the reduction of pension benefit would be 30% in average for retired employees and 50% in average for current employees. And if two-thirds or more of them do not agree, the pension system could not be revised and the reduction of pension benefit would be much greater.

Despite the critical management situation of the company, many retired employees in particular were reluctant to agree to reduction in pension benefit. This probably attributes mainly to their old, conservative mindset, believing that JAL will never go bankrupt, cannot forget the good old days of JAL and not really aware of the hard reality of today's struggling JAL, and also how corporate pension is managed. Since corporate pension includes retirement benefit to be paid by installation, reduction in corporate pension means reduction in retirement allowance, and retired employees may well need to drastically change their family financing plan.

Employees currently working accepted the reduction relatively straightforwardly, then they made maximum efforts in persuading the retired employees to accept the reduction until the last minutes of deadline of January 11. They finally managed to win the minimum two-thirds of agreement.

4) How to overcome financing and avoid shortage of working capital?

To overcome financing (i.e. avoiding shortage of working capital), the government asked financial institutions to write-off the debts similarly to previous turnarounds initiated by IRCJ (Industrial Revitalization Corporation of Japan) and to assist in bridge financing. It was natural for the financial institutions not to easily agree on this point when the satisfactory turnaround plan had not been presented to them.

On January 12, the 3 major financial institutions (The Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation) finally changed their stance/policy and agreed to accept the support from public institution of "Company Turnaround Aid Institution" on condition that Corporate Reorganization Act is to be adopted, after Mr. Maehara, Minister of Land, Infrastructure, Transport and Tourism presented them with the government's policy of supporting turnaround methodology of pre-package (coordinated beforehand).

And the government is to provide JAL of capital support, which was finalized as much as 1 trillion yen.

3. What is the business restructure framework/plan of JAL?

JAL is to accelerate developing revival action plan based on the following business restructure framework.

1) Apply Corporate Reorganization Act simultaneously with 2 affiliate business companies.

Apply for adoption of Corporate Reorganization Act simultaneously with JALI (Japan Air Lines International) and JAL Capital. The three companies will be integrated immediately after the application and other procedures for reorganization are complete and make back office etc. streamlined.

2) Request banks to support financing for refunding refinanced loans etc. that are to accrue from autumn 2010.

This is in addition to DBJ (Development Bank of Japan) is to loan 200 billion yen on January 15 in order to stop capital outflow from credit uncertainty of JAL. (With a rumour of delisting of JAL, JAL's stock price had dropped drastically by 30 JPY from 37 JPY in a day, which recovered a little after the government announced the policy that shareholder special benefit plan and frequent flyer programme will be valid for a certain period after the application of the act).

After application of Corporate Reorganization Act、JAL is to gain bridge financing of total of 600 billion yen from the assisting organizations etc. And if the revival plan is approved, JAL is to request total of 50.6 billion yen to DBJ and the 3 major banks as capital used to refunding of refinanced loans of bridge financing. JAL also would like to raise capital of 21 billion yen in 5 years to purchase airplanes for the plan mentioned in 3) below.

3) Accelerate replacement of half the jumbo jet airplanes with smaller energy-saving airplanes.

By the end of 2012, JAL aims to own 46 jumbo jet planes, 76 middle size planes and 107 small size planes.

4) Reduce 53 affiliate companies from current 110 companies.

This includes selling out and/or liquidation of 24 affiliates.

5) Cut additional　domestic and international flights, 25 in total.

13 international flights and 12 domestic flights will be additionally reduced.

6) Review of cargo flight business will include studying of closure.

The operation deficit of cargo flight business is estimated to expand to 23.3 billion yen by the end of current fiscal year ending March 2010 and therefore is reviewed including option of closure of the business.

A part of affiliates that have domestic flights to isolated islands have already finalized its policy of terminating such business.

7) Cut 15,000 jobs.

This is equivalent to one-thirds of the total current employees.

8) Amortize pension liability of 100 billion yen over 5 years.

Since more than two-third of employees, retired and currently working, agreed to accept reduction in pension benefit, continuation of pension fund will be specified in the revival plan. Approximately 100 billion yen of serve for pension fund will be minus but JAL is to amortize over 5 years.

9) Turn back into black in 2011.

With drastic loss of passanges, revenue for current fiscal year is estimated to be 1.4 trillion yen, which is -27% from the previous year, with operation loss of 32.91 billion yen. However, with extreme restructuring, 2 years later (i.e. by the end of fiscal year ending March 2012), JAL aims to return to black by 23.4 billion yen and 3 years later by 85.2 billion yen.

4. Who will be driving the JAL turnaround?

Mr. Kazuo Inamori, founder and chairperson emeritus of Kyocera　（77 year old）, was requested to be the new CEO of JAL from the government and Company Turnaround Aid Institution, and he accepted on January 13. Having reached advanced age and being responsible for other roles, he will be working 3 or 4 days a week with no rewards. He is expected to initiate restructuring and then the key coordinator with internal and external stakeholders. He will soon choose COO from short-listed internal candidates of 45-55 years old, to lead operation, supporting Mr. Inamoti.

Mr. Inamori has no experience in transportation business but was appointed with his management ability of having founded and made Kyocera into a global company, and entered telecommunication business by starting up another company (now KDDI）, himself balancing the two businesses to be successful in both.

Mr. Inamori has been supporting the DPJ long before it won the general election on August 30 2009 and has strong ties with key politician of the DPJ including Mr. Maehara, Minister of Land, Infrastructure, Transport and Tourism and Mr. Ozawa, Secretary-General of the DPJ.

Some experts say that Mr. Inamori is the ideal person to drive the turnaround but some others say that he is not because he has no experience of turnaround. Mr. Inamori believes that turnaround is quite possible as long as the revival plan is executed steadily. The key for execution is clarification of CEO's authority and responsibility, and supporting organization/environment. And last but not least, change in culture, and mindset and behaviour (action) of employees determine whether JAL will succeed in its turnaround.