Lenders may carve out JAL’s profitable operations

Lenders may carve out JAL’s profitable operations

Tokyo: Lenders to Japan Airlines Corp may seek to split the carrier between its profitable and loss-making parts, two sources familiar with the matter said on Tuesday, as part of a radical overhaul that could also see foreign carriers invest in Asia’s largest airline by revenue.

Delta Airlines and American Airlines, with British Airways and Qantas Airways, are in rival talks to invest in JAL and form an operational alliance, as JAL also plans for job losses and route reductions.

But the Development Bank of Japan (DBJ) and other lenders are reluctant to offer additional loans without further restructuring and deeper government involvement, the sources said.

“The turnaround plans are not enough. A capital raising from foreign carriers is not enough, either," one of the sources told Reuters.

New transport minister Seiji Maehara is to meet the airline’s CEO and officials from the lenders separately on Thursday to discuss JAL’s revival plans.

Last week, Maehara said JAL must not be allowed to fail, indicating the state would support the struggling carrier as it seeks fresh funding.

Only the leading lender DBJ may refer to the separation plan in the meeting, one of the sources said, as the lenders have yet to reach an agreement on the issue.

Job, routes to go

JAL lost about $1 billion last quarter and has been scrambling to put together a revival plan to submit to the transport ministry, which is supervising its restructuring after the state backed a ¥100 billion ($1.1 billion) loan.

Up to 6,800 jobs and 50 unprofitable routes will be cut by March 2012 in an effort to slash operational costs by 30%, according to a draft plan submitted by JAL last week and obtained by Reuters. Tokyo to Rome and Osaka to Dalian are among the 21 international routes earmarked to go.

The carrier is seeking another ¥250 billion in funds through a mixture of debt and equity.

The lenders are poised to ask the government for a drastic overhaul of JAL, including calling for streamlining of the carrier’s operations by separating them into distinct entities, the Nikkei business daily reported earlier on Tuesday.

The “new" section would comprise profitable routes, while the “old" section would absorb unprofitable routes and segments, the Nikkei said.

Another proposal under consideration would have the government provide capital to JAL’s new entity as part of a temporary nationalisation of these operations, the daily said.

The old entity would then be subject to a liquidation of assets over time, while taking into account the interests of local communities that would be impacted by such a move, it said.

“Not only us, but the financial institutions are all first waiting for the plan (of rebuilding) to be crafted," an official at the DBJ, who declined to be identified, told Reuters. “At such a stage, it is unlikely that we suddenly ask to split into “new" and “old" sections," he said.

JAL could not be reached for comment.

Japanese markets were closed on Tuesday for a holiday. JAL shares have fallen 19% so far this year, lagging the 17% rise in the Nikkei average.