JAL faces $8.8 bn excess debt if liquidated: source

JAL faces $8.8 bn excess debt if liquidated: source

Tokyo: Japan Airlines Corp’s liabilities would exceed its assets by as much as 800 billion yen ($8.8 billion) if the struggling airline, Asia’s largest by revenues, were liquidated, a source familiar with the matter said.

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.

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 by November to prevent JAL from running out of cash, the source said.

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, but no concrete decisions were made.

“There are various options regarding public support for JAL and we will put together these options. The prime minister will make a final decision," Maehara said.

Shares of JAL, which have lost more than 40% so far this year, were down 1.6% at 120 yen by early afternoon. The benchmark Nikkei average was up 0.7%.

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.

The task force is seeking 300 billion yen in fresh capital from the government and the private sector to bolster JAL’s battered finances, the source said, confirming a report earlier in the week by the Nikkei newspaper.

The source, who spoke on condition of anonymity, has direct knowledge of the task force’s discussions.

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

The task force also wants to use a recently created scheme 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 JAL’s 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.

“There are problems from the perspectives of the viability of the restructuring plan and the fairness of who shoulders the burden," a banker involved in the discussions told Reuters.

The task force’s plan also includes JAL halving the number of subsidiaries and affiliates from 290 and about 8,000 job cuts, a little less than a fifth of its work force, the source said.

The negative net worth figure of 800 billion yen is significantly higher than a 600 billion yen estimate reported by the Nikkei this week and the 250 billion yen assumed by Citigroup Global Markets Japan in evaluating JAL’s shares.

Citigroup halved its target price on JAL to 80 yen on Thursday. It rates the stock “sell/high risk".

“It is not certain whether JAL will go through a private reorganization or file for bankruptcy, but even if it stays clear of bankruptcy, we think value for existing shareholders will be substantially reduced on dilution accompanying a big capital increase," analyst Naoko Matsumoto wrote in a note to clients.

The task force believes its restructuring plan would allow JAL to cut its negative net worth to 270 billion yen and enable creditors to collect on 20-30% of their loans, as opposed to just 2 to 3% in a bankruptcy, the source said.

Despite its woes, JAL’s extensive network in Asia and access to the Chinese market has made it attractive to US airlines.

JAL, a member of the Oneworld airline alliance, has held separate talks about business ties and possible capital injection with AMR Corp’s American Airlines, its alliance partner, and Delta Air Lines of the rival SkyTeam group.

AMR chairman Gerard Arpey and other American Airlines executives met with JAL executives in Tokyo last week to continue discussions about bolstering their ties, a person with knowledge of the meeting said.