03 January 2010

What Options Realistically for JAL?

There is a lot of speculation - including the Professor's - over what the real options are for JAL. There are also a lot of moving parts. Many who are unhappy that the white knight is coming from across the Pacific in the form of an American Suitor either Delta or incumbent American Airlines. It this group that see a lot of mileage in making ANA into a mega carrier and having it assume many of JAL's current international routes.

I think that this is pie in the sky thinking. The realistic options are few and far between. With the Government clearly stating it will not give carte blanche in writing yet another cheque for the ailing airline - it has few options.

So the likely scenario in my thinking goes as follows.

Firstly Open Skies means that there are few restrictions in letting ANA move into additional markets. It will be up to ANA to decide how to do that but already it has signalled its intentions by forming a transpacific alliance within an alliance with fellow Star carriers CO and UA.

Second the value of Haneda means that an inter-modal hub will be established there giving ANA an edge of JAL. JAL will be hard pressed to compete with its base in remote Narita. Also the international airlines are not going to be happy with having the local carrier enjoy an advantage and will clamour for access to Haneda.

Thirdly - we have to be practical. The current investors in JAL and those who have in recent years lent it money as it continued to bleed are not going to allow a wholesale carve up with them getting nothing in return.

While no one can reasonably muster a lot of sympathy for the airline itself and its financial institutional backers - there has to be some accommodation. The government bought some more time by agreeing before the markets opened today in Tokyo to double the amount of financial guarantees and cash that will enable JAL to stay afloat after a round of news stories over the past week that said both ANA would be acquiring some JAL routes and that the Government was going to enable a bankruptcy based reorganization.

JAL president Haruka Nishimatsu in a published interview with the Asahi Shimbun newspaper yesterday that he was opposed to any bankruptcy filing including "legal liquidation" and also had no plans to halt international flights. That is said after JAL has already announced or already pruned several cities and routes. On Thursday another Japanese paper the Mainichi Shimbun reported that the government was considering a plan which would see rival All Nippon Airways take over JAL's international flights. This plan was dismissed with derision as "impossible". Indeed such a decision at this time would be counter productive given the slow resurgence of traffic. Remember that Asia Pacific traffic was very badly hit in the Recession last year.

JAL is already on the record favoring a switch to a partnership with Delta and Air France from the OneWorld group of American Airlines for the reasons I have laid out before.

So there really isn't much choice or maneuvering room. JAL cannot recover from its current situation with external help. it's debts and obligations are too great and its need for radical restructuring too hard without a legal form of protection from both existing contracts with labour and a reduction in the bloated and expensive current operations cost load. A restructured arrangement with the banks taking shares in the newly restructured carrier and the existing shareholders - many of whom are small shareholders who must see their share percentage fall. Given the almost junk bond status of its debt and the penny stock basis of its current stock - there is little that anything other than a legal restructuring can accomplish. Its market cap is now worth a little more than a quarter of its competitor ANA. Fall of more than 80% since the halcyon days of 2006. I firmly believe that the ETIC board must move swiftly to act and recommend a form of restructuring akin to the US Chapter 11 for the sick carrier.

Only with this process and a clear plan can the form national carrier survive in any form. There needs to be no more bickering or prevaricating. Rome is decidedly burning and Nero and his friends better move out of the way.


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