JAL’s Bumpy Ride: From Bankruptcy to Relisting


In September 2012 Japan Airlines was relisted on the Tokyo Stock Exchange, two years after claiming support under the Corporate Reorganization Law. Waseda University Professor Tozaki Hajime, an expert on the aviation industry, looks back on the restructuring process and assesses the prospects for the future.

The immediate trigger for the JAL bankruptcy was the global economic crisis of 2008. But even before that crisis, the company was structurally weak. It was these structural weaknesses, built up over the course of many years, that made the company unable to withstand the shock when it came.

One example was the company’s dependence on a large fleet of inefficient jumbo jets—“inefficient” in the sense that supply often exceeded demand and the airline often struggled to fill its planes, even after aggressive discounting. This was partly the result of the nature of the Japanese aviation market. For a time, massive overcrowding at Haneda airport, the hub of the national air network, made mass transportation seem the obvious answer. This was what pushed JAL to build its massive fleet of jumbos. But as demand diversified with the construction of regional airports, the situation changed and large aircraft were no longer necessarily the best solution.

Poor investments were another factor. The company increased its holdings in hotels and other sectors related to its primary business. The idea was to boost competitiveness by providing a more comprehensive service. But the company’s expectations for the profitability of these ventures were unrealistically optimistic. As it happened, these non-performing investments ended up dragging the company’s main business down. The company’s long-term losses on exchange rates are now seen as symbolic of the complacent and profligate manner in which the company was run.

Another problem came from the company’s relations with labor unions. The existence of multiple unions within the company complicated relations not only between management and employees but between different groups of workers as well. This made it extremely difficult to manage the company efficiently. It would be easy to point to other factors that contributed to the bankruptcy, such as the political need to maintain unprofitable regional routes. One thing is certain: JAL was a company with a mountain of problems.

From Bankruptcy to Turnaround

Initially, the Ministry of Land, Infrastructure, Transport, and Tourism adopted a rather relaxed approach to resolving the JAL management crisis. In August 2009 the ministry set up a committee of experts to look into improving the way the company was run. At this stage, the idea was that JAL itself would take the lead in formulating a turnaround plan. When the new Democratic Party of Japan government took office after the general election in September 2009, however, the situation changed suddenly. With Maehara Seiji providing strong leadership as minister of land, infrastructure, transport, and tourism, the government started to take a much more direct role in addressing the situation.

Initially, a thorough internal audit was carried out under a regeneration taskforce commissioned personally by Maehara to take charge of rebuilding JAL. But following the establishment of the Enterprise Turnaround Initiative Corporation of Japan, funded by the government and Japan’s major banks, responsibility for JAL passed to the ETIC. In January 2010 JAL applied for protection under the Corporate Reorganization Law, and work began on rebuilding the company under the direction of Seto Hideo, chairman of the ETIC’s corporate regeneration support committee, who had acted as receiver in numerous bankruptcy cases in the past. In accordance with the turnaround plan, the company’s capital stock was reduced in value by 100%, following forgiveness of debt by the banks (worth ¥521.5 billion) and an injection of public funds from the ETIC (¥350 billion).

Probably the biggest factor in getting JAL back on its feet has been the arrival of Kyocera founder Inamori Kazuo, a close friend of Maehara who has taken charge at JAL. The managerial skills of Inamori, who succeeded in turning Kyocera into a global corporation, have had a huge impact. In the past, JAL assessed income and expenditure on a network-wide basis and neglected to look closely at the profitability of individual flight routes. By contrast, Inamori has insisted on understanding exactly how much each route is making or losing. He has worked hard in seminars and other training settings to cultivate a better feeling for management, particularly among senior staff. It seems doubtful that the turnaround would have been possible without the involvement of Inamori and Seto.

Cutting the Flab

Let me provide a brief run-through of some of the other major reforms that have been introduced.

First up was a radical restructuring of JAL’s fleet of aircraft. Inefficient jumbos were sold off and a new fleet built around medium-sized aircraft like the Boeing 737 and 767. As a result, some older pilots whose licenses were valid only for the bigger planes were forced to retire. This has led to court actions against the company, several of which are still pending.

Many of the group’s subsidiary companies were also sold off. These included the “JAL Card” credit card company and several others with good prospects for future profitability and growth. Some people have expressed concerns that getting rid of promising subsidiaries like this will come back to haunt the company after the restructuring period is over.

The process also involved major job losses. The company made several calls for voluntary redundancies, and a number of employees accepted these offers and left the company on a voluntary basis.

Employees who remained also had their pay cut, with salaries brought down to around 20% lower than those at All Nippon Airways, JAL’s main Japanese rival. Moves were made to link pay to performance, and compensation packages for pilots and cabin staff underwent major changes. Pilots in particular lost many of the cushy benefits they had previously enjoyed, including being driven to and from work in a hire car at company expense. Previously, employees had been paid whether they flew or not; this system was scrapped and replaced with one in which employees were only paid for the time they actually spent onboard.

Given the existence of powerful unions, reform on this scale would have been unthinkable in the past. They were made possible by two main factors: external pressure from the ETIC, which proved a powerful force in negotiations persuading the unions to come online, and the unions’ own sense of unease about the future of the company, which made them readier to cooperate with reforms.

Major cuts to employee pension payments were another reform that was only pushed through after considerable hard work. After drawn-out negotiations, an agreement was reached on a 50% cut for current employees and 30% for those who had already retired. Although employees—particularly those still working—are likely to feel hard done by, the fact that these reforms were pushed through at all was vital in terms of giving the company a viable future.

As a result of these efforts, JAL was able to make a remarkably quick turnaround—from an operating loss of ¥133.7 billion for fiscal 2009 (April 2009 to March 2010) to an operating profit of ¥204.9 billion for fiscal 2011 (April 2011 to March 2012). The company’s results today rival those of any aviation company in the world, despite the unforeseeable complications of the March 2011 tsunami and nuclear disaster. So dramatic has the recovery been, indeed, that it has started to provoke jealousy in the industry. In the lead-up to JAL’s relisting, a number of people have leveled complaints at the company. Some competitors grumble that JAL has gained an advantage by carrying its debts forward and claiming them as a deduction against corporate tax. A project team of the Liberal Democratic Party, meanwhile, has resolved to oppose JAL’s return to the stock market and is insisting that the carrier expand its roster of regional services. Protests by this group and others have made the relisting process far from smooth.

Problems Remain

After a long and painful rebuilding process, JAL was relisted on September 19, 2012. This marks a new beginning for the company. What are the main issues for JAL in the years to come?

The first problem is a question of trust. How will JAL set about rebuilding its reputation in the eyes of the shareholders who suffered major losses when the company slid into bankruptcy? JAL will need to proceed with caution and remember to show proper respect for the sacrifices that have been made. The essential task for the company is to regain the trust not just of individual shareholders but, even more importantly, of organizational investors. The company needs a strategy for attracting a stable base of shareholders. In the aviation industry, where long-term strategy is vital, a stable base of shareholders is indispensable.

Next is the problem of internal corporate governance. Employees have made significant sacrifices as well in order to turn the company around—and unless the company can recognize the efforts these employees have made, it will be difficult to maintain morale and drive within the company. But this will not be easy: All eyes are on JAL at the moment, watching for the first sign of instability or backsliding. People take a tough line with companies that have declared bankruptcy. And the danger remains that employees could lapse back into complacency. Keeping a tight grip on the reins and making sure this does not happen is likely to be a major challenge.

Another potential problem concerns what happens after outsiders like Inamori and Seto step down and the company is left to its own devices. Will the new management team continue to run a tight ship? Negotiations with unions are likely to be especially challenging without the weight provided by these outsiders, particularly when to all appearances the company’s results are going from strength to strength.

Another problem involves the pending disputes regarding nonvoluntary redundancies. Depending on the court’s decisions, it is not impossible that some of the reforms will be reversed. If JAL is to succeed in the years to come, it is vital that management and employees alike remain aware of the many dangers and risks that lie ahead.

In closing, let me comment briefly on the argument that JAL ought to revive the regional routes that were scrapped during the restructuring process. I believe that it makes little sense for a private company to be in charge of running unprofitable routes that will ultimately be maintained at public expense. The regeneration of JAL offers an ideal opportunity to take a fresh look at the way in which the aviation industry as a whole operates.

(Originally written in Japanese on September 19, 2012.)

Democratic Party of Japan Liberal Democratic Party Tozaki Hajime Japan Airlines Maehara Seiji JAL aviation industry aviation policy Inamori Kazuo ANA