Posts Tagged ‘JAL Finance’
At TWC Avaition, we beleive that there are many alternatives still availbe for JAL, and it appears that Minister of Transport Meihara and the Opposition Demoncrats are doing all they can to keep the carrier operating. Our view is that there would be more political will to legally restructure JAL and start fresh than allow a major change in foreign ownerships laws that woudl allow a firm to acquire even non-voting equity to the maximum allowed by current Japanese law. Lets take a look at why that might be how this may play out.
Two Bidders, and empty lot number, and no Auctioneer
What a difference a week can make, not to mention a few billion US dollar bids. The bids were not fully cash, mind you. More a mix of revenue gurantees, non-voting equity stakes, and guranteed securities-backed access to cash.
So this week we see both the Delta (DL) and American Airlines (AMR) unsolicited, and in some ways unwelcome, bidding war to attract JAL to/or remain loyal to an alllinace.
We liken it to watching two bidders at Sotheby’s waving their paddles and starting a bidding frenzy prior to the auctioneer ever taking his place.
Even though JAL had previously announced its intent to “put aside these discussions”, it seems that fine point has been overlooked by both these would be suitors.
The tone being played out this week has certinaly changed as well. Far from the threats that American Airlines CEO Gerard Arpey was making last week, this week AA’s ASPAC MD has taken a more traditional Japanese approach in his public statments. He said, “if invited, we would like to [better] the current offer”. A C+ for the change in tone and effort.
We would give also give the Delta CEO’s comments failing grade for claiming among other things that Delta (DL) are “No 1 to-and-from Japan”. Simply Cringe-worthy and Ameri-centric.
A Ward of the State
The point that I think that most of us commentating on this from the outside are missing is that JAL has become for all intents and purposes a “ward of the state” via the Hatoyama’s Opposition Democrats placing it in the Enterprise Turnaround Initiative Corp (or just ETIC). In the very near future, they will technically have the majority say of JAL’s operations up to an including the reorganization of its management team- right up to the CEO.
A few faux pas
I would urge everyone to take a breath and to look at the JAL from a Japanese viewpoint vs. the more propagated stories being put out by the more western press on this issue. Both JAL and the Japanese government are well aware of the losses JAL will continue to sustain- but they do not view foreign equity investment or guarantees that contain covenants to places like Haneda or skirt current Japanese equity law by being non-voting and revenue guarantees as a viable solution.
In our analysis the entire reason why intial, and solicited talks with JAL, initially fell apart wast the prescence of Macquarie Bank in the role as a potential funding source. This was, in our opinion, a grossly misplayed hand by all involved. Macquarie is at best a controversial prescence in many nations, at least in aviation circles. This is due to their airport dealings in both Australia and in the Haneda financing chain. So, as AMR steps away to find new backing to go along with their own 2.5M USD warchest, TPG was hastily invited to the party after the initial JAL rebuff. Then came SkyTeams non-US based chequebook.
JAL’s biggest shareholder bails
Then the Tokyu Corporation, JALs largest shareholder (a real-estate and rail company) carefully announced its intent and began unloaded shares as a result of seeing JAL as no longer part of their “strategy”.
The Minister Speaks and New Laws are on the way
It is also this formal move that has also gave cover to Minister of Transport Maehara the freedom to carefully craft a statement to a Diet commission where he was mis-translated by western sources. What he actually said was, “We have carefully considered all possibilities, and we have ruled nothing out, including court supervised protection and restructuring”. As you are well aware Japanese nuance is often mis-translated, and that as a general rule Japanese Gov’t Ministers do not misspeak. They are careful, and deliberate.
In addition, should JAL fail to reach the required pension cutbacks- new laws are already being prepared in the background of the Diet by several ministers to override the tradition provision requiring a 2/3 majority agreement to change a pensions terms- again further referenced by the above article. Bear in mind, these people came to power on the promise of corporate reform- and even with great Union support.
Suspicion and the “Tempest in a Teapot”
Make no mistake- we believe that these offers are a tempest in a teapot, and moreover the Japanese and JAL care about keeping JAL flying- and keeping it Japanese. They are also as I understand it a bit “troubled” by a perceived incongruity in the offers on the table and the behaviour of DL in particular. They do not appear understand how their partners AF/KLM could be looking for 1000+ redundancies- but yet still seeking a deal with them. This is not something that the Japanese understand at a deeper level, and it also could make them believe that their partner(s) are unworthy of their trust. What would happen if the tables were turned, they ask themselves. Would my partner not come to my aid lie a kieretsu partner would.
What the West fails to undertand about kieretsu
JAL is a vertical kieretsu- which includes things like JAL catering, JAL Asia Airways, JAL Hotels Group, and many other ancillary businesses- including being the second largest shareholder of Haneda. You will have note by now that one of the chief characteristics of a kieretsu is their secrecy in terms of deals done behind closed doors- and companies pooling resources to help one another for the common good.
The Cultural Context
You may find the following paragraph is perhaps un-important but I offer it as history. Contextually you are already aware that Japan, while outwardly friendly, is in the pains of a major internal cultural upheaval. The veneers that have been allowed to exist for generations about family units, company loyalty, and thoughts around the keiretsu are still quite strong. Social contracts are being violated about pensions, company loyalty to employees, and even the very core ideas of family. In many ways it is not unlike the late 1950’s-1970 America- with its resulting seismic social shifts. Although we think these adjustments to approach and culture may be a more difficult process due to the deeply ingrained nature of their own identity. Something, which, is worthy of a great deal of respect.
So what’s next for JAL
A painful, and public, time of ETIC being in the cockpit and boardroom. Resignations of senior staff as required by their inability to effect change. Fundamental Japanese laws changing as the relate to unions pensions, and a goverment that needs to look tough on such old-style business practices. We will see a streamlining of operations, and even potential use of Haneda for more international flying- but not the US- rather the rest of Asia.
While they are at it, they may have to look at the now strained relationships with their OneWorld partner, and see if the trust is still there. I hope it is. as I think OneWorld is the right answer for JAL short of an all Asia alliance, of which there is no obvious answer.
The author, Carter Stewart, is a full time airline analyst and strategist at TWC Aviation Consulting- and is based in London.
At the time of this article, the author did not have any shareholdings or active contracts with any of the companies covered in the scope of the work.
Copyright TWC Aviation 2009 – TWC Aviation 2009
Photo Credits: C. Stewart, Copyright 2009
No bidder had Japan Air Lines (JAL) by the tail, but the Japanese Government, through ETIC, is centainly firmly now at the helm and in the boardroom.
The simple fact is that JAL is a quality brand, and an essential link to the Japanese Home Island which in our analysis cannot be allowed to fail. Japan Air lines accounts for the majority of the key domestic capacity in Japan.
At the American Airlines Fall Management Conference, CEO Mr Gerard Arpey stated that JAL would not benefit by leaving the OneWorld alliance. A day later AA CFO Tom Horton followed-up by saying JAL would “have have difficulty clearing regulatory hurdles if they sought antitrust immunity for closer business ties with another alliance. ” In fact, AA has clearly alluded it would oppose any such move.
There is no argument that JAL is in serious financial trouble, and perhaps even less of an argument that Japan may yet be the next sovereign national default. That could even be part of the AMR strategy, as they begin to see their chances with a mutual AA/BA eclipsed slightly by BA/Iberia- and the delay U.S. governments official ruling on this important subject.
Even in that light, Mr. Arpey’s recent comments represent, at best, a fundamental misunderstanding of his Japanese partner’s cultural approach to business. At worst they demonstrate yet again a narrow U.S.-centric view of the global aviation industry. Even if JAL would make a comment, which they wouldn’t, statments of this calibre would generally only serve to further isolate AMR from this important strategic partner both culturally and financially.
I personally know the ladies and gentlemen of AMR to be clever, erudite, and savvy people. I respect them. In my opinion, however, I have seen them demonstrate a repeated weakness through the years. This weakness comes in two parts. First is to unabashedly apply US style business approaches in places where an alternate approach may be advisable, and the second is to rely on US O/D traffic on most int’l routes to an excess that isolate them from some local markets. Ironically, this appears to not a mistake shared by all of their US competitors.
I do not believe that AMR, DL and the rest of JAL’s recent suitors could have been unaware of Japan’s much stricter foreign ownership rules, which make U.S. ownership appear positively liberal. They also could not have been oblivious to the complexities of lobbying a new Diet that has barely taken office for a change in laws related to restrictions on simple equity stakes. Add into mix the potential suitors intense interest in Haneda, and then overlay the already contentious presence of Macquarie Bank in Haneda financing chain, and I think what you will find is a perfect storm. In my view, it is a storm that has already taken both JAL and the new Japanese Government to a more isolationist stance.
I would even go so far as to hypothesise that JAL simply and strategically used the OneWorld and SkyTeam interest to their own political advantage, never fully intending the follow through with a financing offer without first doing what the foreign carriers could not- lobbying their own government.
JAL knew that the guaranteed financing was in place prior to the landslide election victory by the Opposition Democrats. Now that that money had evaporated in a single August evening, a sense of careful self preservation became the focus. JAL had to demonstrate contrition for their failures through management shake-ups and uncomfortable cultural issues around lay-offs and pension issues, and painful semi-public audits.
Simultaneously, however, it also began to draw a picture the new Hatoyama government what life might be like with another major Japanese company, some say even the “flag-carrier”, being funded by non-Japanese- and with access covenants that may not have been in best interest of any Japanese carrier.
The manner in which the Opposition Democrats have responded to the JAL crisis only further proves that there are discrete and delicate cultural issues at play here that must not be ignored. The most telling demonstration of this is the first radical change in government in over fifty years was swept to power on a wave of promises to reform government handouts to corporations chose to break with their own platform of reforms within weeks of taking office. This very public break with policy came in the form of mixture of guarantees and promises of further support measures for JAL on the condition of reform.
One of the most painful reforms is the requirement for JAL to cut their pension by a two thirds consent of it’s retirees. It is this requirement that has JAL seeking professional mediation.
While most western carriers such as BA and AA are no strangers to pension shortfalls, this is a more difficult issue in Japan. Japanese culture still holds on to the idea, even if it is an illusion, that a company has a tacit understanding to look after the employee during the course of their lives. While the reality has been quietly changing over the past decade, and represents one of the core changes occuring in Japanese society, it is difficult for for the culture as a whole to adapt to this particular change.
Overall JAL has most likely “shelved these discussions” with AMR and DL and moved on to chart it’s own course. It is a mixture of national pride, culture, and their potential to turnaround that make it plausible that JAL can chart an independant course.
As for AMR and Mr. Arpey, you would think that he of all people should know that threats, no matter how veiled, rarely will win you many friends in Japan- much less help you conclude a successful deal.