Posts Tagged ‘Japanese Prime Minister Yukio Hatoyama’
Holiday Intrigue at JAL
Money is getting tight as JAL awaits the ETIC decision in January (Photo C. Stewart 2009)
- Updated 05/01/10 at 1400 Local
- Cabinet Minsters Meet with DBJ to secure further funding for JAL- along w/ three of Japan’s biggest banks
- JAL Stock sees its record volume and lowpoint
- How does Japanese Law set out Kaisaha Kousei?
- Who are DBJ, ETIC, and the DICJ really?
- Capital Adequacy found without giving up foreign ownership?
- So what do we think will happen- with the DBJ and new bank money- Reorg is looking unlikely now!
What a week we have had while most of Japan has been on holiday!
Minsters Meet with DBP to secure further funding for JAL
While the stock takes a bath, and rumours of the ETIC report leaking just prior to the final day and a half of trading on the 29-30th of Dec,the mood around JAL was not exactly a festive one. It was highly probable that a draft of the ETIC report was complete as most Japanese will not be at work for even the remainder of this week- so the idea of having it leaked prior to the break seems logical. ETIC, in their report allegedly state the Corporate Reorganisation Code (In Japanese this is known as Kaisha Kousei or 会社更生法, かいしゃこうせいほう) should be used to turn JAL around.
Against that backdrop Minister Meahara and his cabinet colleagues were in talks over the holiday with DBJ (Development Bank of Japan) officials. Were they seeking arrangments for additional funds in place for JAL that missed the supplemental budget?
On Sunday Japanese Minster for Transport Seiji Maehara told reporters that the Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion). In addition the Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, and Bank of Tokyo-Mitsubishi UFJ are all commiting to similar amounts.
Japanese transport minister Seiji Maehara told reporters Sunday the state-owned Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion).
That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier, government officials said.
“That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier”, government officials said.
Japanese Law and Corporate Reorganisation
As far as the Japanese bankruptcy code, I should be clear that I was using the term DIP previously, and many of my Japanese colleagues have been kind enough to give me a lesson in the legal complexity of DIP and Restructuring.
There is one major difference that I have recently been educated on regarding Japanese Insolvency Laws that now show that my previous, and rather US-centric use of the term DIP were not entirely accurate.
The first and most important distinction is that the laws were updated in 2000, and at that time several updated concepts were introduced to Japanese law. One was the concept of Debtor in Possession (DIP) for a Civil Reconstruction, which is available to both Corporations and Individuals. It is generally a faster and more flexible process than a Corporate Reorganisation. Unfortunately for JAL, most experts agree that it is not suitable to their particular situation.
The most suitable form of JAL may only be the Corporate Reorganisation Code, where a court appointed administrator is granted a small stay on debt payment, and then embarks on the same general procedures of U.S. Chapter 11 proceedings with a few minor nuances. The process is strictly prescribed and a great deal of time can elapse prior to the company emerging from administration. Under the Japanese systems however, it is noted by several prominent experts that this procedure is “both highly reliable, and has an excellent chance of success.”
So in the past, while I have been quoted as saying, “ETIC or The Government” would become the DIP in this case, that was technically inaccurate. It would be more appropriate to say that under the prescriptive terms of the reorganisation process, the Government would be free to infuse cash as the airline set new terms with its creditors without the need to “possess” (or re-nationalise) the carrier in any direct or overt way.
The reality, of course, some would say that is exactly what it would be. The largest creditor by far would be the Guarantees of the Japanese government via the DJP and ETIC. So effectively, DIP it is not wrong- it is just a quirk of Japanese law that make it inaccurate.
Is there an alternative? I can see one possible longshot
As for the possibility of opening up capital partnership opportunities for other carriers, there looks like there is some behind the scenes movement to do so.
There is also the possibility that if enough capital can be located (which I do not see as the most probable outcome) that they could initiate a Civil Reconstruction. While this is a much faster process, it would leave the Hatoyama Government in the position to “wean off the carrier” more quickly from state funds. Frankly this whole idea of changes in foreign ownership laws during a time of Japan exerting its sovereignty again smells funny to me, but politicians have been known to do some fairly strange things when their backs are to the wall- which by the way I do not think Prime Minister Hatoyama is.
So who are all these players like the DBJ, ETIC and DICJ anyway?
The DBJ is a seperate entity from both the DICJ and ETIC. All three are "semi-governmental" bodies, the latter only having been established in 2009
Sometimes it is best to get it direct from the source:
The Development Bank of Japan Inc. was established on October 1, 2008. Under the terms of the Development Bank of Japan Inc. Law approved by the Japanese Diet on June 6, 2007 . It was to be a fully private institution, except it was recently allowed to an extention on those plans. It currently is a state-owned bank. At the end of fiscal year 2011, the government plans a review of DBJ’s organization which will include the future of government-held shares. The Japanese government will continue to hold its shares until then.
“Enterprise Turnaround Initiative Corporation (ETIC) is a 100% owned subsidiary of the Deposit Insurance Corporation of Japan (DICJ) a semi-governmental organisation. ETIC was founded in 2009 with the remit to provide support for revitalization of Japanese enterprises operations by assessing their assets, assisting formulation of their operation and finance restructuring plans, coordinating their creditors and other stakeholders, and rendering human and financial support to them, in an impartial and neutral manner.”
Ah, well, that clears that up. They are all three semi-independent governmental bodies.
What about all these alliance offers?
It remains unclear that if JAL does enter into a Corporate Restructuring which of either offer would be more useful or welcome to ETIC. It could be that more fundamental issues are addressed first, and then the question of alliances would come in at a later time.
It is being widely reported that both “are still in talks”, and even some news outlets are reporting that one has been selected- SkyTeam/Delta. Now, if this were true, let have a look at some of the reasons why that could be the case.
I don’t think that AMR has not made any friends in Japan, particularly in the early days of their overtures. In my opinion Delta and SkyTeam only fared marginally better, and stopped short of what I called in some of my previous blogs naked threats.
One of the more interesting quotes of this week came while attending a friends New Years Celebrations He asked me “If TPG are high-end airline investors, then why did they sell Midwest to Republic? They had ample time to do what Republic has done, and make it a success, did they not? What do we know of their true core skills and intentions?”
The man has a point.
So what do we think will come of all this in the end?
I don’t think we will see a firm decision made until after the 12th of January. On Monday JAL said that more than two-thirds of its current employees have agreed to accept the company’s proposal to cut pension benefits substantially as part of efforts to turn the struggling carrier around. Around 11,800 of the approximately 16,000 employees had responded positively to JAL’s proposal . At this time it is unclear if the company’s retirees will accept the proposed pension benefit cuts in a similar vote.
I have the highest respect for the men and women of JAL. As a person who has stood on the precipice with my colleagues and watched two of the three major carriers I have worked for take their last flight, I find my thoughts returning to how the employees must be feeling. All of this uncertainty at a time where they were culturally in Japan there is a celebration to end and even ”forget” about the past year. For thousands that was not possible this New Year. My thought go out to them, and what they must be feeling.
Japanese Prime Minister Yukio Hatoyama (Reuters)
For my money, I see JAL at the fork in the road. The alleged ETIC recommendation to employ Corporate Reorginasation is the strongest possibility, and most likely. Prime Minister Hatoyama, and his cabinet, however appear at least ready to make a political move and step in to save JAL from the process. The fact that three of Japan’s biggest banks are also willing to put up the cash says that we should watch out for something other than the Corporate Reorganisation- or it could just be DIP money. Whichever way he, and his cabinet, choose to go will be a clear signal not just to JAL- but to Japan- about the futuer of his time in Government. Make no mistake, however, the Japanese are clearly in control here.
Carter Stewart, is a Pricipal at TWC Aviation Consulting- an aviation consulting firm headquartered 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 (unless otherwise attributed)
Do JAL’s suitors understand that sometimes you can’t always get what you want?
JAL's future could be solely a Japanese question (Photo C. Stewart 2009)
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.
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