Japan Airlines survival hinges on pension cuts

JAL's pension shortfall, which it estimated at 330 billion yen ($3.6 billion) in March, is threatening to push Asia's largest airline into bankruptcy unless its 9,000 retirees are forced to have their payouts cut, lawyers and analysts said.

"My pension contract is settled and I have my certificate," said the 65-year old Watanabe, who logged more than 18,000 hours in international flights during his career.

"People are calling for JAL pensioners to accept a cut in payouts, but is it wrong for me to say I don't want my pension to be reduced? I have a right to receive it."

JAL said last week it would apply for aid from a state-backed turnaround fund. It could receive a large injection of public money from the fund if it can secure the backing of creditors and come up with a viable restructuring plan.

That plan hinges on addressing its pension problem, for which there is no obvious solution.

JAL President Haruka Nishimatsu made a plea to the company's pension fund in May for payments to be reduced by more than half, and the airline has already factored a 88 billion yen gain from the move into its profit forecasts for this financial year.

A government-led task force that had been working on a JAL revival plan estimated the shortfall could be cut to 100 billion yen if the annual interest rate on pension reserves was cut to 1.5 percent from 4.5 percent, sources have told Reuters.

These proposals have triggered strong opposition from retirees and employees, who under current laws can easily block any cuts to their benefits if just one third of them vote against.

To get around this, the government is considering legislation that would allow JAL to forcibly cut payouts, but implementation would be tricky as it could be interpreted as violating a constitutional protection of personal property rights.

Not all agree.

"I don't think it's unconstitutional and the argument about requiring a reduction in pension is a valid one," said Kazumasa Otsuka, a lawyer specializing in corporate legal affairs at Mitsui Company. "If this can't be accepted, then there is little choice but for JAL's debt to be handled in (bankruptcy) court."

POLITICAL DECISION

A JAL spokesman said the airline was working with the state-backed Enterprise Turnaround Initiative Corporation of Japan and could not comment on the possibility of a court-led restructuring to deal with the pension issue.

A bankruptcy would likely cause more pain for creditors, which include the state-owned Development Bank of Japan and the country's top three private banks.

The task force has estimated creditors could recover just 2-3 percent of their loans in bankruptcy, as opposed to 20-30 percent if the restructuring were out of court.

Dealing with JAL is also proving to be a headache for the Democratic Party, which came to power in August on a platform that promised to focus on the sometimes conflicting interests of protecting workers and prudent use of taxpayer funds.

While Transport Minister Seiji Maehara and other leading party figures have repeatedly said they would like to keep JAL out of bankruptcy, some party officials are pushing the option of a court-led restructuring, sources have said.

A politician in the Democratic Party recently sent a list of questions to Japanese law firm TMI Associates asking how pension cuts could be made in the case of a bankruptcy.

According to a document obtained by Reuters, TMI responded that in theory the pension obligations could be slashed by two thirds if JAL's restructuring were handled by the courts.