JAL, Asia's largest airline by revenues and an ambassador for Japan across the world, will remain in the skies thanks to nearly 1 trillion yen ($11 billion) in state-backed support and faces a sweeping restructuring under a new board and management.
Shareholders will be wiped out and creditors will forgive 730 billion yen in debt, with banks waiving 350 billion yen in loans, as part of the deal with the fund, the Enterprise Turnaround Initiative Corp of Japan (ETIC).
JAL lacked strong governance and was unable to keep up with changing times, ETIC Executive Director Akitoshi Nakamura told a packed news conference. In a sense JAL encapsulates what is a typical problem and hurdle for Japan as a whole.
Bankruptcy will only be the beginning for an airline that once symbolized Japan Inc's international aspirations and now faces depleted capital, rising fuel prices and shrinking passenger numbers -- all on top of hefty restructuring costs.
JAL, which has now been bailed out by the Japanese government four times in the past 10 years, will replace many of its older and less fuel-efficient planes. It also faces tough decisions about foreign capital and alliances.
It's unclear how JAL will be able to grow as a business, said Yasuhiro Matsumoto, credit analyst at Shinsei Securities.
I can't see how JAL is going to build its network domestically and internationally.
JAL and two core units filed for court protection from creditors in a procedure similar to Chapter 11 in the United States. Combined, the three firms had 2.3 trillion yen in debt as of the end of September, making it Japan's fourth-largest ever bankruptcy and its biggest by a non-financial firm.
Shares of JAL, which have fallen more than 90 percent since the start of the month, closed flat at 5 yen after trading down 2 yen to 3 yen. They will be delisted on February 20.
With a market value of about $150 million, JAL is now smaller than minor carriers Croatia Airlines and Jazeera Airways and is worth less than one Boeing 747.
I thought that there was no way that JAL would fail, said Akiko Saito, a 63-year-old retiree returning from Sydney to Tokyo's Haneda Airport. Even when the value of my JAL shares fell from 800,000 yen to below 120,000 yen, I was convinced that it would recover, and I held on to my stock.
JAL bonds maturing in 2013 were priced at the equivalent of just 27.8 cents on the dollar, versus around 70 cents last month, but traders said there was little trading appetite for the bonds on Tuesday.
The dollar fell to a session low against the yen on the news.
The bankruptcy move could make rival All Nippon Airways Co <9202.T> Japan's new flagship carrier, but a debt-free and leaner JAL could eventually become a formidable threat for ANA, according to some analysts.
Shares in ANA fell 4.2 percent after rallying to a six-month high last week.
The tough love for JAL by Prime Minister Yukio Hatoyama's four-month-old Democratic Party-led government signals a shift from previous governments under the long-dominant Liberal Democratic Party, which had authored the previous JAL bailouts.
What this shows is that the nation won't just take total care of a company. They've now said they'll let badly run companies fail, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Following similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines , JAL plans to slash its 51,862 workforce to 36,201 and to cut 14 international routes and 17 domestic routes in three years.
The ETIC will support the carrier with about 300 billion yen in capital. The ETIC and the Development Bank of Japan will together provide a 600 billion yen credit line.
Fuel-hedging contracts may also be affected by a bankruptcy filing. JAL uses mostly Brent forward contracts and about 40 billion yen is estimated to be exposed in the event of an automatic termination, a source familiar with the matter said.
JAL will also need to decide about competing aid offers from Oneworld alliance partner American Airlines and rival Delta, which wants to woo JAL to its SkyTeam group.
That decision will be left to the new management, to be led by Kazuo Inamori, the 77-year-old founder of electronics maker Kyocera Corp <6971.T>, who was tapped last week to become JAL's new chief executive officer to oversee its restructuring.
JAL's restructuring plan also calls for increasing fuel-efficiency in its fleet, replacing all 37 of its B747-400 jets and 16 MD90s, both supplied by Boeing , with 33 small jets and 17 regional ones. ($1=90.43 Yen)
(Additional reporting by Nathan Layne, Nobuhiro Kubo, Chris Meyers and Linda Sieg; Writing by Lincoln Feast; Editing by Jean Yoon, Tim Hepher and Elaine Hardcastle)