Japan Airlines gets new CEO as bankruptcy looms

on January 13 2010 7:00 AM

Kazuo Inamori, the founder of electronics maker Kyocera Corp <6971.T>, agreed on Wednesday to become the new chief executive of Japan Airlines <9205.T>, as the carrier's shares plunged ahead of its expected bankruptcy.

JAL is likely to file for bankruptcy as early as next week as part of a broader restructuring aimed at reducing debts, slashing about 13,000 jobs and cutting dozens of unprofitable routes, sources have told Reuters.

With $16 billion in debts, JAL's bankruptcy would be the sixth largest in Japan's history.

Inamori, the 77-year-old honorary chairman of Kyocera and an ordained Buddhist priest, will replace Haruka Nishimatsu, who has indicated he would resign as part of the restructuring overseen by a government-backed fund.

Founded in 1959 as a ceramics company, Kyocera has grown into one of Japan's most profitable technology firms. Its products include semiconductor components, mobile phones and solar cells.

I don't know anything about the transportation industry, but I would like to make my best contribution, Inamori told reporters after meeting Prime Minister Yukio Hatoyama, adding that he did not plan to take a salary.

I am old and a full-time job is hard for me, so I would like to work three or four days a week and I will work for free.

Lack of experience in the airline industry may initially hinder Inamori's effort, but it would not be a critical drawback, analysts said.

I think he's a right person for Japan Airlines at this point since Japan Airlines needs a respected person for its business restructuring, said Yasuhiro Matsumoto, senior credit analyst at Shinsei Securities.

For the time being, the government has agreed to offer financial support for Japan Airlines, so we should not worry about how long it would take for him to become more familiar with Japan Airlines.

Dealing with the ailing airline is one of a long list of problems confronting Hatoyama's government, which took power in September after his Democratic Party trounced the long-ruling conservative rival in an election.

Inamori is a staunch supporter of the Democrats and known to have close ties with Ichiro Ozawa, the party's No.2 official. He is also a member of a panel headed by Hatoyama seeking to cut wasteful government spending.

SHARES SLUMP

JAL shares tumbled by their daily limit of 30 yen to 7 yen, or less than 10 cents, leaving Asia's largest carrier by revenue with a market value of $208 million, about the same as Tunisair and less than the cost of a Boeing 747-8 widebody commercial airliner.

More than 820 million JAL shares changed hands, accounting for one-fourth of all volume on the Tokyo exchange.

The Enterprise Turnaround Initiative Corp of Japan (ETIC), the state-backed fund, plans to put about 300 billion yen ($3.3 billion) in fresh capital into JAL, provided it file for bankruptcy and its banks forgive about 350 billion yen in debts, sources have said.

Normally a bankruptcy would lead to a delisting and render shares worthless.

It is highly probable that JAL will have its capital wiped out when it files for bankruptcy, said Shinsei's Matsumoto.

Debt holders will also suffer. JAL has 67.2 billion yen in outstanding bonds, only about 20 percent of which will likely be recoverable in a court-led restructuring, according to an estimate by UBS Securities.

The ETIC said in a statement that in the support plan under consideration it would take measures to ensure JAL can maintain its operations, including securing funding so it can continue to pay for fuel, aircraft leases and other commercial debts.

TACKLING BUREAUCRACY

Besides being an entrepreneur, incoming CEO Inamori has a track record as a corporate turnaround specialist.

A decade ago, Kyocera made failed office equipment maker Mita Industrial its wholly owned subsidiary and helped its recovery. The entity now is a profit-making operation, with more than 200 billion yen in annual sales.

But analysts said turning JAL around would not be easy.

JAL has been encumbered to serve 108 airports, when there is no economic justification for some of the airports in the first place. As a regulator, you're not going to tell them no, said Lance Gatling, president of Nexial Research, a consultancy.

The question is whether any management can come in and undo any of these traditional relationships, he said.

(Additional reporting by Dan Sloan, Nathan Layne, Taiga Uranaka, Hideyuki Sano, Junko Fujita; Editing by David Dolan and Lincoln Feast)

($1=91.14 Yen)

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