Financial News

The rising sun that adorns every Japan Airlines tailfin seems to mock the company these days.

The lossmaking former flag carrier has avoided bankruptcy thanks only to the benevolence of the Japanese state, which in its role as a zealous protector of former national champions is known as as oyakata hinomaru, or "guardian rising sun".

But JAL's problems highlight how government "guardianship" can be a mixed blessing.

JAL (Berlin: JAY.BE - news) remains Asia's biggest carrier by revenue but its market value has shrunk by more than half in the past year to Y320bn ($3.5bn) - less than a third of the capitalisation of Singapore Airlines (C6L.SI - news) , its closest regional rival.

JAL's shares lost Y99bn in the April-to-June quarter, meaning it is in effective insolvent, according to an unpublished government assessment.

Now a bail-out worth Y550bn, split more or less evenly between new equity and debt waivers, awaits final approval from Yukio Hatoyama, Japan's prime minister. The bail-out is conditional on JAL pushing 9,000 workers into early retirement and replacing its chief executive with an outsider.

Motoshige Itoh, an economics professor at the University of Tokyo who has studied Japan's airline industry, says the carrier suffers from the same weaknesses that have beset other global airlines. These are high wage bills; a bloated network that serves too many marginal routes; and big "legacy" costs. JAL has Y330bn in pension obligations, accounting for close to a quarter of its debt.

"JAL has been protected by the government, so it has been able to put off solving its problems," Mr Itoh says. The reckoning came with the global recession, which pushed demand below the level JAL's cost structure could bear.

Almost no one in Japan has suggested liquidating JAL, although many analysts say Japan's other big airline, All Nippon Airways (Frankfurt: 861920 - news) , could serve the country adequately alone.

Industry executives say that the success European carriers such as Lufthansa (Xetra: 823212 - news) and Air France (Paris: FR0000031122 - news) -KLM have found as global airlines would not have been possible without first securing unrivalled dominance in their home base.

A large amount of Japanese government money is already tied up in JAL. After three smaller bailouts this decade, the state-owned Development Bank of Japan has Y274bn in outstanding loans to the airline, four times as much as the next-biggest creditor. A Y100bn emergency loan issued in June is backed by explicit government guarantees.

In spite of JAL's problems, it still has a valuable asset to offer potential industry investors, such as Delta Air Lines and American Airlines. Both carriers are attracted by JAL's many connections to China and elsewhere in Asia, where overcrowded airports make it difficult to secure landing slots.

"There is a lot of merit for US carriers to partner with JAL," says Osuke Itazaki, analyst at Credit Suisse.

Delta has sought a relationship with JAL ever since ANA abandoned its partnership with the US carrier in favour of one with rival United Airlines a decade ago.

But last year's merger with Northwest Airlines (NWACQ.PK - news) , another longtime JAL suitor, created the world's largest carrier.

Delta already has a successful venture with Air France-KLM. Thanks to Northwest's existing presence in Japan, a Delta-JAL tie-up would control about 60 per cent of the trans-Pacific (002790.KS - news) air travel out of Tokyo.

As a fellow member of the Oneworld alliance, American has argued that JAL could avoid considerable cost and complexity by simply staying put.

The lack of overlap between the two carriers' route maps would make winning immunity from antitrust laws a relatively easy process.

American officials have pointed out that JAL could agree to form a venture with Delta this year, only to learn by late 2010 that US transport regulators had rejected the plan on the grounds that the partnership would hold an unfair grip on trans-Pacific traffic.