JAL’s $8.5 Billion Rebirth Took Lessons From Crash-Site Morgue
Japan Airlines Co. Chairman Masaru Onishi still feels a burning sensation in his stomach each time he climbs Osutaka Ridge, where 27 years ago he helped man a make-shift morgue after one of the carrier’s jets plowed into the mountainside.
The former aircraft engineer, who helped steer JAL from its 2010 bankruptcy to an $8.5 billion share sale and restored listing next week in Tokyo, remembers the crash in which 520 people perished as an early turning point for the company. As passengers deserted the airline and the government ended its monopoly on international routes, managers began a top-to-bottom overhaul as if they were starting from scratch.
“There’s a lot of similarities between our turnaround from bankruptcy and our recovery from the crash,” Onishi said after revisiting the disaster site on a hot and humid evening last month in an annual pilgrimage by management to commemorate the tragedy. “We started over again with a blank sheet, taking our recovery process step by step.”
This time around, the blank sheet meant a shake-up as profound as recent years of tinkering had been skin-deep: 21,000 jobs went, prestige routes to Milan and Rome were axed, and the company that was once the world’s biggest operator of Boeing Co. (BA) 747s retired all 37 of the planes still left in its fleet. After reporting losses in 10 of the previous 16 years, JAL emerged as the world’s most profitable airline in March.
“They did a lot of the things they hadn’t been doing for 20 or 30 years,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $300 million in assets. “They were very overstaffed and they got rid of people. They had too many routes and they cut routes.”
Top of Range
JAL shares were sold at the top end of the range offered to investors in the world’s second-biggest initial public offering this year. At five times the company’s forecast of 130 billion yen ($1.68 billion) in net income for the year ending March 31, the stock was priced at half the global average for airlines with a market value of at least $5 billion, data compiled by Bloomberg show.
“A fully fledged airline coming out and IPO-ing is virtually unheard of,” said Peter Harbison, who advises carriers as executive chairman at the Centre for Asia Pacific Aviation in Sydney. “It’s been done extremely well.”
JAL may become the world’s fourth-largest airline by market value, displacing All Nippon Airways Co. (9202) -- which won an international license following the 1985 crash that is still the world’s deadliest single-plane disaster. Santiago-based Latam Airlines Group SA (LFL) is the largest carrier at $11.8 billion, followed by Singapore Airlines Ltd. (SIA) and Beijing-based Air China Ltd. (753)
Shares in the Japanese carrier traded in the gray market this week about 7 percent higher than the IPO price, according to BTIG Hong Kong Ltd.
Sheared free of most interest expenses after creditors took an 88 percent bath on 522 billion yen of debt, JAL also slashed operating costs in half to 1 trillion yen while the Tokyo-based company was under court protection. Revenue also fell, by 40 percent, as underperforming or non-aviation units were jettisoned.
The cuts enabled the carrier to post a record profit of 187 billion yen last fiscal year. In dollar terms, that was more than double the $1.1 billion net income at Air China, the second-most profitable airline, data compiled by Bloomberg show.
“JAL is a reborn company,” said Masayuki Kubota, who oversees $1.9 billion in assets at Daiwa SB Investments Ltd. in Tokyo. “Bankruptcy makes a company’s reform easier.”
Seeking court protection is relatively common in Western nations -- General Motors Co. (GM) emerged from a government-backed bankruptcy in 2009; all the full-service U.S. carriers have gone bust. In Japan, while the laws exist, the stigma associated with failure and a culture in which corporations are run as much for employees as for shareholders has created a reluctance to make such drastic decisions.
The more so with a national champion such as JAL.
The airline was founded in 1951, becoming state-owned two years later. Routes to Asia, the U.S. and Europe followed, with JAL opening an office on Fifth Avenue in New York in 1969 and dozens of hotels around the world, including New York, London and Frankfurt.
“They were exciting times,” said former spokesman Geoff Tudor, who joined the company in 1969. “We were expanding rapidly. We came from nowhere in the 1950s to world recognition.”
Then in 1985, a faulty bulkhead ruptured, damaging the tail of a 747 on a flight to Osaka. JAL used the long-haul aircraft like a shuttle bus, cramming more than 500 people into domestic flights. Boeing later settled with the families of the 520 people who died. There were four survivors.
As JAL struggled to restore its reputation in the wake of the crash, the government in 1986 granted ANA its international license. Years of unchallenged growth as the nation’s economy expanded more than 20-fold had left JAL bloated and vulnerable when Japan’s bubble economy burst at the end of the 1980s, according to Tudor.
“JAL had invested in lots of other businesses,” he said. “JAL people were not good at managing them. That sort of dragged the company down.”
The airline limped along with emergency loans from state- owned Development Bank of Japan following the Sept. 11 terrorist attacks in 2001, the 2003 outbreak of severe acute respiratory syndrome and again in 2008 as Japan suffered its worst postwar recession.
In January 2010, JAL filed for the nation’s largest bankruptcy of a non-financial company, outlining a turnaround plan costing 900 billion yen -- $10 billion at the time.
The government, once again JAL’s owner after a state-led bailout, turned to Kazuo Inamori, the 80-year-old founder of Kyocera Corp. (6971), a $15 billion electronics company. Inamori had no airline experience and Onishi was made president to aid him.
Inamori “was the first real businessman who was running JAL,” said Atlantis Investment’s Merner. “He was very important in making the strategy. Other people weren’t going to rock the boat.”
He cut more than a third of the company’s workforce, triple the number proposed by previous President Haruka Nishimatsu. The fleet shrank to 215 planes at the end of March, from 278 two years earlier, as 28 international routes and 41 domestic ones were axed. JAL flew about 35.8 million passengers last fiscal year, compared with ANA’s 42.6 million.
Wages, pensions and benefits -- such as free flights for employees -- were all reduced. JAL said employees earned 6.3 million yen a year on average at the end of June, compared with 7.7 million yen at ANA.
In November 2010, JAL sold its 51 percent stake in catering unit TFK. The carrier also sold its headquarters, leasing back fewer floors -- Oneworld loyalty program partner American Airlines Inc. now occupies the top story.
JAL and American Airlines started a venture last year on that sets fares, sells tickets and decides schedules on Pacific routes to boost sales and pare costs. The number of code-share tickets issued on JAL and American Airlines jumped eightfold for the year ended March 31, from a year earlier, said Sze Hunn Yap, a spokeswoman for the Japanese airline. JAL is also forming a venture with British Airways on European routes.
The Japanese carrier now aims to boost international capacity 25 percent by March 2017. JAL began its first flights to Boston in April, using Boeing’s more fuel-efficient 787 aircraft, and plans to add services to San Diego in December and Helsinki in March. It has ordered 45 of the Dreamliners.
“Courtesy of rehabilitation, JAL has a stronger balance sheet than both ANA and global peers,” said Nicholas Cunningham, a Tokyo-based analyst at Macquarie Group Ltd.
Inamori, who is also an ordained Buddhist priest, stepped back to become chairman emeritus in February, with Onishi taking his current role and 37-year JAL veteran Yoshiharu Ueki taking over as president.
Ueki, a former pilot who flew 747s to North America, is the son of actor Chiezo Kataoka, who starred in dozens of samurai movies up until his death in 1983. The 59-year-old starred in a couple of movies as a child. He decided acting wasn’t for him when he was unable to cry on cue.
Onishi and Ueki face more competition from low-cost carriers both domestically and from overseas.
ANA affiliate Peach Aviation Ltd. began flying from Osaka, in western Japan, in March, while AirAsia Japan Co., owned by ANA and AirAsia Bhd. (AIRA), started services last month. Jetstar Japan Co., partly owned by JAL, entered the fray in July.
Singapore Airlines’ long-haul discount carrier, Scoot, will begin flights to Japan next year.
“It’s not going to be easy to continue to make big profits,” said Merner. “It’s a very tough business. If they lose momentum it all falls back.”
After descending from the crash site, Onishi laid a single white flower at the foot of the memorial to the victims. Several hundred relatives lit candles around the two triangular gray stone blocks in the village of Ueno, about three hours by car north of Tokyo.
JAL executives make the journey as a reminder of the importance of safety. For Onishi, who said he visits the site several times each year, there are wider implications too.
“We need to pay extra special attention to the lessons of the past,” he said.