Published: Thursday, 29 Oct 2009 | 6:21 AM ET

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Japan Airlines said it would apply for assistance from a state-backed corporate turnaround body, setting the stage for a large injection of public funds into the troubled airline.

The government has been scrambling to secure financing and map out a restructuring plan for JAL, which is headed for its fourth annual loss in five years, weighed down by $15 billion in debt and crippling pension and other costs.

JAL, Asia's largest airline by revenue, said it had started preliminary talks with the Enterprise Turnaround Initiative Corp, a body of turnaround specialists established this month to buy the debt of and invest in struggling but viable firms.

Katsumi Kasahara / AP

"JAL will need huge money, huge public money, through both capital and loans," Shinjiro Takagi, the head of a government-led task force that has been crafting JAL's revival plan, told a news conference. "JAL has three main problems: it has too many big planes, too many routes and a bloated structure," said deputy head Kazuhiko Toyama.

The ETIC, which can draw on up to 1.6 trillion yen ($17.8 billion) in state-guaranteed funding, will decide whether it can help JAL after studying its assets and its prospects for recovery -- a process that could take several months.

JAL will still need to gain the support of its main creditors, which include the state-owned Development Bank of Japan and the country's three top lenders, as well as address a massive pension shortfall that may need new legislation to fix.

A decision by the ETIC not to support JAL would likely push the airline into bankruptcy, which would risk disrupting air travel and would likely cost taxpayers far more than an out-of-court restructuring, the task force said. 

Dealing with the ailing airline is one of a long list of problems confronting Prime Minister Yukio Hatoyama's new government, which took office last month after his Democratic Party trounced its long-ruling conservative
rival on a platform that promised to focus on the interests of consumers and
workers.

"The Democratic Party of Japan is backed by labour unions and there are risks that the state-financed bailout will be determined without fixing real problems," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center.

"The widely held perception in the market is that the DPJ government favors anti-business measures and my concern is that such a perception could be strengthened depending on the government's handling of the JAL revival efforts."
    
More Than Half the Sky

Transport Minister Seiji Maehara said reviving the airline was vital to Japan's economy but that he would leave a decision on whether to offer support up to the ETIC.

"JAL's operation covers more than a half of Japan's sky and considering its global network and how it connects regional economies, its revival is extremely important for Japan's economy as well as for our policy," Maehara told parliament.

The task force, which reports to Maehara, has asked creditors to accept a total of 250 billion yen in loan waivers and debt-for-equity swaps and has sought 300 billion yen in fresh capital, including from public funds, sources have told Reuters.

The banks have so far rejected the task force's requests, saying they are being asked to shoulder too much of the financial burden of reviving JAL and due to a lack of clarity on how much the state would be willing to invest, sources have said.

JAL's pension shortfall, which the airline estimated at 330 billion yen as of March, is another hurdle. Media says the government may craft legislation to force payout cuts on workers and retirees, which under current regulations can easily block such a move.

The task force has also sought a 180 billion yen bridge loan, worried JAL could run out of cash as early as next month, sources have said.

The task force will disband following JAL's application to the ETIC, and it is unclear how much of its work will be used in shaping the body's decision. 

JAL shares closed Thursday up 2.7 percent at 115 yen, boosted by media reports it was planning to seek the turnaround body's help. The stock is still down 46 percent so far this year.

The airline's 5-year credit default swaps have been quoted above 2,000 points, suggesting investors see the risk restructuring could lead to a "credit event", triggering a payout on CDS contracts that insure against corporate failure.

Some analysts believe it is a foregone conclusion the government will save JAL from bankruptcy.

"It's not like you have a whole lot of small and medium-sized companies dependent on the  business like with a car company, but it's a big company and it's got a powerful union," said Jesper Koll, chief executive of Tantallon Research Japan.

"A debate (over whether to use taxpayers' money) is not going to happen. This is JAL, it's the national carrier, it's not Pan Am."

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