Japan Airlines’s initial public offering, expected in September, could be a monster affair.
After a reorganization with the help of Japanese taxpayers, the airline is posting record profits and healthy operating margins. It even expanded on Tuesday morning into budget air travel in a venture with Qantas Airways .
Analysts estimate that the airline could raise up to 700 billion yen ($8.8 billion) in the offering, making it the biggest anywhere in the world since Facebook listed in May. But the revival of JAL, once the world’s largest international carrier, is sparking debate in Japan on how, and to what extent, the government should rescue large companies that stumble.
Critics say the bailout has given JAL an unfair edge that distorts competition, and questions about its underlying health threaten to distract from the company’s return to the stock market. Whether its shares will be a good long-term investment is still to be seen, analysts say.
The biggest bone of contention is a provision that allows JAL to forgo $4.5 billion in tax payments on future profits. Japan’s other major airline, All Nippon Airlines , says it cannot possibly compete with its rival’s special deal and warns that ANA itself could be pushed to the financial brink.
Other critics worry that JAL has not addressed the structural problems that led to the government bailout, making it unable to stand on its own in the increasingly cutthroat global airline industry.
Encouraged by a record annual profit of 204.9 billion yen, for example, the airline has said it will bring back summer bonuses — a reminder, to some, of its once notoriously profligate ways.
To compete with JAL, All Nippon plans to raise as much as ¥211 billion ($2.6 billion) by selling a billion new shares, partly to buy new planes, the airline said in a statement Tuesday. Shares in All Nippon plunged almost 14 percent on the news. The number of outstanding shares would increase by 40 percent, greatly diluting each existing share’s value.
Tellingly, critics say, Japan Airlines itself predicts lower profits in the next two years.
“We need to know JAL can stand up to more competition, not less,” said Toshiaki Koizumi, director of the ruling Democratic Party’s committee on transport. “At this rate, even ANA will start to founder. JAL is going to relist, but how long will it last?”
Initially state-owned, Japan Airlines grew out of the ashes of World War II and expanded rapidly along with the Japanese economy. The red-crested crane on JAL’s aircraft became a national motif, and drove the heyday of Japanese tour groups overseas in the 1970s and 1980s. It became a private company in 1987.
But overzealous investments in overseas hotels and resorts during the bubble era, coupled with soaring personnel and pensions costs, started to sully JAL’s finances. From 2001 to 2009, the airline was bailed out by the government three times.
Then in early 2010, JAL filed for bankruptcy protection with 25 billion in yen in debt, wiping out its shareholders. The company received a 350 billion-yen capital injection from a state-backed fund, which the fund is set to recoup when JAL relists.
JAL’s troubles have become another symbol of Japan’s precarious global economic standing. Once the envy of Asia with their sleek fleets, impeccable service and punctuality, Japanese airlines have not been able to keep up with global, or even regional, competition.
Even as global air travel has surged, airlines in Japan have shrunk, both in the volume of passengers carried and market share, the only airlines in an industrialized country to experience such a decline. Passenger kilometers on Japanese airlines fell 30 percent from 2000 to 2010 to 72.2 billion kilometers, far behind airlines based in the United States, Britain, and even behind South Korea and China, according to figures from the International Civil Aviation Organization.
The Japanese themselves increasingly no longer fly on Japanese airlines when going overseas. The market share of JALand ANA on Japan’s international routes fell to 32 percent from 39 percent from 2005 to 2012 at Narita, Tokyo’s main international airport, according to a report released in April by CLSA Asia-Pacific Markets.
That share is unusually low, the report said. Typically, airlines manage to retain at least half of all international travel originating from their home country.
“Japan’s airlines desperately need a strategic rethink, or the going will get even tougher,” said Hideo Inagaki, a former JAL executive who is a principal analyst at the research group, Japan Aviation Management Research, which is based in Tokyo.
JAL is quick to defend its turnaround, and tells a different story to potential investors, a tough sell so soon after the airline wiped out investors just two years ago. It is now a lean-and-mean company, its executives say. As part of its overhaul, it has eliminated one-third of its work force — about 16,000 jobs — dropped unprofitable routes and slashed pensions.
“Our performance is the direct result of the dedicated efforts of our employees,” the JAL Group president, Yoshiharu Ueki, said at a news conference last week. “To then be told that those numbers are unfair is baffling.”
ANA points to JAL’s more favorable position — fresh capital, tax breaks, clean balance sheet, lower interest rate payments, lower depreciation costs tied to a write-down of its fleet — as evidence that the government continues to favor the old state-run carrier. Indeed, JAL’s 204.9 billion yen profit through March 2012 is more than double ANA’s.
“An important function of bankruptcies is that it opens up the market for other stronger players,” said Ryosei Nomura, a spokesman in Tokyo for ANA. “But the opposite has happened. JAL is being rewarded for failing.”
To trim costs and regain profitability, JAL has made steep cuts in all of its businesses, leading sales to also fall. Compared with 2008, the year before its bankruptcy, revenue has fallen 45 percent on international flights and 28 percent on domestic ones, as JAL slashes unprofitable routes and capacity. But seat-occupancy rates have hardly risen for international flights and actually fell domestically.
And while JAL has cut its work force, sales have fallen faster. Compared with 2008, sales per employee are down by 2.6 million yen to 38 million yen, according to calculations by Japan Aviation Management Research.
“Whatever cutbacks JAL has made, sales have fallen by about the same,” said Mr. Inagaki at J.A.M.R. “If they aren’t really raising efficiency, is it really restructuring?”
There are other signs of troubles ahead, critics say.
JAL has little in the way of a low-cost carrier strategy, they say. Budget carriers could account for half of all domestic seats in Japan by the end of the decade, helped by long-awaited government deregulation, according to the Center for Aviation, a research group based in Sydney.
“These seismic changes will not be absorbed without significant ramifications to the incumbents,” the group said in a research note last week.
Although JAL entered the low-cost fray last year with a 5 billion yen investment in Jetstar Japan, a budget airline started with the low-cost unit of Qantas and Mitsubishi, strategy is largely in the hands of its Australian partner. Jetstar Japan sent out its first flight on Tuesday, between Tokyo’s Narita Airport to Chitose on the northernmost main island of Hokkaido.
JAL’s sharply reduced capacity could also hurt its competitiveness in the long run, especially at a time when global air travel is growing. JAL, which has retired its jumbo jets, now runs a fleet centered on midsize planes, including Boeing’s 787 Dreamliner jets, which seat up to 290 people.
But on many cash-cow routes, for which landing berths are hard to come by, big planes are crucial to raising revenues and profitability, analysts say. Singapore Airlines and Emirates use the Airbus A380, which can seat more than 500 people.
Then there are the high costs of being based in Japan, both because of the strong yen and because the Japanese government has financed the building of almost 100 airports across Japan with special fuel taxes and some of the highest airport landing fees in the world. Those high costs are a drain on both JAL and ANA.
Mr. Koizumi, the lawmaker, said the worst nightmare would be that a resurgent JAL, temporarily buoyed by tax breaks, weakened ANA, leaving neither of Japan’s airlines strong enough to compete globally.
“Then it will be just like the rest of Japan — they will both shrink,” he said.
But defenders of the bailout see a more optimistic outcome. JAL has plenty of cheerleaders. In an editorial last month, the Nikkei, Japan’s largest newspaper, hailed an unusually swift turnaround for Japan Inc.
JAL’s turnaround could spark much-needed reform in the rest of Japan’s airline industry, the Nikkei said. “Stimulated by JAL’s rebirth, rival ANA will also go through belt-tightening to improve profitability. The entire industry itself is set to escape a frail setup based on heavy fixed costs and wildly volatile earnings.”