Ten years ago, on January 19, 2010, Japan Airlines (JAL) filed for bankruptcy protection in a Tokyo court, along with its subsidiaries such as Japan Airlines International and Japan Capital. On the same day, the Enterprise Turnaround Initiative Corporation (ETIC), a government organization, announced its support for JAL's restructuring and organizational reform.

Five Areas of Organizational Recovery

ETIC announced a five-pronged plan for JAL's restructuring: (1) improving operational reliability, (2) enhancing efficiency by using smaller aircraft, (3) discontinuing unprofitable routes and seeking synergies with business partners, (4) managing human resources effectively, and (5) creating mechanisms for swift decision-making.

Additionally, ETIC injected 300 billion yen (3.3 billion dollars) into JAL, while the Development Bank of Japan pledged to provide a loan of 600 billion yen (6.6 billion dollars).

In an article published on globalasia.org titled The Real Story of the Problems at Japan Airlines, Kazuhiko Toyama, CEO of Industrial Growth Platform and a member of the JAL Reorganization Task Force, questioned the fundamental issues facing JAL, how the company could recover, and what policy challenges exist in restructuring a business reliant on government support.

Toyama, who was previously the Chief Operating Officer of the Industrial Reorganization Corporation of Japan, was appointed to the JAL restructuring task force on September 25, 2009, by the Ministry of Land, Infrastructure, Transport and Tourism. His experience allowed him to identify the root problems of JAL.

Toyama stated that the crisis facing JAL could be categorized into two main types: (1) deep-rooted and chronic issues, and (2) problems that worsened after the Lehman Brothers crisis in 2008. The immediate concern was how to avoid cash shortages and keep the planes flying.

The airline industry has high fixed costs, including wages, aircraft leases, fuel, and maintenance. JAL has faced chronic cash shortages due to high fixed costs while revenues have consistently declined during economic crises.

Many airlines around the world that cannot cover their daily operational expenses have had to temporarily cease operations, often leading to bankruptcy. Most end up liquidating their assets, and once an airline halts operations, its brand value is severely diminished. JAL was also nearing such a dangerous situation due to cash shortages.

Toyama likened JAL's situation to that of a critically ill patient needing surgery, where the surgery itself poses risks. The fundamental solution for JAL required a court-ordered restructuring process, and JAL needed a significant cash injection, potentially up to 1 trillion yen, which only the government could provide in such a short timeframe.

The JAL Reorganization Task Force concluded on October 20, 2009, that only a government-backed restructuring company could provide the necessary funding for JAL.

The task force's work concluded on October 29, 2009, after which the Development Bank of Japan provided two loans totaling 200 billion yen. The court-ordered restructuring allowed JAL to secure an additional 600 billion yen in loans. A key recommendation from the JAL recovery task force was to ensure that JAL could continue operations during the restructuring process.

Legacy of High Costs

Toyama pointed out that the chronic issues leading to JAL's crisis included an excess of aircraft, personnel, and flight routes. The routes themselves are not a direct cost of fixed expenses, so discontinuing unprofitable routes did not resolve JAL's problems.

A more serious issue was the aircraft and personnel. For instance, at Narita Airport, due to limited flight slots, JAL used Jumbo 747 aircraft, which later became uncompetitive assets as the industry shifted to more efficient smaller aircraft.

Regarding personnel, JAL employed around 50,000 people, which was considered excessive by 30%. Historically, JAL was known for proactive hiring, but since 1975, new hiring decreased due to increased competition and economic downturns. This resulted in a 'reverse pyramid' structure within the company, with many senior employees and few new hires. Cost-cutting measures were effective for new employees but limited in reducing benefits for senior or retired employees.

Generally, Japanese people viewed JAL as a company offering good salaries and benefits, but younger, high-potential employees faced challenging work conditions. Toyama noted that one reason Kazuo Inamori, founder of Kyocera, was chosen as JAL's CEO was to harness the potential of JAL's younger workforce.

Toyama stated that if JAL needed to move forward, the first step was to eliminate negative assets and operational practices that caused problems. Addressing this issue would involve various stakeholders, including current employees, retirees, and politicians.

Both JAL and the involved parties had long denied reality, leading JAL to the brink of collapse. With the court-ordered restructuring process and substantial government funding, JAL must seize this opportunity to eliminate past practices that caused issues.

First, JAL needed to establish a new management team composed of young, skilled individuals under Inamori's leadership. The company had to confront its past. The court-ordered restructuring allowed JAL to significantly reduce its financial burdens from creditors by 700 billion yen, cut pension payments to retirees by 45%, and retire several older aircraft from its fleet.

In terms of personnel, ETIC planned to reduce the workforce by 30%, or 15,000 employees, but the number would naturally decrease as subsidiaries were sold off. JAL needed to focus on economic fundamentals and immediately discontinue unprofitable routes. For routes that were unprofitable but served local economic interests, JAL would need to seek government subsidies. JAL had to achieve organizational downsizing and maintain cash flow before discussing growth strategies.

Impact on Market Mechanisms

Toyama stated that JAL received support from ETIC for three years. From a broader perspective, JAL's recovery through the court process and government funding distorted market mechanisms. Government intervention obstructed the market's ability to eliminate inefficient operators, allowing a failing company like JAL to gain a cost advantage. Successful competitors in the market became the new losers.

Toyama questioned whether JAL's crisis reflected the effective functioning of market mechanisms. If so, what justifies the Japanese government's decision to intervene in the market to preserve JAL? The answer lies in JAL's public role. If JAL went bankrupt and its assets were liquidated, it would significantly impact the daily lives of Japanese people and severely affect Japan's international relations.

On the other hand, ETIC had the responsibility to rehabilitate JAL and ensure the return of the injected funds. This was ETIC's mission, including finding ways to enhance JAL's organizational value. The 900 billion yen government injection to JAL was akin to 'consolation money.'

Toyama concluded that after three years, JAL would need to repay the 'consolation money' to the government. Once ETIC withdrew from JAL, the airline would re-enter the aviation market as an independent company standing on its own feet. At that time, we would know whether JAL's recovery plan had succeeded.

However, on January 10, 2012, an article in The Financial Times titled JAL provided blueprint for others to follow stated that within just two years of restructuring, JAL was already profitable, reducing its workforce from 48,000 to 30,000 and retiring over 100 aircraft from its fleet while simplifying its organizational structure.

Inamori, JAL's CEO, who had previously been a Zen monk, was able to create clear and decisive leadership. In 2010, he told employees that JAL's managers were so incompetent they couldn't even run a 'grocery store.'

References

The Real Story of the Problems at Japan Airlines, Kazuhiko Toyama, June 20, 2010, globalasia.org
JAL provides blueprint for others to follow, January 10, 2012, ft.com

SOURCE: www.thaipublica.org