x Abu Dhabi, UAEThursday 27 July 2017

Time to call chocks away and let JAL taxi to failure

Tim Kelly: Poor management and bureaucratic interference have left Japan Airlines at the point where it may be better to let it fail and allow foreign owners in to pick up the pieces.

JAL had agreed to a government-led restructuring designed to resurrect the airline.
JAL had agreed to a government-led restructuring designed to resurrect the airline.

When Japan Airlines (JAL) went bankrupt this year the carrier's managers blamed the failure on factors including the conflict in Iraq and the outbreak of Severe Acute Respiratory Syndrome. What they did not mention was their own incompetence, compounded by years of bureaucratic meddling, which in the end left the Japanese carrier worth less than a second-hand jumbo jet.

In the business year to March 31 last year, JAL had a net loss of ¥63.2 billion (Dh2.52bn). In those 12 months it carried 8.4 per cent fewer passengers on international routes, with revenue per passenger kilometre dipping by 8.3 per cent after a 3.6 per cent decline the year before. But JAL did not drop into commercial oblivion. Instead it landed on a cushion of taxpayer money. The Japanese government last March agreed to buy almost $2bn of JAL's loans with more than $5bn in other debt forgiven by lenders including Mizuho Corporate Bank, Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking.

In return for that bailout, JAL agreed to a government-led restructuring designed to resurrect the flag carrier, and new management promised by the end of this month to reveal details of how it will put the carrier back on a stable financial footing. It was an optimistic assessment. The revival team will fail to deliver the nuts and bolts of the turnaround plan until August at the earliest, local press reports say.

But they need not deliver at all. There's an easier way to kick Japan's leading airline into shape and one that won't cost taxpayers anything: just let it fail. Japan's government can trim costs at JAL and will somehow find a way to bring it back to profit. But the country's aviation bureaucrats may have other goals that conflict with restoring JAL's long-term profitability. And with it more beholden to public funds than it has been since it was a state-owned airline, it will find it hard to resist the designs of those government officials.

They may, for example, want the carrier to maintain money-losing routes to Japan's smaller regional airports. Bureaucratic interference could also extend to fleet planning. It's no coincidence that JAL has only ever bought American aircraft, mostly Boeing jets. It was an easy way in the past for Japan to placate US trade officials peeved by Japan's widening trade gap. A few jumbo jets costing about $200 million each adds up to a lot.

Trade friction has since eased but aviation officials have another plane they want JAL's pilots to fly - Japan's first home-made commercial jet in more than four decades. Dubbed the MRJ, it is a 70-seat, single-aisle jet to be built by Japan's leading aerospace company Mitsubishi Heavy Industries. It will begin flying in 2013 and Japanese airlines are under pressure to be the first customers. JAL's rival All Nippon Airways has already said it would buy 15 of the regional jets.

It would be better for the government to cut the taxpayer lifeline and with it the influence exerted by bureaucrats. A host of suitors would be ready to pick up the pieces. When the Japanese carrier was wobbling in February, both Delta Air Lines and American Airlines wanted to buy a stake. Apart from owning 279 jetliners, JAL is the biggest carrier operating from Tokyo's international and domestic hubs. It dominates its home market, operating some of the world's busiest air routes, including the one between Tokyo and Osaka in western Japan.

Should JAL retreat from its money-losing services, low-cost carriers would have the chance to step in. Government also has a role to play, although not as JAL's boss. Like other countries, Japan limits foreign ownership of airlines, a decades-old rule that in a globalised economy has become meaningless. By removing it, Japan could set an example to the rest of the world including the world's biggest protected aviation market, the US.

business@thenational.ae