Japan's government said it was considering legislation to cut the pensions of Japan Airlines Corp retirees and would use loans from a state bank to keep it operating while it seeks its fourth bailout since 2001. Transport Minister Seiji Maehara said the government would present proposed legislation to forcibly slash pension payouts during the next regular session of parliament, which starts in January, if the airline could not get the retirees to support the cuts.
The state-owned Development Bank of Japan will supply bridge loans to keep the airline operating until it secures long term financing, Maehara said. JAL is waiting for a government-backed turnaround body to decide whether to recapitalise it with public funds. "We recognise that JAL will face a cash problem this month," Maehara told a news conference.
"The government will take steps to ensure JAL won't run out of money and to solve the pension issue, which could be a big problem even if the ETIC (Enterprise Turnaround Initiative Corporation of Japan) decides to support the carrier." JAL, Asia's largest airline by revenue, is headed for its fourth annual loss in five years, weighed down by $15 billion in debt and a bloated cost base, including a pension shortfall estimated at $3.7 billion as of March.
The government has been considering legislation to push through reductions to pension payouts, aiming to get around current laws that allow retirees and employees to easily block such cuts if just one-third of them oppose. The government's announcement of plans to deal with the pension and financing issues were partly aimed at easing worries auditors might not sign off on JAL's first half earnings report scheduled for Friday.
"We know JAL will announce earings on November 13, so it's books will have to be audited," national strategy minister Naoto Kan told reporters at a separate briefing. "We felt we needed to clear up the issue of bridge loans before then to ensure the airline continues to operate smoothly." A banking source with knowledge of JAL's finances said the airline needs about 100 billion yen ($1.1 billion) in bridge loans to prevent it from running short of cash this month.
JAL needs loans to tide it over while the government-backed Enterprise Turnaround Initiative Corporation of Japan (ETIC) studies its assets and decides whether it is worthy of state aid. JAL applied to the ETIC last month and a decision is expected in January. The body is able to tap up to 1.6 trillion yen in state-guaranteed loans to buy the debt of and invest in struggling but viable firms.
While the Development Bank of Japan has been tapped by the government to provide short-term financing, it remains unclear whether private bank creditors will be willing to extend fresh loans in the absence of state guarantees. Maehara said that for the time being the government does not plan to back the bridge loans, but that it would consider legislation or a budget provision to do so in the future. Japan's top three private banks - Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group - are all JAL creditors.
A government task force working on JAL's revival plan is considering tapping a debt restructuring scheme under which a third party would mediate between JAL and its creditors, two sources familiar with the matter told Reuters earlier on Tuesday. This scheme, called "Alternative Dispute Resolution", would trigger a suspension of loan payments. This would reduce the amount of funds JAL needs to secure in the near term and thereby lower the bar to securing the bridge loan.
JAL needs about 180 billion yen by the end of March, according to one of the two sources. By using the debt restructuring scheme, the airline can reduce that amount to around 80 billion yen, the source said. Bridge loans extended under the debt restructuring scheme would be given high priority in case of a JAL bankruptcy, a factor that may encourage the banks to lend, the sources said.
A decision by the ETIC not to support JAL would likely push the airline into bankruptcy, a scenario Maehara and other leading members of the ruling Democratic Party have said they would seek to avoid, citing the importance of JAL to the economy. One trigger for bankruptcy would be a failure to resolve the pension issue.
Legislation would be tricky as forced cuts could be interpreted as violating personal property rights protected by the constitution, and some retirees have threatened to sue. The issue is proving to be a headache for the Democratic Party, which was swept to power earlier this year on a platform that promised to focus on the sometimes conflicting interests of protecting workers and prudent use of taxpayer's funds.
"It's also important to make clear that we won't use public funds to pay out pensions for JAL employees. When you're faced with the question of using the taxpayers' money, you have to make sure you have the public's understanding," Kan said. Shares of JAL fell 0.9 percent to 105 yen on Tuesday and are down 50 percent so far this year, underperforming a rise of 11 percent in the benchmark Nikkei stock average.
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