J A PA N A I R L I N E S

Japan Airlines:
Dramatic success
stokes controversy

30 SUMMER 2013
 J A PA N A I R L I N E S

The collapse of Japan Airlines Corporation (JAL), Japans

national flag carrier resulted in the largest insolvency proceeding
in Japanese corporate history outside of the financial services
industry. At filing, JAL owed approximately JPY 2.3 trillion
(approximately USD 23 billion). For a variety of reasons, JALs
restructuring was the focus of considerable attention in Japan and
around the world. On 19 September 2012, JAL re-listed on the
Tokyo Stock Exchange and completed a successful IPO. YOSHITAKA OSHIMA
Partner, Bingham McCutchen

Yoshitaka Oshima and Lisa Valentovish report for eurofenix. Murase, Sakai Mimura Aizawa
Foreign Law Joint Enterprise, Tokyo

Distinguishing features In advance of the filing, a ETIC and DBJ

JPY 600 billion (approximately
Several features distinguish ETIC was established in October
USD 6 billion) credit line was
the JAL proceeding from more 2009 under a special act of
set up by ETIC and DBJ
ordinary Japanese insolvency Japans Diet called the Act on the
(Development Bank of Japan)
cases:
and a detailed public
Enterprise Turnaround Initiative
ETIC, a quasi-government Corporation of Japan. ETICs
announcement was made
entity (discussed below) mission is to revitalise businesses
stating that all trade claims
became JALs sponsor and in financial distress, with a focus
incurred in the ordinary
played a significant role in its mainly on regional, small or mid-
course of business would be
capacity as the corporate sized companies. ETIC is a joint
paid in full.
trustee in JALs corporate stock company owned by the
LISA VALENTOVISH

reorganisation procedure. It is JALs corporate reorganisation Japanese government and private

Partner, Bingham McCutchen
Murase, Sakai Mimura Aizawa

very rare in Japanese procedure was Japans first sector financial institutions. ETIC
Foreign Law Joint Enterprise, Tokyo

insolvency proceedings for the
court to appoint a corporate
trustee (compared to a trustee
who is an individual).
To preserve JALs corporate
value and ease the burden on
trade creditors, some unique
policies were applied, such as
full payment of all trade
claims incurred in the ordinary
course of business.
government endorsed
filing and was concluded
within the shortest period
of time permissible under
established court timelines.
After its exit from corporate
reorganisation, JAL initiated a
very successful re-listing on the
Tokyo Stock Exchange and
IPO in the stock market.
was reorganised and renamed the
Regional Economy Vitalisation
Corporation of Japan (REVIC) in
March 2013 by a revision of its
governing Act.
DBJ was privatised in
October 2008 under a special act
of Japans Diet called The
Development Bank of Japan, Inc.
Act. Though privatised in
structure, DBJ is still owned

SUMMER 2013 31
J A PA N A I R L I N E S

entirely by the Japanese

MR. INAMORI
IS A WORLD-
FAMOUS CHIEF
government. DBJ raises funds by
borrowing from the Japanese
governments Fiscal Investment
and Loan Program (FILP), by
issuing bonds (both with and
without government guarantees)
and by taking out long-term loans
from private sector banks.

EXECUTIVE Events leading to filing

OFFICER AND A JAL, after privatisation in 1987,
MANAGEMENT had long been criticised for being
intensely bureaucratic and lacking
GURU IN JAPAN in cost-consciousness throughout
the overall corporate group. JAL
had been cash-strapped for several
years due to its high-cost

operations and continuous
exposure to event risk.
Moreover, during 2008 and 2009,
demand for passenger and air
cargo transportation declined
sharply due to the after-effects of
the Lehman Shock and travel
ban instituted in Asia following
the outbreak of the avian flu
2009, the Task Force concluded proceeding was filed in the
H1N1.
that JALs restructuring and Southern District of New York
In March 2008, JAL issued
revitalisation should be arranged under Chapter 15 of the United
JPY 150 billion (approximately
and handled by ETIC (which had States Bankruptcy Code and
USD 1.5 billion) of preferred
just been established two weeks ETIC commenced providing its
shares. In the summer of 2009, to
earlier). support program to JAL.
further address deficient cash flow,
In accordance with the Subsequently, other ancillary
JAL borrowed JPY 100 billion
recommendation of the Task proceedings were also filed in the
(approximately USD 1.0 billion)
Force, JAL formally requested that United Kingdom, Canada and
from major Japanese banks as
ETIC initiate its preliminary Australia.
crisis management financing.
consultation under ETICs After the filing, JAL carried
Unfortunately, these measures
procedures. Concurrently, JAL out its revitalisation plan with
were insufficient to resolve JALs
commenced an out-of-court strong support from ETIC. JAL
deteriorating financial condition.
workout procedure under abandoned many of its inefficient
To further manage JALs
Japanese law called Turnaround routes and began to retire aircraft
severe situation, in September
Alternative Dispute Resolution with poor fuel efficiency and high
2009, the Democratic Party of
(ADR). ETIC started its own due maintenance costs such as the
Japan (DPJ) (which replaced the
diligence and set up a 747-400s, A300-600s, MD-81s
Liberal Democratic Party (LDP)
restructuring plan. After two and MD-90s. JAL also reduced its
in the 2009 elections in the House
months of consultation, however, workforce in its total group
of Representatives) formed the
ETIC concluded that JALs companies by one-third by selling
Task Force for JALs
revitalisation should be several major group companies
Revitalisation. The Task Force
implemented by filing a corporate and encouraging the early
began executing overall due
reorganisation proceeding under retirement of employees inside the
diligence on JAL and studied
the supervision of the Tokyo group.
potential measures for turnaround
District Court, instead of the out- It is particularly noteworthy
of the company assuming that
of-court procedure that would that Mr. Kazuo Inamori was
JAL could revitalise (and not
have been customary under installed as JALs Chief Executive
liquidate) if it obtained a large
ETICs support program. Based Officer. Mr. Inamori founded
amount of additional cash.
on ETICs conclusion, on January both Kyocera Corporation and
However, the major Japanese
19, 2010, JAL and two of its KDDI Corporation. He is a
banks already had billions in loans
affiliates (Japan Airlines world-famous Chief Executive
outstanding to JAL and it was not
International, Co., Ltd. and JAL Officer and a management guru
feasible for these banks to place
Capital Co., Ltd.) filed for in Japan. As described below, Mr.
further amounts at risk.
corporate reorganisation in the Inamori and his team made great
Therefore, at the end of October
Tokyo District Court, an ancillary contributions to JAL in terms of

32 SUMMER 2013
 J A PA N A I R L I N E S

on the Tokyo Stock Exchange. measures were thought to be

Since ETICs rules require it to
exit from a credit within three
years, ETIC sold all of its shares
of JAL through the IPO. ETICs
proceeds from the IPO were not
only sufficient to repay the cash
equity infusion in full but also
resulted in an additional profit of
JPY 300 billion (approximately
USD 3.0 billion). Most of this
profit is expected to be returned to
the government. Due to ETICs
large capital gain and JALs
sustained good performance over
the past few fiscal years, investors
and government policymakers
alike have been focusing on JALs
successful revitalisation
accomplished with ETICs
support.
essential to maintaining those
operations. First, in order to avoid
operational disorder, full payment
of trade claims and leasing fees
was necessary. Second, to avoid a
cash shortage, maximum working
capital should be prepared in
advance for paying the full
TO PRESERVE
THE CORPORATE
VALUE OF JAL, IT
amount of the trade claims on
and after the filing. Third, WAS CRITICAL TO
appropriate and timely MAINTAIN DAILY
communication was required to
keep creditors, customers and WORLDWIDE
business partners fully informed OPERATIONS
and assured.
JAL and ETIC arranged and
established a policy to make full
payment of trade claims and

Key points of JALs

successful restructuring
Several key points of JALs
successful restructuring should be
emphasised.
business expertise, corporate
philosophy and morale.
Putting the plans below into
Application of corporate
leasing fees to continue worldwide
operations as usual and avoid
aircraft foreclosures at foreign
airports.
To support JALs working
capital and keep JAL solvent
throughout the proceeding, ETIC
and DBJ prepared an additional
credit line before and on the filing
up to JPY 600 billion
(approximately USD 6 billion).

action, JAL drew up its Furthermore, ETIC publicly

reorganisation plan and submitted
it to the Tokyo District Court on
August 31, 2010.
Following the overwhelming
approval of the plan by more than
ninety-six percent of creditors of
all classes, JALs reorganisation
plan was also approved by the
Tokyo District Court on
November 30, 2010. In
accordance with the approved
plan, all of the existing issued
shares were cancelled and ETIC
injected JPY 350 billion
(approximately USD 3.5 billion)
for new equity. The DIP loan
from DBJ and ETIC was paid in
full with the equity infusion.
Rules of the Tokyo Stock
Exchange require a debtor to exit
from corporate reorganisation
proceedings before re-listing on
the stock exchange, and a debtor
may not exit unless more than
two-thirds of all the claims
allowed in the proceeding are
satisfied. To facilitate the re-listing,
on March 28, 2011 JAL acquired
a loan from five major Japanese
banks sufficient to pay almost all
of the accepted claims. On
September 19, 2012, JAL re-listed
reorganisation procedure
Although ETIC was originally
announced JALs policy of full
designed to conduct restructuring
payment to trade creditors and
through out-of-court workout
lessors, and protection of issued
procedures, ETIC correctly
tickets, frequent flyer miles and
decided to file for corporate
flight coupons already issued for
reorganisation under the
shareholders. ETIC arranged
protection of the court. ETICs
these policies with the Japanese
top management discussed this
government and the Japanese
over and over and finally
government in turn
concluded that it was definitely
communicated with other
necessary for JAL to file for the
countries and kept those countries
court protection.
informed through diplomatic
The main reasons were that
channels. Furthermore, on the
JALs restructuring procedure
day of the filing, the Japanese
needed transparency, JAL had to
government made a statement
block potential interference from
that it would provide the support
political or bureaucratic powers,
necessary for JAL to maintain its
and JAL had to be shocked into
flight operations and rehabilitate
changing the mindset of
throughout the proceeding.
management and employees (who
seemed to lack adequate
productivity).
Drastic management reform
After the filing, Mr. Inamori
assumed the position of CEO and
began his dialogue with the
No disruption of business
management to assess JALs
operations
Careful study of past air carrier
current situation and most
bankruptcy cases taught JAL that
pressing problems. Mr. Inamori
to preserve the corporate value of
and his team then initiated his
JAL, it was critical to maintain
unique management policy called
daily worldwide operations as
Amoeba Management which
usual in the beginning of the
first became famous when he
restructuring procedure. Several
initiated it at Kyocera

SUMMER 2013 33
J A PA N A I R L I N E S
AFTER THE
IMPLEMENTATION
OF AMOEBA
MANAGEMENT,
JALS
MANAGEMENT
COULD BE AWARE
OF ITS DAILY
REVENUE AND
CASH POSITION
IN ONLY THREE
DAYS
Corporation. Amoeba
Management is best known for its
themes of decentralisation,
employee empowerment and
accountability.
The application of Amoeba
Management at JAL entirely
changed its management and
accounting systems and JALs
management could timely and
precisely determine the revenue
and profit of any domestic or
international route. For example,
before the filing, it took three
months for JALs management to
know the daily revenue and cash
position, which was obviously
critical for making important
decisions. After the
implementation of Amoeba
Management, JALs management
could be aware of its daily
revenue and cash position in only
three days. Moreover, the new
system enabled JAL to operate
different sized aircraft to flexibly
meet changing route demands.
This flexibility also enabled JAL to
supply many additional flights to
airports available in the Tohoku
area when that area suffered from
Make a comment!
the devastating earthquake and
tsunami in March 2011.
Mr. Inamori also made a
drastic revolution at the company
in terms of thinking, psychology
and morale. Together with some
young leaders at JAL, he made up
34
a company creed called JALs
Philosophy and instilled it in all
members of the company. JALs
Philosophy drastically changed
the mindset of employees and
confirmed the way of thinking at
JAL.
Thanks to Amoeba
Management and JALs
Philosophy, all of the
management and employees
became well aware of JALs
current revenue, profit, cost
reduction, work efficiency and
status of necessary services to
customers. The result was a
dramatic rebound of JALs
corporate profit. In the fiscal year
of 2011, JALs operating income
jumped to JPY 204.9 billion, and
in 2012, JPY 195.2 billion. The
operating profit margins for both
years were among the highest in
the world for air carriers, however,
as discussed below the unexpected
high profit brought some
controversy.
ETICs Role
As discussed, ETIC played a
critical role during JALs
restructuring proceedings.
First, ETIC helped to provide
a large amount of financing to
JAL at a significant risk when JAL
could not further access credit in
the market. That same money
kept JALs credit with vendors
favourable such that all trade
creditors continued transactions
with JAL on the same terms and
conditions as before the filing.
Second, ETIC could utilise
government assistance. As seen
above, ETIC could seek full
government support before the
filing to keep JALs worldwide
operations functioning without
disruption. Moreover, in the
restructuring proceeding, ETIC
and JAL petitioned the
government to decrease the
Japanese fuel tax and airport fees.
These expenses were higher in
Japan than in foreign countries,
and these high fixed costs
weakened the competitiveness of
Japanese air carriers in the global
market. As a result of the request,
Japanese fuel tax was cut by thirty
percent in 2011 and some airports
reduced their airport fees.
Third, ETIC chose an IPO as
the means to exit its investment.
The law requires ETIC to collect
all of the investment provided to
the supported company in three
years. ETIC thought that the IPO
proceedings could generate the
maximum return for ETIC and
thereby minimise the loss of
taxpayers. Some argued that
ETIC should consider a merger
with another air carrier, but due
to the regulations limiting foreign
ownership of a Japanese air
carriers shares to under one third
of all its issued shares, a merger
was not a viable option.
Controversies
JALs dramatic recovery raised
some controversies with respect to
a restructuring procedure that
uses government support, tools
and rules for revitalisation.
Critics argue that JALs
restructuring procedure was
unfair because JAL can enjoy an
additional large corporate tax
savings for 9 years (estimated to be
up to JPY 125 billion) while
competitors who received no
government support must pay
their corporate taxes in full.
While it may seem unfair, it
can also be said that JAL simply
made the most of the tools and
rules available to it under
corporate restructuring
SUMMER 2013

procedures. (Similar criticisms are
sometimes also applied to
companies that filed Chapter 11
in the United States.) We can
expect that the tax savings issue
will remain a continued point of
contention, particularly if JAL
continues to out-perform its
competitors. Recently, more
landing slots at Tokyos Haneda
Airport were newly allocated by
the government in favour of JALs
competitors.
Another issue is that ETIC
did not share any of its upside
with impaired creditors. Some
argue that JALs creditors should
have insisted on sharing JALs
upside with ETIC, but in fact,
large creditors such as major
Japanese banks did not. Since
Japanese banks dont want to
suffer further loss and they are
subject to regulations limiting a
banks holdings to less than five
percent of the company, Japanese
banks are traditionally reluctant to
hold a debtors shares in
restructuring procedures.
However, as a compromise
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between debtors uncertainty of
future profits and creditors
expectation for sharing the upside
of those profits, issuing shares or
stock options (including by debt-
to-equity-swap) to creditors may
be more likely in Japanese
restructuring proceedings
following JAL.
Conclusion
There are two types of
restructuring, financial and
operational. The JAL case is
notable not only for its unique
financial restructuring procedure,
but for its success in a full
operational restructuring as well.
Compared with other corporate
reorganisation cases in Japan, JAL
made a dramatic turnaround and
exceeded all expectations. Because
expectations were low, creditors
were relatively modest in their
approach and aggressive actions
from creditors were not seen in
the overall proceedings.
The success of JAL's
restructuring could raise
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J A PA N A I R L I N E S
expectations for creditors in future
restructuring cases in Japan and
result in tougher settlement
negotiations between the debtor
and creditors (including requests
for debt-to-equity-swaps).
Co-author Yoshitaka Oshima
is a Japanese licensed bengoshi
COMPARED
TO OTHER
CORPORATE
(attorney at law) who was a member
REORGANISATION
of the legal team at the Enterprise
Turnaround Initiative Corporation
CASES IN JAPAN,
of Japan (ETIC) and was in charge
of JALs restructuring team.
JAL MADE A
Co-author Lisa Valentovish
DRAMATIC
is a Gaikokuho Jimu Bengoshi
TURNAROUND
(Registered Foreign Lawyer in Japan)
admitted in New York and Connecticut
AND EXCEEDED
who has represented creditors in the US
bankruptcy proceedings of Atlas Air, US
EXPECTATIONS
Airways, United Air Lines, Northwest
Airlines, Delta Air Lines and American
Airlines.
The opinions expressed in this article
are entirely the authors personal views
and may be different from ETICs
official position.
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