January 19, 2010 - Japan Airlines today, filed bankruptcy petition in Tokyo District Court. In addition the airline submitted an application with Enterprise Turnaround Initiative Corporation of Japan (ETIC) for support with restructuring the airline. Tokyo District Court entered an order allowing the airline to file bankruptcy and appointed ETIC and Eiji Katayama, Esq. as reorganization trustees. The petition will allow the airline to get some breathing room from Development Bank of Japan, Japan Bank for International Cooperation, Mizuho Corporate Bank, The Bank of Tokyo Mitsubishi and Sumitomo Mitsui Banking Corporation. 

President of Japan Airlines, Haruka Nishimatsu today resigned for causing JAL current situation and it is also expected that all of other directors will resign. However, it is expected that they will cooperate whenever any cooperation necessary to conduct JAL business is requested by the company under the Corporate Reorganization proceedings. Haruka Nishimatsu has been President of Japan Airlines Corp. and JAL Group since June 28, 2006.

However, since the beginning of this century, several incidents such as the September 11th multiple attacks in the U.S., the outbreak of Severe Acute Respiratory Syndrome (SARS) and the Iraq War, these events have contributed to the decline in demand especially for international flight services, which significantly affected JAL Group. In addition, there was a decline in tourism demand due to unprecedented soaring fuel prices and high fuel surcharges. 

Under such circumstances, the JAL group has made numerous efforts to improve their group’s business, including a decrease in the number of employees by improving employee productivity and efficiency, amendment of the wage system and retirement allowance system, decrease in employee-related costs by reducing lump-sum payments and other similar measures, improvements to the cost system by reviewing operation structures and business processes, intensive analysis of the profitability of international and domestic flight routes, and replacement of certain aircrafts and progress in downsizing.  

As a result, JAL gained operating profits in the first quarter of fiscal year 2008 for the first time since their consolidation in 2002, despite the fact that the first quarter is usually a low-demand quarter.  

However, the financial crisis that occurred in the fall of 2008, pushed the world economy into an unprecedented global recession and JAL Group also suffered a significant decline in sales due mainly to a decline in demand for international passenger service for business users and a sudden decline in demand for international cargo service. As a result of such circumstances, in June of 2009, JAL Group received loans in the total amount of 100 billion yen from DBJ and other private financial institutions. 

Under such business circumstances, on October 29, 2009, “JAL Task Force”, a professional Group consisting of business restructuring specialists and established by the Minister of Land, Infrastructure, Transport and Tourism for the purpose of ensuring JAL Group’s restructuring, reported to the Minister of Land, Infrastructure, Transport and Tourism the results of their examinations to the effect that it is appropriate that JAL Group’s corporate restructuring should be conducted with the support of ETIC. 

JAL began prior consultations with ETIC regarding support for their restructuring and, while pursuing the Turnaround ADR Procedure, they had continued to consult with ETIC.  

Today, after prior examination by ETIC, JAL filed, jointly with DBJ and other Financial Institution Applicants, an application to ETIC for support for their restructuring and received ETIC’s decision to provide support.  

ETIC is a joint-stock corporation established and authorized by the Japanese government to provide support for the revitalization of certain corporations as stipulated by laws.  

With respect to Turnaround ADR Procedure that JAL had begun, today JAL offered to both of the JATP and appointed mediators (Tetsuzuki Jisshisha) to terminate the procedure. Having received their offer, as a result of discussion among the appointed mediators, the appointed mediators decided that it is appropriate to terminate the Turnaround ADR Procedure. Upon such decision, JATP decided to terminate the Turnaround ADR Procedure prior to the filing of the petitions for commencement of corporate reorganization proceedings. 

2. Protection, Etc. of Commercial Transaction Claims 

Upon commencement of corporate reorganization proceedings, JAL restructuring will be conducted, while they will receive support from ETIC, under the supervision of the Court and the leadership of the Trustees. In order to ensure safe flight operations and maintain corporate value as much as possible, JAL believes that at least the following measures are indispensable. In this regard, JAL requested and obtained its consent that ETIC will take the following measures and maintain necessary funds for those measures.

(1) Protection of Commercial Transaction Claims 

In order to maintain the trust of JAL commercial related parties and to continue providing safe flight operations, protection of commercial transaction claims is indispensable. JAL is requesting that commercial transaction claims be protected under the Corporate Reorganization proceedings. 

(2) Protection of Customers’ Frequent Flyer Miles 

JAL’s frequent flyer program has been used by many customers and has contributed substantially to its business operations. JAL is requesting that customers’ frequent flyer miles be protected under the Corporate Reorganization proceedings. 

(3) Protection of Leasing Fees 

In order for JAL to continue smooth flight operations, payment of the leasing fees regarding the aircrafts necessary for their flight operations is indispensable. JAL is requesting that the payment for the leasing fees will be continued as it has been conducted and that the leasing fee claims be protected under the Corporate Reorganization proceedings. 

3. Outlook for JAL Business Restructuring Plan 

JAL believes that their business revitalization is sufficiently feasible through the adoption of the following measures: 

(1) Renewal of Aircraft and Reviewing Airline Routes 

JAL believes that the proactive shift from low-efficiency large aircrafts to high-efficiency small aircrafts as well as regional jet aircrafts is necessary and restructuring and consolidation of underperforming routes are also necessary. 

(2)  Review of the Workforce and Organization Structure 

JAL believes that the following measures are necessary: the streamlining of headquarters; improvement of productivity by adjustment of the workforce, including aircraft mechanics, flight attendants and flight crews, to an appropriate scale; establishment of a new management system that will promote appropriate and timely decision-making and the appointment of younger management team members. 

(3)  Establishment of the Business Operation System Optimizing Revenue 

JAL believes that the following measures are necessary: establishing an operating system maximizing revenue by flexibly and swiftly planning flight routes and aircraft schedules in response to demand changes both in domestic and international routes; especially for international flights, conducting business operations under the Open Sky Policy by leveraging their multiple alliances to expand JAL networks, in addition to structuring flight routes to match business demand; as for local flights, by establishing a low-cost flight service model, satisfying demand for tourism and expanding the local network. 

(4)  Focused Investment to Realize Business Strategy 

JAL believes that a significant amount of investment is necessary for the renovation of aircrafts as necessary to maintain their competitiveness as well as investment in ground infrastructure such as IT systems. 

4. Restructuring of the Pension System 

With respect to JAL Corporate Pension Funds, the consent of more than two thirds of each of pension rights holders (i.e., former employees) and current employees, and the consent of the JAL Labor Union, the largest labor union of JAL, have been obtained as to the amendment regarding the significant decrease in pension payments. Therefore, the amendment regarding the decrease of pension payments will be carried out subject to the approval of the Minister of Health, Labor and Welfare of such amendment of the pension plan.  

JAL has requested that the intentions of pension rights holders and current employees who accepted such a great burden for their revitalization be respected. Appropriate arrangements will be made to the effect that the pension system of JAL Corporate Pension Funds will be amended to reduce the pension payments pursuant to the proposed amendment agreed by the related parties and will be continued under the Corporate Reorganization proceedings supported by ETIC.   

5. Management Structure 

The new management structure will be determined in early February. Meanwhile, it is expected that Masato Uehara, the Senior Managing Executive Officer, will be the Group Temporary Chief Operating Officer.