Japan Airlines has turned the year of the tiger into the year of cleaning up its balance sheet. JAL ended its financial year with a massive write-off which aims to speed its return to profits.
Without the write-off of US$1.2 billion on 31 March, JAL would have reported a respectable net result of some $450 million for the year. Instead, the airline will take a $753 million loss. The JAL group's consolidated loss is some $543 million. Senior management decided it was time to erase some $450 million in accumulated debt and $753 million in inflated asset values.
JAL has taken the write-off in two ways. Firstly, by reducing the value of shareholdings and loans to subsidiaries by an estimated $620 million and then by reducing shareholder equity by $580 million.
JAL's write-off slashes its shareholder equity by 80 per cent. President Akira Kondo sees it is as better to take this hit now rather than drag it out over a number of years, trying to write off $1.2 billion against future profits.
JAL has not declared a dividend in six years, but company officials say this move improves the chances of one next March.
JAL's write-off is subject to shareholder approval at an annual meeting in June. Both president Kondo and chairman Susumu Yamaji say they will resign at that time to take responsibility for the company's losses. Kondo declares it is 'time to hand over to a new top management team,' but it remains unclear if shareholders can convince him to stay or if he will take Yamaji's place as chairman. Isao Kaneko, senior managing director, has been tipped to become the airline's next president.
Analysts applaud JAL's move as necessary and decisive, but they remain sceptical about how soon the airline may see any profits.
Both Moody's Investors Service and Standard & Poor's have placed JAL on credit watch for a possible downgrade, citing problems that the write-off cannot resolve. Chief among these are the prolonged weakness in Japan's economy, the overall effects of the Asian currency crisis, high costs, domestic deregulation, and more competition under Japan's new US bilateral.
Suffering the same problems, All Nippon Airways also reported a financial year-end loss. According to interim results, ANA lost $25 million compared to a $38 million profit a year earlier.
For the first time in 30 years the airline did not pay a dividend. Citing sluggish traffic and more competition, ANA says it plans to reduce staff numbers by up to 2,000 and cut investment and financing by 20 per cent over the next three years. Neither JAL nor ANA have asked to delay any aircraft now on order.
Another threat is in sight. Both Japanese carriers now face an onslaught of new capacity from US airlines.
Source: Airline Business
