A Potted History of Flag Carriers + Japan Airlines

Once upon a time, it was the most fashionable thing for countries to boast national flag carriers. It was a symbol of arriving on the international scene alike having, well, a flag, anthem, and other appurtenances of nationhood. (My personal favourite is Ecuador's TAME, though there should be WILD: West Indies Lines Direct.) In time, however, we gradually learned that not all countries had innate attractions and management skill in running these national carriers. Some had tourist destinations at home while others didn't. Some had routes which attracted frequent business passengers while others didn't. Some had dodgy safety records while others had more exemplary ones. Some had strike-prone staff while others didn't. And there's my favourite un-PC one: some had frumpy old flight attendants while others had slinky young'uns.

Whatever the reason (like flight crew unfit for The Girls of Ryanair duty, maybe), Japan Airlines or JAL has never been a much-respected carrier in Asia. A chequered safety record including the worst single aircraft disaster in aviation history certainly doesn't help. It has been more popular among the locals, if at all with foreigners (gaijin). As for travel awards, you must be joking. There are Japanese-owned travel services that rate among the world's finest like Crystal Cruise Lines; let's just say JAL isn't up to snuff. Like American carriers, it upholds the proud rich country tradition of requiring vast amounts of bailout money from the public purse for no real public benefit.

How pathetic is JAL, you ask? Well, it is now seeking help...by forming alliances with US airlines. To me, this is like begging for money from bankrupts. Wait a minute--that's not an analogy but what's going on. Anyway, to the latest JAL bailout. From the WSJ:

Japan Airlines Corp. shares soared over 30% Monday as the government and state-backed Development Bank of Japan worked out details of a plan to double an existing credit line to 200 billion yen ($2.2 billion). The surge came as the struggling carrier sought to play down local media reports that it has already decided to accept an investment offer from Delta Air Lines and its SkyTeam global carriers alliance due to their strength in Asia, preferring it over a rival offer from existing Oneworld alliance partner American Airlines' parent, AMR Corp. Despite lingering questions about the air carrier's future, JAL's shares ended the day up 31% at 88 yen on the Tokyo Stock Exchange after soaring as high as 39%.

Prompting the rise was news that Transport Minister Seiji Maehara and other top government officials have asked the Development Bank of Japan to boost JAL's credit line to up to 200 billion yen so the airline can avoid disruptions while drafting a restructuring plan. A DBJ spokesman said earlier Monday that he doesn't know yet when his bank would be able to offer the additional loans because it needs to consider the government's request first.

The airline's steep share-price rise also gained momentum after major stock lending firm Japan Securities Finance decided on Dec. 30 to stop accepting applications for borrowing JAL shares starting Monday, forcing those who sold short on the previous trading day to buy the stock back. Monday's share climb more than recouped a 24% tumble last Wednesday when investors feared that the struggling carrier could file for bankruptcy protection...

However, despite the prospect of additional funding, there are still a number of grave concerns over the fate of the ailing carrier, including the prospect of filing for bankruptcy protection. Investors "have to see concrete restructuring plans to see whether it will be court-led or out-of-court restructuring," Mr. Kishi said.

In October, JAL asked quasi-government investment fund Enterprise Turnaround Initiative Corp. for support in restoring its operations. ETIC, which has access to up to 1.6 trillion yen in state-guaranteed funds and the ability to purchase the debts of beleaguered companies, will decide whether to help JAL's turnaround by the end of the month.

Kishi said he expects the decision by the ETIC on the support to JAL to come after voting by JAL's retirees on whether to accept a 30% reduction in their benefits ends on Tuesday next week. The Japanese airline is now mapping out restructuring plans with ETIC as it also looks to ally with either of the two big U.S. carriers, Delta Air Lines or American Airlines.

The Yomiuri Shimbun reported in its Monday evening edition that JAL and the ETIC chose Delta Air Lines as a capital alliance partner for the struggling airline, while the Asahi Shimbun reported on Sunday that the Japanese carrier was in favor of partnering Delta. A spokesman at the Japanese carrier denied these reports, saying the company is continuing discussions with both parties.

Meanwhile, shares in JAL's domestic rival All Nippon Airways jumped 5% to 265 yen after the Yomiuri Shimbun reported Friday that ANA is considering taking over some of Japan Airlines' international routes, though a spokeswoman at ANA said it wasn't.

The sensible thing to do would be to turf JAL as there is no change in its flawed business model on deck. Yes, reducing pensions will help, but it will only prolong the inevitable. As mentioned above, Air Nippon should be given the more profitable international routes while allowing JAL to ride off into the sunset where so many other national carriers that can't make it have gone.

It's difficult to make it in the airline space nowadays, especially with high fuel costs and passengers simply annoyed with endless (quite racist) security hassles. There are a few that can still make it that have a number of advantages going for them--few of which JAL really has. Despite Dubai's woes, for instance, Emirates and its Abu Dhabi-based cousin Etihad are still making money--if not gobs of it--during this time. What is the recipe for success? It's a combination of different things; in no particular order:

• High-traffic routes (preferably with light competition);
• Hubs in reach of many international destinations (Middle East scores here);
  
• Value-for-money fares (or what passes for them nowadays);
• Non-unionized workforces to avoid strikes, fat pensions, geezerized crew;
• New fleet (instead of ancient gas guzzlers you find Stateside);
• Good safety record;
• Quality in-flight entertainment / decent food;
• Good-looking flight crew (stewards too for lady passengers!)

It's a long list, but hey, nobody said it was this was an easy industry in this day and age. Swissair couldn't hack it, so developed country airlines had better look to the best Southeast Asian and Middle Eastern airlines for inspiration. Those who can't keep up should've quit a long, long time ago.

UPDATE 1: Also see this WSJ article I missed earlier cataloguing JAL's familiar-sounding woes.

UPDATE 2: The MoF says a prepackaged (GM-style) bankruptcy is the likely option.