Japan Airlines, a once-proud flag carrier crippled by huge debts, opted for bankruptcy Tuesday as part of a painful overhaul involving thousands of job cuts, route closures and asset sales.
JAL, Asia's largest airline by revenues, will remain in the skies thanks to almost 1 trillion yen ($11 billion) in support from a state-backed fund, but must go through a sweeping restructuring under a new board and management.
Shareholders will be wiped out and lenders will forgive a larger-than-expected 730 billion yen in debt as part of the deal with the fund, the Enterprise Turnaround Initiative Corp of Japan (ETIC).
Bankruptcy will only be the beginning for an airline with depleted capital, facing headwinds such as rising fuel prices and shrinking passenger numbers, on top of hefty restructuring costs.
JAL, which has been bailed out by the Japanese government three times in the past 10 years, will replace many of its older, larger and less fuel-efficient planes. It also faces tough decisions about foreign capital and alliances.
"I have a little bit of a sense that we're now finding out that things were a bit worse than expected," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "What this has shown is that the nation won't just take total care of a company, that they've now said they'll let badly-run companies fail.
JAL's bankruptcy listing 2.3 trillion yen in total debts as of Sept. 30 ranks as Japan's fourth-largest ever.
Shares of JAL, which have fallen more than 90 percent since the start of the month, closed flat at 5 yen after trading down 2 yen to 3 yen. They will be de-listed on Feb. 20, according to the stock exchange.
With a market value of about $150 million, JAL is now smaller than minor carriers Croatia Airlines and Jazeera Airways and is worth less than a Boeing 747.
"I thought that there was no way that JAL would fail," said Akiko Saito, a 63-year-old retiree returning from Sydney to Tokyo's Haneda Airport. "Even when the value of my JAL shares fell from 800,000 yen to below 120,000 yen, I was convinced that it would recover, and I held on to my stock."
JAL bonds maturing in 2013 were priced at the equivalent of just 27.8 cents on the dollar, versus around 70 cents last month, but traders said that trade dried up on the bonds on Tuesday.
The dollar fell to its session low against the yen on the news.
The move could make rival All Nippon Airways Co Japan's new flagship carrier, according to some analysts. Shares in ANA fell 4.2 percent after rallying to a six-month high last week.
Prime Minister Yukio Hatoyama's four-month-old Democratic Party-led government signals a shift from previous governments under the long-dominant Liberal Democratic Party, which had authored the previous JAL bailouts.
Hatoyama's government said it would provide the necessary support for JAL during its restructuring.
Following similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines, JAL plans to cut about a third of its 47,000 workforce and erase about two dozen unprofitable routes, sources said.
The ETIC will support the carrier with about 300 billion yen in capital and a 600 billion yen credit line.
Fuel hedging contracts may also be affected by a bankruptcy filing. JAL uses mostly in Brent forward contracts and about 40 billion yen is estimated to be exposed in the event of an automatic termination, a source familiar with the matter said.
JAL needs to do what it has long put off: Focus on its main business and cut operations it doesn't need, said Andrew Miller, chief executive officer of CAPA Consulting.
"I would have a fire sale -- get rid of the family silver, sell everything that is non-core and focus in on the core and make that work efficiently," he said.
JAL will also need to make a decision about competing aid offers from Oneworld alliance partner American Airlines and rival Delta, which wants to woo JAL to its SkyTeam group.
The carrier has spent two decades trying to recover public trust following a 1985 crash that became the world's worst single aircraft disaster in history, claiming 520 lives.
Kazuo Inamori, the 77-year-old founder of electronics maker Kyocera Corp, was tapped last week to become JAL's new chief executive officer to oversee its restructuring.
JAL's restructuring plan also calls for increasing the fuel efficiency of its fleet, replacing 53 bigger jets with 33 small jets and 17 regional ones.
"I think a revival of JAL will be good for manufacturers such as Mitsubishi Heavy industries which is developing new regional jets," said Shinsei's Matsumoto. ($1=90.43 Yen)