turnaround of japan airlines.pdf

8/10/2019 Turnaround of Japan Airlines.pdf

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Turnaround of Japan AirlinesStrategy Management Project

Group 4Ankit Goel, 13P124 Kaushik Nihalani, 13P148

Mayank Rathore, 13P150 Nikhil Jain, 13P152

Prabudh Jain, 13P155 Shashank Shukla, 13P166


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cknowledgement

We would like to express our profound gratitude and indebtedness to Prof. Ankur Roy, who has

been a source of constant motivation and a guiding factor throughout the duration of this

project work. It has been a great pleasure for us to get an opportunity to work under him and

complete the project successfully.

The project has enabled us to gather insights about the working of a lesser known or studied

industry sector. It has also helped us to learn about the gamut of factors and strategic principles

that enable companies to stage a turnaround, which is a management marvel of sorts.


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Executive Summary

With the current scenario in Indian aviation, it seems that it is difficult to affect a turnaround in

this cut throat industry, with high fixed and running costs. However, JAL turnaround is a study

that can help us to understand how a loss making airline can also be turned around. Japan

Airlines was the nations pride and was growing as the fastest Airline in the world by 1980s.

From 1983 to 1987, it was the best cargo and passenger transportation platform. However,

some risky endeavors led to its first loss making year in 1991 since 1985, and had to remain

unprofitable for 7 more years. We look at the reasons of the down fall and how it pulled itself

to reach a level of thin profits, only to go back into losses. The economic downturn meant

record debts for the carrier, forcing it to file for Chapter 11 in January 19 2010. We look at the

debt profile of the subsidiaries to get a clearer picture of where the problems were. To affect a

turnaround, a number of structural reforms were undertaken. It was a first example, where we

saw an airline shrink itself to become profitable. We look at Japan government and various

other players who helped JAL to get back on its feet. We also look at the transformational

leadership of its CEO in 2010, Kazuo Inamori, who successfully led the airlines out of trouble,

despite having zero experience in aviation. We look at how different stakeholders played an

important role in affecting the turn around. There were process improvements, organizational

changes, and financial restructuring, which were all a part of the turnaround. There were a few

risks and controversies associated, which we briefly touch upon in this paper, and end it with

the achievements of JAL since the turnaround


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Table of Contents

Table of Contents ......................................................................................................................................... 3

Introduction .................................................................................................................................................. 4

Company History .......................................................................................................................................... 6

Reasons for the fall....................................................................................................................................... 9

Outstanding debts ...................................................................................................................................... 11

Structural Reforms ..................................................................................................................................... 13

The Restructuring plan ............................................................................................................................... 14

Crisis Stabilization .................................................................................................................................. 17

New Leadership ...................................................................................................................................... 17

Stakeholder Management ..................................................................................................................... 18

Strategic focus ........................................................................................................................................ 18

Critical Process Improvement ................................................................................................................ 19

Organizational Change ........................................................................................................................... 20

Financial restructuring ........................................................................................................................... 21

Risks and controversies .............................................................................................................................. 22

Achievements ............................................................................................................................................. 23

Financials .................................................................................................................................................... 24

Exhibits ....................................................................................................................................................... 28

References .................................................................................................................................................. 31


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Introduction

Set-up to meet the countrys requirement of a reliable air transport during the reconstruction period

after the Second World War, Japan Airlines has come a long way since its modest beginning more than

sixty years ago.

The airline was founded in 1951 with an approximate amount of 100 million yen in its pockets. During

the 1960s and 1970s, the airline experienced a phase of explosive growth and expansion. Japan Airlines

had become the worlds largest international air cargo operator by 1981 and had carried more than 100

million passengers to their respective destinations around the globe.

Privatization of the flag carrier was done in 1987. By the late 1980s and early 1990s, the shareholders

were guaranteed profitability quarter after quarter (success in no small part due to a promo-campaign

that had Janet Jackson dancing in front of JAL 747s). During that period, Japan Airlines seemed to be

unstoppable.

Japan Airlines Co. Ltd, the predecessor of the current company, was founded on August 1, 1951 with

100 million yen in capital and from October of the following year, it began its scheduled air

transportation on domestic routes independently.

The current company was established with 1 billion yen in government funding and 1 billion yen in sales,

for a total of 2 billion yen in capital as of October 1, 1953. This was on the basis of the Japan Airlines Act

(Act No. 154 of 1953).

In this way all of the rights and obligations of the previous company were inherited by the established

company and was licensed to become the Nations only scheduled international air carrier, along with its

domestic routes.


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Company History

August

1951

Japan Airlines Co., Ltd. (former) was established with 100 million yen capital. JAL began

independent operation as a scheduled domestic air carrier from October of the following

year.

October

1953

Under the Japan Airlines Act (Act No. 154 of 1953), Japan Airlines Co., Ltd. was

established with a capital of 2 billion yen.

In addition with the operation of domestic routes, JAL obtained a license as the only

international scheduled air transportation company in the country

February

1954

Commenced the first scheduled international service, with the opening of the Tokyo -

Honolulu - San Francisco route.

August

1960 Began service of the Douglas DC-8, the first jet airliner.

June 1961 Commenced northbound route to Europe.

October

1961Listed on the second section of the stock exchange (Tokyo, Osaka, and Nagoya).

October

1963Merged with Japan Aircraft Maintenance Co. Ltd.

April 1964Established Japan Domestic Airlines with the merger of Nitto Aviation, Fuji Airline, and

North Japan Airlines.

January

1965Began sale of JALPAK.

November

1966Commenced New York route.

March 1967 Commenced round the world route (westbound).

February

1970Listed on the first section of the stock exchange (Tokyo, Osaka, and Nagoya).

July 1970 Commenced operation of the Boeing 747 (jumbo jet).

May 1971Toa Domestic Airlines created out of the merger of Japan Domestic Airlines and Toa

Airways.

August Established Japan Asia Airways in order to operate route to Taiwan with the suspension


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1975 of diplomatic relations between Japan and China.

1983

World's number one passenger and cargo transportation performance according to the

International Air Transport Association (IATA).

(Maintains No.1 in world for 5 years, until 1987)

November

1987Full privatization.

July 1988 Toa Domestic Airlines changes name to Japan Air System

January

1993Introduced mileage program.

September

2002

Through the transfer of shares between Japan Air System and our company, Japan

Airlines System is established, and the company is desisted from the stock exchange

(Tokyo, Osaka, Nagoya)

October

2002

Japan Airlines System is listed on the first section of the stock exchange (Tokyo, Osaka,

Nagoya)

April 2004

Japan Airlines System and Japan Air System change names to Japan Airlines International

Co., Ltd. and Japan Airlines Domestic Co., Ltd. respectively. In order for our company to

target international passenger and cargo operations, Japan Airlines Domestic is

restructured to handle domestic passenger operations.

April 2004Japan Asia Airways becomes wholly owned subsidiary through simple exchange of

shares.

October

2006Merged with Japan Airlines Domestic Co., Ltd.

April 2007 Joined the "OneWorld" global alliance.

April 2008 Merged with Japan Asia Airways.

January

2010

Our company, Japan Airlines Corporation and JAL Capital file for reorganization

proceedings.

February

2010

Japan Airlines delisted from the first section of the stock exchange (Tokyo, Osaka, and

Nagoya) as part of reorganization proceedings.

November

2010Obtained anti-trust approval (ATI) for American Airlines.

November Rehabilitation plan approved.


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2010

December

2010

Merged with Japan Airlines Corporation At the same time, merged two group companies

operating on international routes, including JAL Airways Co., Ltd.

March 2011 Completed corporate reorganization proceedings.

April 2011 Changed trading name from Japan Airlines International to Japan Airlines Co., Ltd.

April 2011 Commenced joint venture with American Airlines.


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Reasons for the fall

After the burst of Japans asset price bubble and economic recessions in theUnited States & the United

Kingdom, the fortunes of the airline took a severe turn for the worse. The carrier was harmed by the

risky investments it had made in foreign resorts and hotels when Japan's stock market and property

bubble of the 1980s burst. In the year 1991, Japan Airlines reported its first loss since 1985 and had to

remain unprofitable for more than 7 years.

The costs incurred by the company also increased manifold with growing pension and payroll costs, and

running many loss making domestic routes, which it could not skip due to political obligations. Due to

the global economic downturn and increased competition from Japanese rival All Nippon Airways, the

passenger numbers were falling. The company lost around 131bn yen ($1.4bn; 880m) in the six months

to September.

In a desperate attempt to reduce its losses, the carrier cut down around four thousand jobs, forged an

alliance with American Airlines and replaced its Japanese employees with Thai workers who were paidless. Then through the launch of its budget airline division Japan Air Charter, it tried to attract customers

who were price-conscious. In due course, these measures allowed Japan Airlines to become profitable

again in 1999but only just.

However, by 2009, Japan Airlines was about to repeat history. Due to the global economic downturn, it

was grappling with a decline in passenger numbers. The carrier had huge debts to the tune of

$25.6billion. Japan Airlines' troubles not only reflected the carrier's inability in controlling its costs, but,

they also serve as a reminder that aviation can be a very difficult industry.

In the first half of the financial year 2009-10 JAL posted a net loss of USD 1465 mn, which was a reversal

of USD 2 bn from the previous years first half result. The company was still servicing a debt of USD 15

billion.

For the nine months period that ended 31-Dec-2009 operating losses that company incurred piled up to

USD1.36 billion and operating revenue slumped 22% to USD4.28 billion, for an operating margin of -

31.8%.During the same period of the previous year, it had recorded a loss of USD100 million. Ordinary

losses were USD 1.72 bn, an increase of USD1.44 billion and net losses became USD2.0 billion (or a net

margin of -46.7%)the carriersworst performance since its merger with Japan Air System in 2002.

Since the company recorded huge losses, it was forced to lay off the staff and cut down on the number

of routes to reduce its operating costs. In order to avoid insolvency, the government of Japan gave a

loan of hundred million yen to its flagship carrier. But none of these measures proved effective, and

Japan Airlines filed for Chapter Eleven on January 19th, 2010.


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Key results for the six months ended 30-Sep-2009:

Revenue USD8527 million, -28.8%

Operating costs USD9597 million, -17.6%

Fuel USD2101 million, -25.0%

Labour USD1484 million, -8.6%

Operating profit (loss) (USD1068 million), compared to a profit of USD337.1 million in the

previous corresponding periodNet profit (loss) (USD1465 million), compared to a profit of USD408.6 million in the

previous corresponding period

Passenger traffic (RPKs) -10.9%


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Outstanding debts

For Japan Airlines International Corp:

Debts related to purchase of aircraft, engines and turbines, parts, fuel, equipment and other

supplies or related services Debts related to consignment goods or contracts for work concerning ground handling,

maintenance, catering and other services related to air freight business operations

Debts based on code-sharing flight agreements between the company and other airline companies

including International Air Transport Association

Landing fees, flyover fees, airport facility use fees, stationery fees, flight support fees, airport

security inspection fees and other debts arising from the arrival and departure of airplanes or the

use of flight courses on air facilities and debts arising from the import of goods which are necessary

to maintain operations and other debts arising from passenger and freight operations

Debts pertaining to the leases of the reorganization company offices and business such as rent,

deposit, restoration expenses and other related obligations

Fees against credit loan companies and travel agencies and other debts pertaining to selling airplane

tickets (including obligations to return expenses based on passenger cancellations)

Rebates of flight charges, refunds of operational deposits and other monetary debts (including debts

pertaining to volume incentives) against travel agencies (including IATA) and other parties which

execute passenger carriage service contracts and cargo carriage service contracts

Debts owed to partner companies due to exchange of accumulated flight mileage for JAL mileage

bank participants, use of airplane tickets exchanged for special benefits and coupons and giving

partner airlines flight mileage to passengers and others

Debts to pay insurance premium and related fees

Fees owed to financial institutions, guarantee fees, reimbursement obligations arising from

performance of overseas acceptance, guarantee contracts and similar debts Debts to pay lease fees and installment payments pertaining to aircrafts, engines and turbines,

systems, equipment and other properties leased or purchased by installments

Debts to pay utilities including costs associated with heat, light, water and communication

Debts arising from the employments relationship between the company and the employees

(including employment insurance and other fees and debts which an employee bears against a third

party and of which the company makes payment based on consignment from the said employee or

the third person, deducting the equivalent from the salary to be paid for the said employee and

excluding retirement allowances)

Other debts arising from acts which fall under scope of the ordinary business (except for loan

obligations, obligations to compensate for damages and tax & public dues imposed in Japan)

Pay monetary debt such as foreign passenger tax, utility user fees, income tax, local tax, insurance

fees and other tax or fees for public service borne against foreign governments other than Japan

Perform and honor obligations to JMB Mileage Bank customers, pertaining to exchanges of

accumulated flight mileage, use of issued airplane tickets and other debts or debts pertaining to the

use of delivered airplane tickets arising pursuant to a JAL travel deposit contract

Perform and honor obligations pertaining to the issue or use of airplane tickets, JAL gift cards and

other discount tickets and coupons, etc.


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Structural Reforms

Following the decision to commence reorganization proceedings, the JAL Group undertook various

initiatives, including initiatives directed towards the following:

Construction of a management control structure and accounting reform

Optimization of route network

Aggressive utilization of alliances Review of the air transport business (including cessation from the use of cargo-only planes)

Avoidance of aviation fuel price fluctuation risk

Sale of aircraft directed towards reducing the number of aircraft models used

Headcount reductions

Sale of subsidiaries directed towards reorganization of group companies

Procurement reform

Facility reform

Pension reform

airport-related cost structure reform

Review of flight crew base and training location structure

Revision of wage and welfare benefit systems Reductions in taxes and public charges

Improvements in employee awareness


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The Restructuring plan

Japan Airlines Corporation, Japan Airlines International Co Ltd and JAL Capital Co Ltd filed its proposed

reorganization plan with the Tokyo District Court on 31-Aug-2010, and on that same day, the Court

rendered an order to put the reorganization plan to a creditors' vote.

As part of the plan, the carrier will eliminate approximately a quarter of its debt, 40% of its fleet, 30% ofits global workforce, and one in eight international routes and a quarter of its domestic routes (the route

reduction is more than expected), creating further opportunities for ANA, which is now larger than JAL

traffic-wise (and also Skymark to a lesser degree) in the Japanese market.

Key details of JAL reorganization plan

Action Details

Fleet The carrier retired 103 aircraft from a fleet of 258 aircraft. It reduced

its fleet through early retirement of inefficient models, a reduction in

aircraft size through deployment of new small and medium-sizedaircraft with a focus on B737-800, E170 and B787 equipment which

were more fuel efficient

Domestic network The carrier eliminated 39 domestic routes out of a network of 109

domestic destinations, with greater focus on more frequent service

routes using smaller aircraft. The carrier centered its network around

Haneda Airport routes

International

network

It eliminated 10 international routes from an international network of

65, focusing on major cities in the US, Europe and Asia only and

eliminating unprofitable routes like Milan and Paris. The carrier also

directed its initiatives towards the consolidation of its network,

including the leveraging of bilateral alliances with other airlines as part

of which the carrier had to apply for antitrust immunity with American

Airlines

Merger of three

debtor

companies/renaming

of airline

The carrier had plans of becoming profitable from the first year of

execution of the restructuring plan, with operating profit of JPY D64.1

billion in the 12 months to 31 -Mar-201 1 . It was separately reported

that JAL's operating profit is expected to improve to JPY 117 .5 billion

in the fiscal year through Mar-201 3 from an operating loss of JPY 1

33.7 billion in the last fiscal year ended Mar-201 0. However, its

revenue also declined by 15% to JPY 1.273 trillion from JPY 1.5 trillion

over the same periodDebt waiver Banks including Bank of Tokyo-Mitsubishi UFJ Financial and Mizuho

Financial waived JPY 521 billion (USD6.1 6 billion) in debt

Capital injection Enterprise Turnaround Initiative Corporation of Japan (ETIC) resolved

to Implement a capital infusion plan at the JAL Companies, subject to

approval of the business revitalization plan. The injection entailed a

new share issue by Japan Airlines International Co Ltd, covering 175


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million ordinary shares, with a pay in amount of JPY 350 billion, with

a pay -in date scheduled for 01 -Dec-201 0 (the day after resolution to

implement the business plan)

Re-listing The carrier stated it will get re-listed by 2013

"Aggressive"

utilization of

alliances

The carrier stated that it would "aggressively " utilize the intangible

assets of alliance partners to maximize the alliance effect, particularly

in the areas of facilities, IT systems and managerial know-how, withthe carrier to also strengthen its bilateral partners with other airlines

Cargo Freighters being a non-core activity were taken out of service, and the

company reoriented its focus on cargo service using passenger belly

hold

Cost reductions The company achieved cost reductions through airport cost structure

reforms, facility reforms, and reviews of wage and benefit systems.

The carrier also directed efforts towards making fixed costs variable

Airport and tax

reductions

The carrier laid-off self-operated airport facilities, with office spaces

reviewed, airport terminal space partially returned and the carrier

requested fee reductions in airport-related services. The carrier also

sought permissions to reduce aviation fuel taxes, landing fees and

other taxes and public charges

Management CEO Kazuo Inamori stated he would resign in Feb-201 2, a year earlier

than previously agreed, stating: "Initially, I said I would stay at my post

for around three years, but I would like to be relieved in two years."

The carrier also restructured its business plan by adding that the multi-

layer management structure and redundant functions of the

organization will be completely eliminated. They added that new

departments will be created that will be responsible for cash flow on

individual routes

IT upgrade The carrier laid critical emphasis on updating its IT infrastructure,through which they expected to have a trickle-down effect into the

carrier's efficiency and productivity improvements

Job reductions The carrier in a bold move of sorts, reduced its workforce by

approximately one third from 48,712 at the end of FY 2009 to

approximately 32,600 by FY 201 0 by Mar-201 1. At the same time

they also overhauled their wage and benefit systems

Subsidiaries It planned to either sell or liquidate non-core subsidiaries, including

selling its hotel business, and concentrate all its managerial resources

on air transport business

Basic policy andreorganization

claims

The carrier also provided details on handling of overlapping claims andreorganization claims (secured and unsecured), provision of collateral

assets and preferred reorganization claims (including taxes and labor

claims) and provisions concerning JAL Corporate Pension Fund claims


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The carrier was also considering the creation of a Japanese-style low-cost carrier as part of its

restructuring programme that would avoid the high operating cost structure characterizing Japans

carriers, which have long-standing problems such as high labor costs.

The Nikkei subsequently reported that the establishment of an LCC was added to the carrier's

restructuring plan "at the last minute at the Transport Ministry's request". It has previously been

reported that the carrier would be operated under its brand name, rather than under the JAL brand.

Back in Nov-2009, when jostling was occurring between OneWorld and SkyTeam related to Japan

Airlines membership, Qantas pledged to advise the carrier in successfully establishing a low-cost

offshoot, as it has successfully done with Jetstar. Qantas is still expected to advise the carrier on the

potential LCC establishment.

Qantas, with its dual brand structure, is perhaps the ideal partner to advice on establishing an LCC

subsidiary, as the Jetstar model, working closely with the mainline Qantas, has been enormously

successful.

While the Japanese market conditions and route structures are very different from the climate in which

Jetstar grew up, as a global model it would seem that Jetstars founders could offer some pretty sound

advice to JAL.

Jetstar has been a lifesaver for Qantas, both in fighting off low-cost competitors and then in expanding

the Qantas Groups market - Qantas now uses Jetstar to substitute for it on long-haul routes from

Australia, where the mainline carriers cost base makes operations unviable. The subsidiary for example

recently took over the key Tokyo Narita route for Qantas, protecting the valuable slots from being lost tocompetitors.

Apart from the possibility of supporting JAL into a successful LCC subsidiary, courtesy of Jetstars

experience and support, there are clear potential advantages for both carriers if a successful venture

were possible.

A stand-alone JAL LCC, working with Jetstar, would offer advantages for both sides: for example, Jetstar

is highly connective, code sharing not only with its parent, but open to others as well. Working jointly to

support each other would alone deliver strong market presence. And the possibility of a joint venture

which would offer a lower-risk option on both sides would seem to be a good solution, with

considerable upside. And the advantage for OneWorld would be in a tighter long-term linkage into the

Japanese flag carrier.


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Crisis Stabilization

JALI will receive pay-in totaling 350 billion yen from the Enterprise Turnaround Initiative

Corporation of Japan ("ETIC") and issue shares to ETIC.

In order to prevent aviation service from being disrupted by the petition for commencement of

corporate reorganization and to enable aircraft to continue to fly safely, ETIC decided, with

certain preconditions for its support such as the continuous repayment of commercial

obligations and lease obligations, to provide support on the same day that the order to

commence reorganization proceedings was made.

In order to alleviate the uncertainty among commercial partners about availability of funds,

prior to filing the petition for commencement of reorganization proceedings, ETIC held

consultations with Development Bank of Japan Inc. and arranged for a line of credit for the JAL

group, totaling 600 billion yen, to be available from January 2010.

The repayment rate for Reorganization Claims shall be the same for all Three Debtor Companies

(what is known as par rate repayment); and with the merger, the internal claims among the

Three Debtor Companies will extinguish, and overlapping claims held by creditors against

multiple entities will be streamlined into a single claim.

New Leadership

Kazuo Inamori took on the task of leading the turnaround of Japan Airlines Co. in January 2010

At that time, he had precisely zero experience in aviation management.

Founded Kyocera Corp. when he was only 27 years old. Kyocera now generates about Y 1.2

trillion in revenue and more than Y 100 billion in operating profits, and it has never made a loss

in its 53-year history.

Another company that he created more than 20 years ago is KDDI Corp., which is the second

biggest telecommunications carrier in Japan.

His style was to have the whole company share a single philosophy, from the top-ranking

executives to low-ranking employees, and then manage the company based on that philosophy.

Told executives early on that they have to state the managements philosophy and share that

with everyone at the company. He also told them they dont need many statements. One thing

they need to say is that the managements goal is to pursue the happiness of all employees,

both physically and mentally. It wasnt for shareholders, and it wasnt for executives. It was for

all the employees working at the company.

o His style was to have everyone involved. Its like a bunch of people carrying a Japanese

mikoshi (a portable Shinto shrine). It may not seem sophisticated, but the crowd

gradually becomes one. For this to work, they have to be united by one philosophy.

o Theres an old saying in Japanese: Issho ko narite bankotsukarua generals success

is built on the bones of ten thousand soldiers. This could be taken to mean that one

person at the top becomes really successful while everyone else working under him

becomes exhausted.

This is your company, and its goal is to make all of you happy.

For him, to share the idea that the companys goal is to make all employees happy is aprerequisite, before sharing any other ideas. The whole philosophy wouldnt work without this

prerequisite.


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Stakeholder Management

For group companies, responsibility for profit and loss will also be clarified; there will be greater

understanding and management of the group's overall managerial conditions, as well as greater

sharing of managerial policy with group companies.

Mr. Inamori's policies took the form of a 125-page booklet, "JAL Philosophy," carried by all

32,000 remaining employees. Many workers say they were initially dubious, but now can cite a

preferred passage. "We talk about 'JAL Philosophy' every day" at morning staff meetings, saysYuta Kawaguchi, 40, a manager responsible for part supply at Haneda.

JAL executives credit Inamoris management system in which individual corporate units are held

accountable for maximizing profitability even divisions that are not directly generating

revenuefor reviving the group.

Under that system unit leaders meet once a month to share cost-saving ideas and competitive

intelligence, and are directed to put that information to work immediately. Previously JALs

various divisions operated in silos and many gave little thought on how best to minimize costs,

executives have said.

Strategic focus

Emphasizing greater frequency and smaller aircraft, we will maintain our network centering onHaneda Airport routes and direct effort towards improving profitability.

We will direct initiatives towards the strengthening of our network, including the utilization of

bilateral alliances with other airlines.

o The customers, managerial know-how, facilities, IT systems and other tangible and

intangible assets of alliance partners will be aggressively utilized to maximize the

alliance effect.

o After obtaining antitrust immunity (ATI) with American Airlines, preparations will be

made for the joint business, American Airlines know-how will be acquired, and bilateral

partnerships with other airlines will be strengthened.

Construct a more efficient and strategic organization that is capable of reliably sharing the

Group's managerial policy. Addressing event risk

o

The aviation business has been exposed to a number of event risks, including SARS,

H1N1 influenza, and financial crises such as the one that began with the collapse of

Lehman Brothers; as a framework for dealing with the onset of a risk, a structure will be

built under which effort will be made to discover signs that an event risk may occur, the

appropriate system development will be carried out, and adjustment of flight structures

and emergency measures for reducing fixed costs can be flexibly implemented.


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Critical Process Improvement

Japan Airlines' selection of the A350 is a welcome win for Airbus in a strongly Boeing-flavored Japanese

aircraft fleet. It is also consistent with JAL's strategy to use smaller wide-body aircraft as Japanese

demand weakens and global competition works even more against JAL's high cost base one of the

highest in Asia. It was not long ago that JAL operated the world's largest fleet of 747s. JAL's 2010

bankruptcy restructure saw all 747s retired.

This is also Airbus' first order from one of Japan's two major airlines who jointly account for nearly 75%

of Japan's domestic market and a quarter of its international market. Boeing had maintained a tight grip

on ANA and JAL, partially due to government and economic pressures, such as the substantial role in

manufacturing Boeing aircraft parts.

JAL evaluated the A350 against the 777X, the planned successor for the 777. The 777X is overall larger

than the existing 777 models it will replace. Its entry into service is also further away (next decade) and

none has yet been built, unlike the A350, which has already flown. JAL expects its first A350 in 2019 and

for delivery to be completed over six years. By 2019 JAL's 777-200ERs will be 14-17 years old and its 777-

300ERs 10-17 years old, according to CAPA's fleet database. This is suitable retirement age and, if

anything, above the typical retirement age for Asian airlines, which prefer young fleets. JAL's future

wide-body fleet will likely be comprised of the initial 31 A350s plus the 45 787s in service or on order.The 787s will mainly be used on thinner routes and the A350s on major ones.

reducing the number of aircraft models through early retirement of inefficient model

o A total of 103 aircraft, including all 747-400sA300-600sMD-81and MD-90s, will be

retired. The number of aircraft models flying JALI routes will be reduced from seven to

four (excluding regional jets).

reduction in aircraft size through deployment of new small and medium-sized aircraft models

o Will proceed with the deployment of the highly efficient small-sized 737-800, the even

smaller regional jet E170, and the 787, an aircraft that is a key to future international

route strategy.

wholesale elimination of unprofitable routes, we will completely eliminate routes that lose

money

o For domestic routes, on the premise of ensuring profitability, emphasis will be placed on

more frequent service using smaller aircraft, and the flight network will be maintained

at a certain level.

o International routes will center on the major cities of US and Europe and on Asian

routes (a growth market), securing strategic positioning in terms of customer needs and

within alliances. For resort routes, JALI will specialize in Honolulu and Guam routes,

which have both high profitability and strong customer demand

JAL has one of the highest cost bases in Asiathis limits potential

o

The reason to move to smaller aircraft is largely due to two factors. First, Japan'spopulation is declining, which will dampen travel demand. Economic reforms will take

some time to materialize, but are not expected to restore Japan to its previous highs. So

this limits point-to-point traffic JAL can carry to/from Japan.

o Other airlines when faced with a small local market Emirates, KLM, and Singapore

Airlines have turned to relying on transfer traffic, using their hub as a mid-point. But

the successful execution of this is dependent partially on having a low cost base. JAL's

cost base was decreased during its bankruptcy restructuring, and its cost is lower than


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rival ANA. But JAL still has one of the most expensive cost bases in Asiaand the world,

according to CAPA's CASK ranking in Asia.

In the cargo and mail business, cargo-only planes (freighters) will be taken out of service, and

the service will focus on cargo service using passenger plane cargo compartments (bellies).

Office space will be reviewed, airport terminal space will be partially returned, requests will be

made for reductions in fees for joint facilities shared with other airlines, real estate-related fees

will be reduced by vacating storage rooms and cargo warehouses, etc., and personnel costs willbe reduced through headcount reductions and lowering per-unit charges for subcontracted

services.

With respect to the Kansai International Airport and the Central Japan International Airport, in

accordance with the reduction in number of flights, there will be contractions in group-run

operations of passenger services and flight services, and through sale of operations to other

companies, such group-run operations will be subcontracted.

Initiatives will be taken to achieve major reductions in real estate-related fees. Office space will

be subject to thorough review.

The IT infrastructure, which has become obsolete and overly complicated, will be updated, the

flow of organization-related information will be accelerated, and an operational platform will be

built that can support assorted productivity improvements and function enhancements at low

cost.

Organizational Change

Through such measures as encouraging early retirement and sale of subsidiaries, there will be

further headcount reductions in the JAL Group, so that the number of Group employees will go

from 48,714 as of the end of FY2009 to roughly 32,600 at the end of FY2010.

o

Through a more flexible personnel positioning among organizational units and a review

of working standards and other personnel policy, the overall bare-minimum headcount

will be reduced, while ensuring safety.

As the basic policy of the new system, employee evaluations will be carried out fairly and in

strict accordance with standards, focusing on employee performance and conduct, and thatevaluation will be properly reflected in employee treatment.

A review will be carried out of the welfare and other benefits (i.e., fringe benefits) provided to

officers and employees, which have been strongly criticized as being too generous. With a basic

principle of making these benefits in line with statutory requirements or with general norms, a

thorough review will be carried out so that the levels and ranges are the minimum required of

air carriers.

JALS, JALI and JLC will merge, with JALI as the surviving entity.

JALI will absorb and merge with JALways Co., Ltd. and JAL LIVRE Co., Ltd

Managerial resources will be concentrated on the air transport business, and subsidiaries in

peripheral fields will be sold.

The multilayer structure and redundant functions of the organization will be eliminated, andnew departments will be created that will be responsible for cash flow on an individual route

basis, thereby clarifying responsibility for profit and loss results for individual routes and

departments.

Securing a proper managerial structure


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21 | P a g e

o For managerial structure, an execution structure will be built that will include

clarification of responsibility for numerical results, in respect of both revenues and costs

for the departments under each management team.

o Under this structure tireless and persistent efforts will be made to achieve the targets

in the plan. In monthly results reporting meeting and business plan status confirmation

meetings, the management teams will gain an awareness of current status and

upcoming issues, with the aim of ensuring that plan targets for the JAL Group overall areattained.

In a large room reminiscent of a school sports hall, with a wood floor and Spartan desks and

chairs, about 80 senior executives gather with Mr. Inamori for a three-day examination of every

line in the budget.

Financial restructuring

Stock owned by JALS shareholders will be acquired gratis, and all treasury shares will be

cancelled, and JALI will reduce stated capital and capital reserves to zero.

Reduction in Taxes and public charges

o Because aviation fuel taxes, landing fees and other taxes and public charges are over

10% or so of sales from domestic and international routes of JAL Group aviationbusinesses (the aggregate amount of aviation fuel taxes, landing fees and other taxes

and charges in FY2008 reached roughly 172.2 billion yen), application will be made to

the competent offices for reductions in amount.

For fuel hedge transactions using derivatives, decisions with wide discretionary latitude will be

eliminated, and risk management will be strengthened.

Elimination of debt

o On an approximate consolidated basis JAL Group had more liabilities than assets at the

end of March 2010 amounting to 959.2 billion yen. But, according to the Reorganization

Plan there would be a modification of rights, an investment by ETIC of 350 billion yen

and recording of business profits etc. which would eliminate the excessive liabilities by

the end of March 2011.


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Risks and controversies

The most frequently asked question by the institutional investors during an overseas tour to market the

Initial Public Offer was whether JAL, after becoming a private company again would be able to maintain

its cost discipline or not.

According to estimation done by JAL, almost three-fourths of its gain in efficiency was due to layoffs and

other structural reforms. But, its jump to profit leader from industry basket-case was possible onlybecause of substantial private and state aid.

Banks had forgiven approximately 520 billion yen in debt. Its depreciation expenses suffered a huge

dent due to the write-down of its ageing fleet. The 1.1 trillion yen in loss carry forwards that the

company is sitting on could translate into a $4.5 billion corporate tax break stretched over 9 years which

would have a significant impact on the companys performance.

The ANA has cried foul stating that charging the aids and other tax breaks has created an unequal

playing field that was not fair. But, it has lobbied for concessions behind the scenes, such as the

preferential allocation of landing slots coming up at Tokyos Haneda airport around 2014.

The Liberal Democratic Party which was always keen to criticize the ruling Democratic Party was the

main opposition to restructuring of JAL and had called for measures to keep resurgence of JAL in check.

The sliding of the carrier into its old bad ways was still the overriding fear among investors.

Elimination of excessive debt

The carrier stated it had JPY 959 billion in liabilities at the end of Mar-2010

Addressing event risk

Plans to implement risk management and planning strategies

Securing a proper managerial structure

Seeking to implement a structure that will include clarification of responsibility fornumerical results

Initiatives addressing changes in the competitive environment

To better react to competitive environment with new fleet and network structure.


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chievements

For the year 2011, the Japan Airlines was named CAPA Asia Pacific Airline of the Year. The Asia

Pacific airline that has had the greatest impact on the growth and development of the airline

industry, established itself as a leader in the field, and has set the benchmark for others to follow

is awarded the CAPA Airline of the Year.

Japan Airlines undertook a noteworthy process of restructuring since 2010. It was an almost

irretrievable situation of a high cost airline an uncompetitive route network but it was able torestore itself. A full metal neutral joint venture with its one-world partner on US routes was set

up by JAL since then and it is exploring an equivalent for its European routes.

Despite serious natural disasters in northern Japan JAL has returned remarkably to profitability

and now looks to be well placed to remain profitable.

To address the fast growing sector of low cost airline, recently JAL has established the

framework for a joint venture low cost airline with Qantas/Jetstar.JAL was established as a

market leader due to these features and it had set a benchmark in achieving profitability in

extremely difficult circumstances

In the 2nd largest initial public offering of the year after Facebook, Japan Airlines (JAL) as it is

poised to raise USD8.5 billion. The amount comes in the midst of much of the world being in the

economic doldrums and is still outstanding for the airline.

JAL's IPO, which is reported to have already been subscribed at the upper price end of JPY3500-

3790 per share (USD44.85-48.57), would allow the Enterprise Turnaround Initiative Corporation

to more than double the JPY350 billion (USD4.5 billion) it loaned to JAL during bankruptcy, from

which JAL emerged in Mar-2011. JAL will not profit from the IPO, which will make JAL the fourth

largest carrier by market value after LATAM, Singapore Airlines and Air China.

In the six months ended 30-Sep-2011 (1HFY2011), Japan Airlines Corp (JAL) generated a solid

profit results with revenues of USD7.7 billion (JPY599.8 billion), an operating profit of JPY106.1

billion (USD1.4 billion) and a net profit of USD1.3 billion (JPY97.4 billion). In the midst of anintensified focus on improving cost efficiency and an aggressive scaling down of operations as part

of its rigorous restructuring efforts, these results were an encouraging sign for the carrier.

JAL would be able to mark its largest full-year operating profit in nearly a decade (since FY2003)

as it upgraded its full year forecast to an operating profit of USD1.8 billion (JPY140 billion). The

airline is expecting a net profit result of USD1.5 billion (JPY120 billion), much higher than its

earlier estimated forecast of JPY75.7 billion, as its restructuring efforts begin to yield results.

For the former national flag carrier which lost its position as the nations largest carrier to All

Nippon Airways (ANA) in FY2010, the past few years have been tumultuous. However, things are

starting to change for the good, with JALs profit outlook more positive than ANAs. While ANAs

revenues are estimated to be much stronger than JALs in the full-year, JALs operating profit is

expected to be double ANA levels, with net income almost 6 times ANA levels.

JAL emerged as the second largest initial public offering after Facebook and the 4 thlargest IPO in

Japan after being declared the 3rdhighest bankruptcy in Japans history.


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24 | P a g e

Financials

Consolidated Balance Sheet

JAPAN AIRLINES CORPORATION

CONSOLIDATED

Financial Statements

Consolidated Balance Sheet Millions

of Yen

As of March 31, 2003 2004 2005 2006 2007 2008 2009

Current assets 530,32

2

519,07

6

683,17

4

687,31

9

707,31

1

810,31

5

487,029

Fixed assets 1,641,

962

1,594,

219

1,479,

403

1,473,

913

1,383,

253

1,310,

534

1,262,5

80

Tangible fixed assets 1,382,

615

1,322,

281

1,191,

744

1,152,

762

1,116,

391

1,037,

117

1,031,0

21

Flight equipment 915,93

8

872,25

6

814,76

0

791,09

8

742,54

5

721,96

7

723,590

Intangible assets 53,127 66,663 69,854 72,075 77,007 82,838 79,548

Investments 206,21

9

205,27

4

217,80

4

249,07

6

189,85

3

190,57

9

152,010

Deferred Charges 123 76 6 669 1,933 1,068

Total assets 2,172,

284

2,113,

418

2,162,

654

2,161,

240

2,091,

233

2,122,

784

1,750,6

79

Current liabilities 615,346 560,559 569,140 644,844 659,796 661,229 649,897

Short-term borrowings 23,035 10,782 11,611 6,562 4,810 3,084 2,911

Current portion of bonds 67,495 23,700 15,000 30,000 70,000 28,000 52,000

Current portion of long-term debts 127,53

7

118,54

5

110,63

6

113,04

5

110,54

9

130,33

5

128,426

Non-current liabilities 1,279,

158

1,369,

446

1,372,

993

1,340,

879

1,099,

563

990,48

3

904,010

bonds 218,70

0

225,00

0

310,00

0

280,00

0

130,22

9

102,22

9

50,229

Long-term debts 864,38

5

936,39

0

862,22

3

800,00

1

705,95

7

651,41

6

567,963

Accrued pension and severance

costs

143,67

0

163,12

8

149,66

5

139,75

3

129,06

1

95,485 94,911

Total liabilities 1,894,

505

1,930,

005

1,942,

133

1,985,

724

1,759,

360

1,651,

713

1,553,9

07

Minority interests 23,522 24,139 25,774 27,449


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25 | P a g e

Common stock 100,00

0

100,00

0

100,00

0

100,00

0

Capital surplus 147,17

5

136,67

8

136,14

1

136,14

5

Retained earnings 23,481 -

65,031

-

34,978

-

90,186

Other retained earnings, etc. -

16,399

-

12,373

-6,416 2,109

Total stockholders' equity 254,25

6

159,27

3

194,74

6

148,06

6

Total of liabilities, minority interest

and

stockholders' equity 2,172,

284

2,113,

418

2,162,

654

2,161,

240

Stockholder's equity 277,235 447,266 384,014

Common stock and preferred stock 174,25

0

251,00

0

251,000

Capital surplus 79,096 155,83

6

155,806

Retained earnings 24,776 41,320 -21,874

Common stock in treasury, at cost -887 -890 -917

Valuation, translation adjustments

and other

33,851 6,668 -

209,358

Net unrealized gain on other

securities, net of taxes

3,557 2,578 -1,440

Net unrealized gain on hedging

instruments, net of taxes

35,314 8,167 -

201,816

Translation adjustments -5,020 -4,077 -6,101

Minority interests 20,785 17,136 22,115

Total net assets 331,87

3

471,07

0

196,771

Total liabilities and net assets 2,091,

233

2,122,

784

1,750,6

79


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Consolidated Statements of Operations


CONSOLIDATED

Financial Statements

Consolidated Statements of Operations Million

s of Yen

Years ended March 31, 2003 2004 2005 2006 2007 2008 2009

Operating revenue 2,083,

480

1,931,

742

2,129,

876

21993

85

2,301,

915

2,230,

416

1,951,1

58

Operating expenses 2,072,

891

1,999,

387

2,073,

727

22262

20

2,278,

997

2,140,

403

2,002,0

43

Operating income 10,58

9

-

67,64

5

56,14

9

-

26834

22,91

7

90,01

3

-50,884

Non-operating income 59,24

9

43,02

4

64,44

6

26378 33,83

4

20,82

5

31,341

Non-operating expenses 53,99

8

47,31

7

50,79

0

41152 36,17

5

41,02

1

62,634

Ordinary income 15,84

0

-

71,93

8

69,80

5

-

41608

20,57

6

69,81

7

-82,177

Extraordinary gain 11,99

9

6,923 6,571 30471 52,41

3

36,23

2

44,604

Extraordinary loss 23,75

8

17,13

4

31,71

0

35303 20,93

3

76,21

7

21,440

Income before income taxes and

minority interests

4,081 -

82,14

8

44,66

6

-

46440

52,05

5

29,83

2

-59,014

Income taxes : Current 8,100 8,854 7,897 8419 9,953 4,897 3,181

Income taxes : Deferred -

16,46

8

-

3,092

4,251 -9966 54,42

4

6,894 22

Minority interests 804 709 2,420 2350 3,945 1,118 977

Net income 11,64

5

-

88,61

9

30,09

6

-

47243

-

16,26

7

16,92

1

-63,194


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27 | P a g e

Non-operating income & expenses (Consolidated)


CONSOLIDATED

Non-operating income & expenses

(Consolidated)

Millions

of Yen

Years ended March 31, 200

3

2004 2005 2006 2007 2008 2009

Non-operating income 59,

249

43,024 64,446 26,378 33,834 20,825 31,341

Interest and dividend income 2,9

31

2,928 3,169 3,713 5,941 7,224 5,303

Flight equipment purchase

incentives

42,

075

29,260 48,386

Exchange gain, net 424 2,075 12,170 18,036 4,070

Equity in earnings of affiliates 340 1,221 1,514 1,899 2,481 2,176 1,630

Gain on derivative instruments 17,462

Other non-operating income 13,

900

9,190 9,300 8,593 7,374 7,354 6,944

Non-operating expenses 53,

998

47,317 50,790 41,152 36,175 41,021 62,634

Interest expense 34,

657

28,503 24,875 21,811 19,068 20,009 17,536

Exchange loss, net 1,9

75

19,571

Loss on sales and disposal of flight

equipment

10,

637

13,946 17,417 12,171 12,257 11,871 7,633

Loss on derivative instruments 8,874

Other non-operating expenses 6,7

27

4,866 8,496 7,169 4,849 9,140 9,018


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28 | P a g e

Exhibits


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30 | P a g e


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References

https://www.jal.com/en/investor/library/information/

http://online.wsj.com/news/articles/SB10000872396390444464304577535042332731160

http://www.economist.com/node/21562941

http://skift.com/2012/09/18/the-worlds-biggest-turnaround-story-japan-airlines-relists-in-huge-ipo/

http://centreforaviation.com/

http://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-

plan.html

http://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-

morgue.html

http://en.wikipedia.org/wiki/Japan_Airlines

http://www.jal.com/en/ir/finance/pdf/10019.pdf
https://www.jal.com/en/investor/library/information/https://www.jal.com/en/investor/library/information/http://online.wsj.com/news/articles/SB10000872396390444464304577535042332731160http://online.wsj.com/news/articles/SB10000872396390444464304577535042332731160http://www.economist.com/node/21562941http://www.economist.com/node/21562941http://skift.com/2012/09/18/the-worlds-biggest-turnaround-story-japan-airlines-relists-in-huge-ipo/http://skift.com/2012/09/18/the-worlds-biggest-turnaround-story-japan-airlines-relists-in-huge-ipo/http://centreforaviation.com/http://centreforaviation.com/http://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-plan.htmlhttp://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-plan.htmlhttp://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-plan.htmlhttp://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-morgue.htmlhttp://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-morgue.htmlhttp://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-morgue.htmlhttp://en.wikipedia.org/wiki/Japan_Airlineshttp://en.wikipedia.org/wiki/Japan_Airlineshttp://www.jal.com/en/ir/finance/pdf/10019.pdfhttp://www.jal.com/en/ir/finance/pdf/10019.pdfhttp://www.jal.com/en/ir/finance/pdf/10019.pdfhttp://en.wikipedia.org/wiki/Japan_Airlineshttp://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-morgue.htmlhttp://www.bloomberg.com/news/2012-09-13/jal-s-8-5-billion-rebirth-took-lessons-from-crash-site-morgue.htmlhttp://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-plan.htmlhttp://www.bloomberg.com/video/57217166-japan-airlines-to-cut-third-of-staff-in-turnaround-plan.htmlhttp://centreforaviation.com/http://skift.com/2012/09/18/the-worlds-biggest-turnaround-story-japan-airlines-relists-in-huge-ipo/http://www.economist.com/node/21562941http://online.wsj.com/news/articles/SB10000872396390444464304577535042332731160https://www.jal.com/en/investor/library/information/

turnaround of japan airlines.pdf

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