The unfortunate fate of Japan Airlines (JAL) should be a vivid demonstration of how companies that have been politically privileged, kept afloat and protected (zombie companies) despite continued financial losses, end up being malignantly mismanaged and eventually ran aground on a surfeit debt ($25 bilion).
This from the Wall Street Journal, (bold emphasis mine)
``Marking a fundamental shift to this nation's corporate culture, Japan AirlinesCorp. filed the country's largest-ever bankruptcy petition by a nonfinancial company, kicking off a painful, three-year restructuring that will have lasting effects on hundreds of thousands of people.
``Undone by government ties that propped up excessive spending, the former flag carrier now will significantly shrink its operations. A third of JAL's work force, 15,700 employees, will be axed. Thousands of retail shareholders will be wiped out. And bondholders will likely take a fat reduction to their holdings. Employees at JAL's sprawling group subsidiaries in Japan and abroad also will be affected...
``A pillar of Japan Inc. founded in 1951 to help the country rise from the ashes of World War II, Asia's largest airline by revenue sought court protection from creditors on Tuesday to grapple with a debt load of $25 billion, a level well above its cash flow.
``Much like Washington's takeover of General Motors Co., JAL will be aided by a $10 billion lifeline from its government through capital injections and credit and will spread billions of dollars in losses across an already weak Japanese economy. Bureaucrats strong-armed Japan's banks, the airline's biggest creditors, into forgiving more than $8 billion of JAL's debt. Retirees and employees accepted more than $11 billion in pension cuts, representing a 30% reduction for retirees and a 50% cut for current employees...
Kevin Duffy of Mises Blog aptly enumerates on the decade long sins of JAL which led to this...
From Mr. Duffy (all bold highlights mine),
``For the record, JAL offers a quick primer on how government intervention destroys an economy:
1. State ownership and control. "Though financial profligacy was one cause of JAL's demise, its close ties with the government -- even after it was privatized in 1987 -- effectively crippled the carrier. Pork-barrel aviation policies drawn up by transport bureaucrats caused JAL to fly unprofitable routes for decades."
2. Moral hazard of implicit government backing. The 1987 IPO (and others like it, such as Nippon Telephone & Telegraph) were wildly successful in part because investors felt the government wouldn't allow them to lose money.
3. Bubble behavior. "When Japan Inc. rose to glory in the late 1980s, gobbling up trophy icons such as New York's Rockefeller Center, JAL also spread its tentacles around the world by buying the Essex House in New York and setting up resorts in Hawaii."
4. Endless government lifelines. According to CNBC, JAL was bailed out four times by the Japanese government over the past decade".
For companies that had undergone the same 'bailout' process during this crisis, the JAL experience would seem as the most likely outcome, in the fullness of time.
