By Yasuhiro Takizawa and Fukutaro Yamashita

The Japanese government chose to effectively place Japan Airlines under its control due to fears that 60 per cent of the flights that fly over the nation would be grounded if JAL's business situation continued to deteriorate.

Construction and transport minister Seiji Maehara has shown he will not hesitate to use public funds to rehabilitate JAL if circumstances warrant. At the same time, the government plans to ask JAL's top management, rank-and-file employees and former employees to take on their share of the burden of corporate reconstruction.

At a press conference Thursday, Maehara was asked why the government would get so involved in the reconstruction of just one company.

"Because JAL operates 60 per cent of the flights in the skies over this country," the minister replied.

The corporate reconstruction of JAL is a burdensome legacy left behind by the former administration. There are many possible ways to reconstruct the airline, but Maehara has consistently rejected the idea of legal liquidation since he took office in September.

Maehara remembers the case of Swissair, the Swiss national carrier that went bankrupt in 2001.

Operations of all Swissair planes stopped for 1-1/2 days after the airline announced in October 2001 that it had initiated bankruptcy procedures, stranding more than 50,000 passengers around the world.

Strapped for funds, the airline could not pay for fuel. In Britain, Swissair planes were seized by authorities because the company could not pay navigation service fees.

Halted flights would not be the only undesirable consequence if the government lets JAL go out of business. In that case, All Nippon Airways would become the only major airline for domestic flights, resulting in less competition and limited choices for customers.

Experts faced tough opposition

To maintain the current situation of two major airlines competing for domestic passengers, JAL needs to return to sound financial condition.

Maehara initially relied on a task force of corporate turnaround experts to help reconstruct JAL, which was established by the government September 25. The task force was placed under Maehara's direct supervision.

On October 13, the task force presented a draft plan to Maehara, JAL and its major financing institutions, suggesting ways to revive the airline at banks' expense. In the plan, the task force urged the Development Bank of Japan, Mizuho Corporate Bank, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Banking Corp and other banks to forgive or accept debt-for-equity swaps for 300 billion yen in debts.

The banks responded angrily. As an executive of one institution said: "Who on Earth is responsible (for JAL's corporate crisis)? Why do only the banks have to shoulder a heavy burden now?"

The draft also mentioned the possibility of the government injecting public funds into JAL under the Industrial Revitalization Law.

This in turn infuriated the government, notably the finance ministry. "If we inject tax money into JAL, the process of reconstructing the airline must be transparent to taxpayers," a senior ministry official said.

After hearing the objections to the task force's ideas, the government eventually decided that JAL's reconstruction should be conducted under its control, not initiated by the task force, and that a framework should be established in which each party involved would share the burden of reconstruction.

JAL also has to fight against time. The airline needs 180 billion yen in a bridging loan in November.

The government began to worry that JAL would become tight for money while negotiations between the task force, financing institutions and other interested parties bogged down, forcing the airline to stop all payments and go bankrupt.

JAL plans to cut 9,000 jobs from its entire corporate group within three years. There also is an unspoken agreement that company President Haruka Nishimatsu will step down after measures to revive the airline get on the right track.

As company employees and top management are being forced to shoulder their share of the burden of reconstruction, the next target was corporate pension benefits.

The turning point came on October 21, when the construction and transport ministry, finance ministry and health, labour and welfare ministry began closed-door discussions on the possibility of drafting a special law to reduce the level of JAL's corporate pension benefits.

Around this time, government officials and other people involved in JAL's reconstruction began to agree that the issue had become too big for the transport ministry and Maehara to handle alone.

Since then, the government has been working to create a framework under which the transport and other related ministries will work together to draw up drastic measures to reconstruct JAL.

Pension issue proving hurdle

The proposal to cut payments to JAL pension recipients has become the most testing aspect of the attempt to turn around the ailing carrier's fortunes.

Finance minister Hirohisa Fujii made it clear Thursday evening that he believed a resolution of JAL's pension issue was a precondition for providing government support to the airline.

"Only when we've come up with a plan that can win over sensible public opinion can we provide government support (for JAL's reconstruction)," Fujii said.

The government is considering taking extreme measures such as bringing in special legislation to reduce the level of pension payments. It is pondering such moves because corporate pensions are similar in nature to deferred payment of wages and the rights of pension recipients are strictly guaranteed under law.

To reduce pension payments, the law on defined-benefit corporate pension plans stipulates that two-thirds or more of all recipients, current and future, must agree to cuts.

Even if a company is legally liquidated or a pension fund is dissolved, the firm must cover its shortfall of pension reserves and pay pensions at the original level in a lump sum.

The only case in which a company can force recipients to accept reduced payments is if it goes into bankruptcy, on the condition of liquidation.

However, it is highly unlikely that former employees, for whom a cut in payments would directly affect their livelihoods, would agree to a reduction.

It is believed that the government will look at including special regulations, such as relaxing procedural conditions, in the drawing up of special legislation.

A lawyer well versed in the pension system expects that the government will initially propose lowering to a straight majority the level of support among recipients needed to reduce pension payments.

Another likely option would be to enforce a debt-equity swap of JAL's pension debt. The airline would issue new stocks to cover part of its pension fund shortfall, to which it should have contributed from profits.

"We can reduce debt and boost capital at the same time," a source close to the company said. "It would still be possible to restore pension levels if business results pick up."

But observers are anxious that the deficit in JAL's pension fund assets will grow if the price of the airline's shares fall.

Article 29 of the Constitution states, "The right to own or to hold property is inviolable."

To avoid violating this article, the government is expected in the special legislation to enforce strict conditions on the type of company that would be able to cut pension payments.

Eligible companies would include those that accept public fund injections, and those that serve the public such as transportation firms.