UPDATE 7-Japan Airlines turns to govt for 'huge' bailout

Published: 29 Oct 2009 02:48:51 PST

* JAL starts talks with state-backed turnaround body

* Transport minister says JAL revival 'extremely important'

* Task force says airline needs 'huge' govt bailout

* Govt considers legislation to slash pension costs-media

* Shares close up 2.7 pct, CDS spreads at distressed levels (Adds background)

TOKYO, Oct 29 - Japan Airlines Corp said it would apply for assistance from a state-backed corporate turnaround body, setting the stage for a large injection of public funds into the troubled airline.

The government has been scrambling to secure financing and map out a restructuring plan for JAL, which is headed for its fourth loss in five years, weighed down by $15 billion in debt and crippling pension costs.

JAL, Asia's largest airline by revenue, said it had started preliminary talks with the Enterprise Turnaround Initiative Corp, a body of turnaround specialists established this month to buy the debt of and invest in struggling but viable firms.

"JAL will need huge money, huge public money, through both capital and loans," Shinjiro Takagi, the head of a government-led task force that has been crafting JAL's revival plan, told a news conference. "JAL has three main problems: it has too many big planes, too many routes and a bloated structure," said deputy head Kazuhiko Toyama.

The ETIC, which can draw on up to 1.6 trillion yen ($17.8 billion) in state-guaranteed funding, will decide whether it can help JAL after studying its assets and its prospects for recovery -- a process that could take 1 to 3 months.

JAL will still need to gain the support of its main creditors, which include the state-owned Development Bank of Japan and the country's three top lenders, as well as address a massive pension shortfall that may need new legislation to fix.

It may need to secure financing to keep operating while the ETIC deliberates on support. The task force has been pushing for a 180 billion yen bridging loan, worried JAL could run out of cash as early as next month, sources have told Reuters.

"It's not as if everything is OK and now JAL will restructure and the stock price will climb. We've gone forward just one step at this point," said Takashi Ushio, head of the investment strategy division at Marusan Securities.

MORE THAN HALF THE SKY

A decision by the ETIC not to support JAL would likely push the airline into bankruptcy, which would risk disrupting air travel and would likely cost taxpayers far more than an out-of-court restructuring, the task force said.

Dealing with the ailing airline is one of a long list of problems confronting Prime Minister Yukio Hatoyama's new government, which took office last month after his Democratic Party trounced its long-ruling conservative rival on a platform that promised to focus on the interests of consumers and workers.

"The Democratic Party of Japan is backed by labour unions and there are risks that the state-financed bailout will be determined without fixing real problems," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center.

"The widely held perception in the market is that the DPJ government favours anti-business measures and my concern is that such a perception could be strengthened depending on the government's handling of the JAL revival efforts."

Transport Minister Seiji Maehara said reviving the airline was vital to Japan's economy but that he would leave the ETIC to make its own decision on whether JAL was worthy of aid.

"JAL's operation covers more than a half of Japan's sky and considering its global network and how it connects regional economies, its revival is extremely important for Japan's economy as well as for our policy," Maehara told parliament.

Despite its woes, JAL is being wooed by two U.S. airlines keen to gain access to its network in Asia and to gain a larger foothold in Japan ahead of an expansion of Haneda airport.

JAL, a member of the Oneworld airline alliance, has held separate talks about business ties and possible capital injection with AMR Corp's American Airlines, its alliance partner, and Delta Air Lines of the rival SkyTeam group.

REJECTED SO FAR

The task force has asked creditors to accept a total of 250 billion yen in loan waivers and debt-for-equity swaps and has sought a total of 300 billion yen in fresh capital, a good part of which would come from public funds, sources have said.

The banks have so far rejected the task force's requests, saying they are being asked to shoulder too much of the financial burden of reviving JAL and due to a lack of clarity on how much the state would be willing to invest, sources have said.

JAL's pension shortfall, which the airline estimated at 330 billion yen as of March, is another hurdle. Japanese media says the government may craft legislation to force payout cuts on workers and retirees, which under current regulations can be blocked if just one-third of them oppose the move.

The task force will disband as the job of reviving JAL now shifts to the ETIC. It is unclear how much of the task force's due diligence and other work will be used in shaping or expediting the ETIC's decision.

JAL shares closed Thursday up 2.7 percent at 115 yen, boosted by media reports it was planning to seek the turnaround body's help. The stock is still down 46 percent so far this year.

The airline's 5-year credit default swaps have been quoted above 2,000 points, suggesting investors see the risk restructuring could lead to a "credit event", triggering a payout on CDS contracts that insure against corporate failure.

Some analysts believe it is a foregone conclusion the government will save JAL from bankruptcy.

"It's not like you have a whole lot of small and medium-sized companies dependent on the business like with a car company, but it's a big company and it's got a powerful union," said Jesper Koll, chief executive of Tantallon Research Japan. "A debate (over whether to use taxpayers' money) is not going to happen. This is JAL, it's the national carrier, it's not Pan Am." ($1=90.77 Yen)