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Japan Airlines bankruptcy filing expected Tuesday

Japan Airlines bankruptcy filing expected Tuesday

TOKYO – Japan Airlines is set to file for bankruptcy Tuesday, ending months-long speculation about its fate and writing Japanese corporate history as one of its biggest-ever failures.

The country’s flagship carrier, called JAL for short, will likely convene a special board meeting in the afternoon before filing for protection from creditors under the Corporate Rehabilitation Law — Japan’s version of Chapter 11, according to Kyodo News agency. The filing will be followed by a restructuring plan crafted by a government-backed corporate turnaround body.

President Haruka Nishimatsu is expected to resign. Leadership of the company will be handed over to Kazuo Inamori, a buddhist monk and founder of electronic components behemoth Kyocera Corp. and Japan’s No. 2 mobile carrier KDDI Corp.

The government will also offer assurances that it backs the company’s rehabilitation and intends to keep JAL flying.

“The government wants to continue to support JAL to ensure its continued stable and safe operations,” said transport minister Seiji Maehara hours before the expected filing.

The day’s events culminate a process that began in October when JAL — saddled with debts of 1.5 trillion yen ($16.5 billion) — first turned to the Enterprise Turnaround Initiative Corp. for help. Under a prepackaged restructuring strategy, it will embark on a massive overhaul to shed the fat and inefficiency that hobbled Asia’s biggest airline.

“As an airline product, it’s always had a high reputation,” said Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a Sydney-based aviation market research firm. “But from a cost base, it’s generally been something of an industry joke.”

The plan calls for about 15,600 job cuts, or a third of JAL’s work force, by March 2013 and will require the airline to halve the number of its subsidiaries which span everything from hotels to credit cards, according to Kyodo. The Enterprise Turnaround Initiative Corp. will invest about 300 billion yen ($3.3 billion) in the carrier, and JAL’s main lenders have been asked to waive about 350 billion yen in liabilities.

What may take longer to emerge is the winner of a fierce tug-of-war between Delta Air Lines and American Airlines for a slice of JAL’s business. Despite its woes, the airline’s access to Asia is a mouthwatering prize for foreign airlines.

Investors Tuesday braced for a seemingly inevitable removal of the airline’s shares from the Tokyo Stock Exchange.

The issue, which has lost more than 90 percent of its value over the last week, tumbled another 20 percent Tuesday to 4 yen. The company is now essentially worthless, with a market capitalization of about 10.9 billion yen ($120 million) — less than the price of one Boeing 787 jet.

It’s a humbling outcome for Japan’s once-proud flagship carrier which was founded in 1951 and spent its early years owned by the state. Along with Japan’s economy, it expanded quickly in the decades after World War II and was privatized in 1987.

But it soon became the victim of its own ambitions.

When Japan’s property and stock bubble of the 1980s burst, risky investments in foreign resorts and hotels undermined its bottom line. JAL also shouldered growing pension and payroll costs, as well as a big network of unprofitable domestic routes it was politically obligated to maintain.

More recently, JAL’s passenger traffic has slowed amid the global economic downturn, swine flu fears, competition from Japanese rival All Nippon Airways Co. and a spate of safety lapses that tarnished its image. It lost 131.2 billion yen ($1.4 billion) in the six months through September.

Its four government bailouts since 2001 only exacerbated JAL’s problems, officials now say. Maehara last week blamed previous administrations, controlled by the opposition Liberal Democrats, for propping up an ailing JAL for years without reforming the company.

Passengers seemed to agree as much.

“I guess they did not work in earnest and so fell into this situation,” said Isao Sasaki, 72, who waited in line Tuesday at a JAL check-in counter at Tokyo’s Haneda Airport. “Weren’t they spoiled as they always had protection from the government?”

Delta Air Lines — the world’s biggest airline operator — and rival American Airlines are courting JAL with massive financial offers as the U.S. carriers seek to expand their Asian networks.

Delta and its SkyTeam partners have offered $1 billion, including $500 million in cash to lure JAL away from American’s oneworld alliance. American Airlines and its partners say they are ready to inject $1.4 billion cash into the Japanese airline, up from a previous $1.1 billion offer.

As of March, JAL’s fleet consisted of 279 aircraft, mainly from Boeing Co. It served 220 airports in 35 countries and territories, including 59 domestic airports.

It carried 11.7 million international passengers last fiscal year and 41.2 million travelers domestically. International traffic was down 12.4 percent from the previous year, while the domestic passenger count fell 1.8 percent.

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China finds $84bn local government debt irregularities

National Audit Office said breaches included “irregular credit guarantees”, “irregular collateral” and “fraudulent and underpayment of registered capital”.

There are growing concerns about the amount of bad loans being held by local governments.Official figures show they held debt of 10.7tn yuan ($1.7tn; £1.1tn) in 2010.

“The State Council is studying proposals to enhance local government debt management and to address fiscal and financial risks,” the audit office said in the report.
‘Again and again’
Continue reading the main story
“Start Quote
A lot of the local debt will be absorbed by the central government”
Michael Pettis Peking University

Local governments have been borrowing money from Chinese banks to fund projects aimed at maintaining economic growth.

According to the China Banking Regulatory Commission, local governments took up 80% of total bank lending in China at the end of 2010.

However, analysts said that although the lending had helped to spur investment and boost growth, it was now weighing on local governments.

“Whenever you look at lending that spurs growth miracles, it starts off with an increasing ability to pay the debt,” Professor Michael Pettis of Peking University told the BBC.

“But in every case that ability fades. That is the process that is happening in China,” he explained. “We are going to see stories like this again and again.”
Easing burden?

In October last year, China allowed four local governments to sell bonds for the first time in 17 year. It was hoped the sale would help them pay their loans.

However, the central government put a limit on the amount of bonds the local governments could issue despite the fact that there was a lot of interest among investors.

According to the Xinhua news agency, Shanghai’s bond sale received bids for three times the amount of bonds on offer.

As a result, many of the local governments still have sizeable debts and while the central government may let them raise money, it may also have to take further measures to solve the problem, analysts said.

“A lot of the local debt will be absorbed by the central government,” said Mr Pettis of Peking University.

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Next sales on target as online business outperforms

Total sales at the clothes retailer between 1 August and 24 December rose 3.1% compared with a year earlier, ignoring the effect of rising VAT.Next Directory sales grew 16.9%.
But its High Street business, which sees some two-thirds of sales, recorded a 2.7% fall, sending Next’s share price 4.3% lower in early London trading.Next has seen its share price rise 39% over the past 12 months, easily outperforming a 5% fall in the broader FTSE 100 index.Shares in some other big retailers also fell in the wake of Next’s announcement, which was the first trading update of the year from a major High Street chain.

Home Retail Group – owner of Homebase and Argos – dropped 4.7%, while car accessories chain Halfords was down 3%.
Profit margins
Next reconfirmed its full-year profits forecast at £565m, narrowing the range to plus-or-minus £7m.
The total sales growth figure of 3.1% was in the middle of its previous guidance of 2.5% to 4%, despite the “slightly disappointing” numbers from its 500 stores.

Next expressed uncertainty in its statement as to why the High Street performance had been so weak, particularly considering that last year’s sales had been hurt by cold weather.One possibility cited in its statement was its long-standing policy of not cutting the price of its products in the run-up to Christmas.

“Next’s own admission of disappointment is a setback to its hitherto robust growth story,” said Richard Hunter, head of equities at brokerage Hargreaves Lansdown.

“The fact that the company did not discount its products in the approach to Christmas may have been a factor, whilst the more general consumer malaise has yet to be corroborated by updates from its rivals.

“In addition, higher sales do not necessarily translate to higher profits, so the fact that the company has been able to maintain operating margins may yet play into its hands.”

Richard Perks, analyst at research firm Mintel, confirmed this view.

“These figures from Next are really pretty good I think,” he told the BBC.

“OK, Next may be – in sales terms – held back by the fact that it wasn’t discounting, but in profit terms it will be a lot better off.”

Mr Perks said he was optimistic about retail sales across the UK – predicting a 4% rise in December.

“People are reluctant to cut back any more on retail, and are cutting back elsewhere, particularly on leisure,” although he added that the rising cost of food was still crimping spending.

Next said it was cautiously optimistic about its end of season sales – which began after the end of its latest reporting period – and expected results to be slightly ahead of budget.

The retailer said it expected sales this year to be helped by a probable freeze in the price of its products.

It forecast generating £200m surplus cash in the year ahead, which it said it would return to shareholders via share buybacks.

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