TOKYO, Dec 24 (Reuters) - A decision on whether Japan Airlines will be kept afloat with taxpayers' money or allowed to go bankrupt will be made over the next few weeks.
At the same time JAL is being courted by American Airlines and Delta Air Lines. The U.S. carriers have made rival offers of financial aid, keen to gain a greater foothold in Japan and access to JAL's network to the rest of Asia.
JAL says it will make a decision on which overseas partner it will choose by early January.
Following are possible scenarios for the restructuring of Asia's largest carrier by revenue.
JAL WINS SUPPORT FROM STATE-BACKED TURNAROUND FUND
The fact that JAL's share price is holding steady at around 100 yen suggests investors see an out-of-court restructuring under the auspices of the state-backed Enterprise Turnaround Initiative Corp of Japan (ETIC) as the most likely outcome.
JAL applied to the ETIC for support in late October. The ETIC has finished basic due diligence on JAL's assets and is aiming to present a request to the main creditors soon for their help in lowering JAL's debt, sources familiar with the matter said.
The ETIC's combined request for debt forgiveness and debt-for-equity swaps will likely be around the same size as the 250 billion yen ($2.7 billion) sought by a government-appointed task force that worked on JAL's revival plan before its application to the ETIC.
However, there could be some provisions to make the deal more palatable to creditors, which include two state-owned lenders and the country's three largest private banks. The creditors remain keen to work with the ETIC to keep JAL out of bankruptcy court.
The ETIC, which can draw on 1.6 trillion yen in state-guaranteed funds to inject capital and buy the debt of troubled but viable Japanese companies, is expected to make a decision on whether to support JAL next month.
The disbanded government-appointed task force had estimated JAL would need 300 billion yen in fresh capital.
The ETIC has said it will support JAL only if it believes the carrier has the potential for revival, but it could face intense political pressure depending on the stance taken by the leaders of the ruling Democratic Party, who have so far given conflicting messages on the extent to which the state should support JAL.
JAL IS RESTRUCTURED OR LIQUIDATED IN BANKRUPTCY COURT
Chances of JAL facing a Chapter 11-style bankruptcy appeared to rise after Finance Minister Hirohisa Fujii said earlier this week that the government would not guarantee loans and other funding to JAL.
The state-backed Development Bank of Japan has set up a 100 billion yen credit line for JAL on condition that the government guarantee it. JAL has used part of it but the DBJ may not lend the rest without a government guarantee.
JAL's earnings have deteriorated sharply and it is burning through cash. There is therefore a risk that it could run out of money for operations before the ETIC can make a decision to support it and start supplying it with funds.
The ETIC has told JAL's creditors that it has not ruled out the possibility of bankruptcy proceedings, sources said. Moreover, some Democratic Party lawmakers are keen to take a tough stance on JAL, given their view that many of its problems originate from the opposition Liberal Democratic Party's rule.
JAL must also get approval from two-thirds of retirees and employees for a reduction in pension benefits so it can cut its pension shortfall, estimated at 330 billion yen in March, to a more manageable size. This is a prerequisite of ETIC support.
The carrier said last week that just under 65 percent of retirees who responded to its survey had agreed to pension cuts, making it confident its proposals would be approved. But the final tally will not become clear until a deadline on Jan. 12.
The government had said it was considering special legislation to push through pension cuts, but it is unclear if such a bill would pass given that it could be interpreted as breaching constitutional protection of property rights.
There are two options for JAL's bankruptcy. One is a reorganisation under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States and often used with large firms. The other option is a court-brokered liquidation.
The ETIC has said it could support a company that has filed for a court-led restructuring. The precedent is consumer electronics retailer Matsuya Denki, which filed for bankruptcy before receiving aid from the ETIC's predecessor, the Industrial Revitalisation Corp of Japan (IRCJ), about six years ago.
STAYS WITH AMERICAN & ONEWORLD OR DEFECTS TO DELTA & SKYTEAM
JAL strongly denied a recent report in the Asahi newspaper that it would likely choose to end its ties with American Airlines and the Oneworld alliance and join hands with Delta and the rival Skyteam airline group.
JAL said it was not leaning either way and would make a decision by early next month.
Some analysts say forging ties with Delta would make sense for JAL because the two have many overlapping routes, offering the best chance to lower its bloated cost base. Delta, the world's largest carrier, has estimated an alliance with it would bring a boost to JAL of $400 million in annual revenues.
American Airlines, a unit of AMR Corp, has emphasised the risk of switching alliances with JAL's operations in such a precarious state. It estimates JAL could lose $500 million in revenues over a two-year transition period if it left Oneworld.
American has also argued that Delta and JAL would be unable to get antitrust immunity under a recently signed "open skies" agreement between the U.S. and Japan because SkyTeam would control the bulk of travel between the two countries.
Another potential strong point for the American camp is its offer of $1.1 billion in direct equity investment, along with private equity firm TPG and other Oneworld members. That is more than double the equity investment component of the roughly $1 billion financial aid package proposed by Delta and SkyTeam. ($1=91.25 Yen) (Reporting by Nathan Layne and Nobuhiro Kubo; Editing by Michael Watson)