Fundraising galore, corporate bond issuances at record high in June, and government enforced inefficiency at Japan Air Lines

15 Responses to “Fundraising galore, corporate bond issuances at record high in June, and government enforced inefficiency at Japan Air Lines”

1. Joe Jones on July 2nd, 2009 8:21 pm

   There are some historical forces at work here. Back in the 70s and 80s, the Japanese government had basically split up the airline market between JAL, ANA and JAS, giving JAL all the international routes and some domestic trunk routes. ANA got a larger share of domestic trunk and a modest share of feeder routes. Then JAS got whatever was left. Although the market kind of sort of deregulated in the 80s, and JAL later acquired JAS, this status quo still sort of continues; ANA is still a much smaller international player than JAL (though catching up in leaps and bounds), while JAL still retains a lot of the podunk service it inherited from JAS’s old monopolies.

2. Ken Worsley on July 2nd, 2009 10:43 pm

   Joe, Thank you for brining up the historical aspect. I didn’t have enough time to get into it when writing and was hoping someone would bring it up here.

   JAL was not fully privatized until 1987, though that was still quite some time ago. I think the point here is that the Transport Ministry is way out of bounds in its micromanagement of JAL’s business model and finances. It should not have the power to declare which routes are in the “national interest” - I’ve seen no proof that it is capable of making such a discrimination. The market itself only has that power. Forcing JAL into keeping routes that lose money and then saying it’s fine because the government will subsidize it with taxpayer money is absurd.

   The Ministry’s solution - keep JAL afloat with taxpayer money while allowing job and wage cuts so long as certain routes are not cut - is absurdly shortsighted and prevents JAL’s management from making the decisions that might actually improve the business.

3. BBC on July 2nd, 2009 11:30 pm

   What’s your take on this?

   http://news.bbc.co.uk/2/hi/business/8127926.stm

4. Ken Worsley on July 2nd, 2009 11:51 pm

   My take on it? I’m a business owner in Japan who doesn’t get to submit input for the Tankan survey, just like most I know. Very similar to what I’ve been saying and what Mr Buerk has to say in the article:

   Recent indicators for Japan’s economy have been good, but so savage has been the recession that any improvement is from a very low level

   Though it’s worth remembering that not all recent indications have been good. Unemployment is still rising, and job offers per applicant are at their lowest level ever. January-March quarter GDP figures were so bad that it certainly looked like it couldn’t get worse, though it looks to me that GDP was down another 0.3% or so in April against March. Even a much smaller decline in the April-June quarter is still a decline against the previous quarter.

   From a recent interview with Professor Noriko Hama:

   “Please do not believe all the talk about the green shoots of the Japanese economy, which I suspect you might have heard. We are in pretty bad shape.”

   (Try to ignore the Krugman part.)

5. Matt on July 3rd, 2009 7:24 am

   Jeez, I can’t believe I’m about to say this, but…

   It is my opinion that this large bear market rally was a result of a concerted effort by governments to push up the prices of all securities in order to provide a temporary fund raising window. Now that secondary equity and new fixed income issuances are slowing down, the equities and junk are sputtering again. No surprise.

6. YJ on July 6th, 2009 11:58 am

   So your suggesting that companies that only exist by the grace of government’s goodwill (who not only provide them with funding, but also provide the entirety of the infrastructure that they utilize) should somehow not be at responsible to that government’s interests?

   I mean, Airlines are in general not especially profitable ventures given even the most surfacial analysis (hence the constant need for government bailouts), but i think if you were to actually do a thorough analysis of the industry as whole, you would find that without massive government subsidization (airports, air traffic control, radar systems, R&D etc) this is an industry that wouldn’t exist at all. As the government is a major stakeholder in JAL it seems stupid to not expect them to be getting something out of it.

7. Ken Worsley on July 6th, 2009 1:50 pm

   YJ, But why erect more barriers in front of their path towards profitability?

8. YJ on July 6th, 2009 3:20 pm

   because the Japanese government, as governments are wont to, is not interested in profits - its interested in serving its interests and the interests of its constituents. Not that such actions are limited solely to governments - If im a whiteknight who has just saved a corporation from bankruptcy and I want the company to put my nitwit son on their board, sure thats quite potentially a barrier to profitability (or perhaps more profitability), but it would still be serving my interests perfectly fine (getting my son a cushy board job etc) and given that i just saved the company from bankruptcy, i doubt they would complain much.

   And realisitically, there could be other means for doing this type of thing. The government could simply subsidize certain routes for the airline industries, but I’m not sure that this is even realistic commercially, much less politically, and the end result would be remarkably similar.

9. Ken Worsley on July 6th, 2009 3:37 pm

   The government (ie, the Transport Ministry - I think it’s important to make the political/bureaucratic distinction here) may not care about profitability at JAL (although I’ve seen no slam-dunk evidence that they don’t, it surely seems that way), but JAL, its stakeholders and the mega banks being asked to front the cash to them certainly do care about it, to varying degrees.

   I think you bring up a good point: The government has a choice of either propping up an inefficient business model or letting those involved sculpt it into something that could (possibly) be more profitable, and thus employ more people.

   This seems like a good example where the interests of the government (the Transport Ministry) and the interests of the people diverge. It’s telling that the ministry labels these unprofitable routes as part of “national interests” but then says that it will support those supposed national interests by backing layoffs and wage cuts, something that is obviously not in the interest of those affected.

   I don’t see these as “national interests” or even as the interests of the government, but rather as the interests of this one ministry, though pressure from the Finance Ministry could certainly be lurking in the shadows.

10. YJ on July 6th, 2009 4:59 pm

    I that you are too quick to angelize the motives of JAL’s shareholders and the mega banks. The fact is the banks want very clearly to eliminate routes and lay people off, thus ensuring that shareholders and the banks profit. Now, this group is certainly a “people” but im not sure they reflects the needs or interests of “the Japanese people”, except in the most macro (and fantastical) sense that the market is going to provide the best for the Japanese people no matter what.

    I don’t want to assume that MLIT is an honest actor in this (as they could simply be protecting entrenched interests/making a power grab) but beyond the fact that MLIT may be opposed to JAL laying off staff, i would also expect that MLIT would not only be looking at the direct job losses from the eliminated routes, but also the whole host of secondary losses that might result from them (most directly closing of airports, then impact on the local economy - loss of tourisms etc leading to economic distress/collapse, further loss of jobs and erosion of the tax base) etc etc etc. Whats good for JAL in the shortrun may not be good for Japan or the Japanese economy or (even for that matter JAL) in the long run.

    In fact, in this case, i am much more likely to believe that it is MLIT who would have the interests of “the people” at heart(in as much as the government exists at the mandate of the people) rathern then JAL’s shareholders or the megabanks.

    The macroeconomic effect of JAL cutting routes is far more complicated and dramatic that you make it seem, and thats before we start adding in less quantifiable things like political importance etc.

11. Ken Worsley on July 6th, 2009 5:23 pm

    Certainly the banks also want to eliminate routes and reduce the number of staff, as was mentioned in the post.

    I agree that the issue is far more complicated and dramatic than what can be fleshed out on a blog - I think that goes without saying. Still, this does appear to be a case of a ministry attempting to guide a private firm into inefficient business practices.

    MILT is not opposed to laying off staff, so long as those layoffs do not effect the loss-making routes. That’s what I get from the quote.

12. Matt on July 6th, 2009 9:51 pm

    “…without massive government subsidization (airports, air traffic control, radar systems, R&D etc) this is an industry that wouldn’t exist at all.”

    Prove that.

    As far as I can tell, all of the government subsidies really just keep more carriers alive chewing into other carriers’ margins. It’s hard to imagine any industry being profitable if neither scale of service nor price can be discovered due to government tampering.

13. Ken Worsley on July 7th, 2009 12:11 am

    Matt, There is certainly no quantifiable, published and peer reviewed proof to back up that statement and I much agree with you. It seems to me that firms such as JAL are staying in business in spite of, rather than okage de, the government. The fact is that many poor decisions about how to use taxpayer money to build regional airports have been made, and the Transport Ministry is somehow in a position to bully domestic carriers into continuing routes into these places that not enough people want to fly to.

    This industry, like all others, would be far better off if the government would let it operate itself.

14. YJ on July 7th, 2009 1:44 pm

    Are you serious? im less familiar with the Japanese context, but basically all commercial airports are publicly funded (generally through debt/bond issues). I have read about one small privately funded commercial airport in Missouri (which is billed as the only privately funded commercial aiport in america), but even it recieves public funding in the form of a per head tourist kickback.

    The radar systems airports use? Publicly funded. Air traffic control? publicly funded (even in cases where air traffic control is run by private non-profit corporations, the systems themselves were developed publicly and then privatized) Most Jet engine research etc, would not exist if it hadnt been heavily subsidized via the armed forces, and a large amount of cutting edge aeronautical research only exists because of such public funding.

    I would be in favor of less regulation, but the backside of that large amount of regulation is that investors know that the government will dive in to bailout the industry when its trouble.

    To return to the concrete example that Ken is giving specifically, the government (presumably with the support of the Japanese people) is committed to providing transportation and access to remote regions of Japan, there are a variety of ways they could do this. One would be to offer a subsidy on routes, but while this might make JAL profitable, it would only be a profit on paper and the subsidies would still distort the market. The way they have chosen is by providing a large chunk of financing and demanding concessions in return for that financing.

    This may not be as good a solution for JAL (or even for the Japanese government in the long run) but from the perspective of the tax payer the end result is similar.

15. Mike on September 15th, 2009 2:19 am

    It almost seems as though the government is trying to bankrupt JAL. Forcing them to keep running unprofitable routes by taking on more debt sounds like a stupid idea at best. If the government was so concerned about transportation for people in these regions it would do something, maybe build Shinkansen lines to these places that could connect them with major hubs. But the government has no real ideas, and resorts to bullying public firms.

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