t
os
5 -2 1 5 -0 4 1
JANUARY 6, 2015
rP
TEACHING NOTE
Restructuring JAL
Synopsis
yo
A series of extreme events, including the onset of the global financial crisis in 2008, the H1N1 flu
epidemic in 2009, and rising fuel prices in 2009, has dealt a severe blow to the JAL Group, the parent
company to JAL International and Japan Airlines Domestic. As a result of the sharp decrease in the
demand for air travel together with significant increases in operating costs, JAL has become highly
levered and is quickly running out of liquidity. The company’s financial condition has also started to
have a negative effect on operations, further eroding profitability. Precipitated by these events, JAL
op
has turned to the Enterprise Turnaround Initiative Corporation (ETIC), a government-backed entity
charged with rehabilitating small- and medium-sized businesses, for new capital.
The case protagonist Hideo Seto, chairman of the ETIC’s investment committee, must decide
whether to provide new capital and, if so, on what terms. Seto has two alternatives: (1) ETIC can
provide new equity financing in an out-of-court restructuring that would moderately reduce JAL’s
operations and its outstanding liabilities, or (2) ETIC can restructure JAL under the Japanese
tC
Corporate Rehabilitation law, the equivalent of Chapter 11 in the US bankruptcy code. Restructuring
in bankruptcy would allow for deeper cuts to JAL’s operations and liabilities, potentially putting it on
more stable footing for the future. However, a protracted bankruptcy could erode the going concern
value of the firm by damaging JAL’s reputation and its relationships with customers, suppliers, and
employees. With JAL’s situation rapidly deteriorating, Seto must act quickly to preserve as much of
the firm’s remaining value as possible.
No
Pedagogical Opportunities
This case is intended to serve as an introduction to the mechanics of bankruptcy and the costs of
financial distress in the MBA required curriculum. The case provides the opportunity for students to
discuss the legal features of bankruptcy and gain a deeper understanding of the economic rationales
behind them. In order to reach a decision, students must confront the conflicts of interest that emerge
prior to and in bankruptcy, and consider how these frictions associated with debt financing impact a
firm’s optimal capital structure in the static tradeoff theory.
Do
, 215-041 Teaching Note—Restructuring JAL
t
os
In addition to the technical issues involved in a restructuring or bankruptcy, the case also raises
several managerial questions. Seto must judge whether the potential benefits of significantly
restructuring JAL’s balance sheet and operations in bankruptcy outweigh the direct and reputational
costs of a potentially protracted bankruptcy process. The discussion is further enriched by the
noneconomic aspects of the case setting. Cultural attitudes are more resistant to bankruptcy in Japan
than in the US, making it a bigger step for JAL to file for bankruptcy than it would be for a US airline.
rP
In addition, the political environment plays a key role in Seto’s decision: JAL is the flagship airline in
Japan and has a history of receiving government bailouts.
Suggested Class Plan
The following is based on an 80 minute class.
yo
Time Discussion Area Opening Questions
JAL’s business and How did JAL get into this situation? What are Seto’s
0-10 m
options options?
How does bankruptcy work? What tools/rights would be
10-45 m Bankruptcy available to Seto? What is the economic rationale behind
these tools?
op
What are the costs of being in bankruptcy? Do any of these
Costs of Financial
45-65 m costs start before bankruptcy? How does this affect a firm’s
Distress
capital structure decision outside of distress?
65-75m Decision What should Seto do?
Discuss bankruptcy as an institution designed to address the
75-80 m Wrap-Up
frictions highlighted in class.
tC
A preliminary board plan can be found in TN Exhibit 1. It is worth noting that there is more
material than easily fits into an 80 minute class. Instructors may wish to pick one or two topics for a
more in-depth discussion.
Opportunities for Analysis
No
JAL’s situation and options
The case provides an overview of JAL’s situation. Case Exhibits 10 and 11 provide students with
stock market and credit default swap data that summarize the situation, showing that JAL’s debt and
equity have both fallen sharply in value.
The instructor can open the class discussion by asking students, “How did JAL get into this
situation?” A follow up question is, “Was this just bad luck? Or bad execution?”
Do
JAL has suffered from falling demand for air travel. The global financial crisis has severely
impacted international business travel, a key source of revenue for JAL. Simultaneously, an outbreak
of H1N1 (swine flu) has reduced leisure travel throughout Asia. The result has been large operating
losses and falling equity and debt valuations. Case Exhibit 1 shows a loss of ¥66 billion for the fiscal
year ending in March 2009 and a loss of ¥232 billion for the twelve months ending in December 2009.
Case Exhibit 10 shows that JAL’s stock price has fallen from a high of over ¥300 to ¥65. Case Exhibit
2
os
5 -2 1 5 -0 4 1
JANUARY 6, 2015
rP
TEACHING NOTE
Restructuring JAL
Synopsis
yo
A series of extreme events, including the onset of the global financial crisis in 2008, the H1N1 flu
epidemic in 2009, and rising fuel prices in 2009, has dealt a severe blow to the JAL Group, the parent
company to JAL International and Japan Airlines Domestic. As a result of the sharp decrease in the
demand for air travel together with significant increases in operating costs, JAL has become highly
levered and is quickly running out of liquidity. The company’s financial condition has also started to
have a negative effect on operations, further eroding profitability. Precipitated by these events, JAL
op
has turned to the Enterprise Turnaround Initiative Corporation (ETIC), a government-backed entity
charged with rehabilitating small- and medium-sized businesses, for new capital.
The case protagonist Hideo Seto, chairman of the ETIC’s investment committee, must decide
whether to provide new capital and, if so, on what terms. Seto has two alternatives: (1) ETIC can
provide new equity financing in an out-of-court restructuring that would moderately reduce JAL’s
operations and its outstanding liabilities, or (2) ETIC can restructure JAL under the Japanese
tC
Corporate Rehabilitation law, the equivalent of Chapter 11 in the US bankruptcy code. Restructuring
in bankruptcy would allow for deeper cuts to JAL’s operations and liabilities, potentially putting it on
more stable footing for the future. However, a protracted bankruptcy could erode the going concern
value of the firm by damaging JAL’s reputation and its relationships with customers, suppliers, and
employees. With JAL’s situation rapidly deteriorating, Seto must act quickly to preserve as much of
the firm’s remaining value as possible.
No
Pedagogical Opportunities
This case is intended to serve as an introduction to the mechanics of bankruptcy and the costs of
financial distress in the MBA required curriculum. The case provides the opportunity for students to
discuss the legal features of bankruptcy and gain a deeper understanding of the economic rationales
behind them. In order to reach a decision, students must confront the conflicts of interest that emerge
prior to and in bankruptcy, and consider how these frictions associated with debt financing impact a
firm’s optimal capital structure in the static tradeoff theory.
Do
, 215-041 Teaching Note—Restructuring JAL
t
os
In addition to the technical issues involved in a restructuring or bankruptcy, the case also raises
several managerial questions. Seto must judge whether the potential benefits of significantly
restructuring JAL’s balance sheet and operations in bankruptcy outweigh the direct and reputational
costs of a potentially protracted bankruptcy process. The discussion is further enriched by the
noneconomic aspects of the case setting. Cultural attitudes are more resistant to bankruptcy in Japan
than in the US, making it a bigger step for JAL to file for bankruptcy than it would be for a US airline.
rP
In addition, the political environment plays a key role in Seto’s decision: JAL is the flagship airline in
Japan and has a history of receiving government bailouts.
Suggested Class Plan
The following is based on an 80 minute class.
yo
Time Discussion Area Opening Questions
JAL’s business and How did JAL get into this situation? What are Seto’s
0-10 m
options options?
How does bankruptcy work? What tools/rights would be
10-45 m Bankruptcy available to Seto? What is the economic rationale behind
these tools?
op
What are the costs of being in bankruptcy? Do any of these
Costs of Financial
45-65 m costs start before bankruptcy? How does this affect a firm’s
Distress
capital structure decision outside of distress?
65-75m Decision What should Seto do?
Discuss bankruptcy as an institution designed to address the
75-80 m Wrap-Up
frictions highlighted in class.
tC
A preliminary board plan can be found in TN Exhibit 1. It is worth noting that there is more
material than easily fits into an 80 minute class. Instructors may wish to pick one or two topics for a
more in-depth discussion.
Opportunities for Analysis
No
JAL’s situation and options
The case provides an overview of JAL’s situation. Case Exhibits 10 and 11 provide students with
stock market and credit default swap data that summarize the situation, showing that JAL’s debt and
equity have both fallen sharply in value.
The instructor can open the class discussion by asking students, “How did JAL get into this
situation?” A follow up question is, “Was this just bad luck? Or bad execution?”
Do
JAL has suffered from falling demand for air travel. The global financial crisis has severely
impacted international business travel, a key source of revenue for JAL. Simultaneously, an outbreak
of H1N1 (swine flu) has reduced leisure travel throughout Asia. The result has been large operating
losses and falling equity and debt valuations. Case Exhibit 1 shows a loss of ¥66 billion for the fiscal
year ending in March 2009 and a loss of ¥232 billion for the twelve months ending in December 2009.
Case Exhibit 10 shows that JAL’s stock price has fallen from a high of over ¥300 to ¥65. Case Exhibit
2
