JAL faces $8.8 billion excess debt if liquidated: source

Liabilities at Japan Airlines Corp would exceed its assets by as much as $8.8 billion if Asia's largest airline by revenues were liquidated, a source with direct knowledge of the matter said on Friday.

The estimate of JAL's negative net worth, calculated by a government-led task force in charge of its restructuring, underscores the depth of the problems facing the airline as it seeks aid from banks and the state to avoid bankruptcy.

Shares of JAL, which are down more than 40 percent this year and hit a record low last week, slid 6.6 percent, extending losses after the Nikkei newspaper said some creditors wanted JAL to cut its capital to hold shareholders accountable.

The task force, which is led by turnaround specialists and reports to Transport Minister Seiji Maehara, is seeking a bridge loan of about 180 billion yen to prevent JAL from running out of cash next month and a total capital boost of 300 billion yen from both the government and the private sector, said the source, who spoke on condition of anonymity.

It's a 'national flag' kind of thing and allowing it to fail would damage trust in Japan, said Koichi Ogawa, chief portfolio manager Daiwa SB Investments. It's even more symbolic than GM, and an airline is essential. They'll inject public funds.

JAL is headed for its fourth annual loss in five years, weighed down by roughly $15 billion in debt and a bloated cost base that makes it less efficient than domestic rival All Nippon Airways Co <9202.T>.

Maehara told a news conference he met Prime Minister Yukio Hatoyama and Finance Minister Hirohisa Fujii earlier on Friday to discuss the state's role in supporting JAL, and that a final decision on the matter would fall to Hatoyama.

The reality is that 60 percent of the flights flying over Japan are JAL flights. If the situation becomes such that these don't fly, then that would make things difficult. We need to understand that, Hatoyama told reporters.

A JAL spokesman said: We have not decided anything. We are crafting a revival plan from various viewpoints.

NEW SCHEME

The task force also wants to use a scheme recently introduced in Japan called Alternative Dispute Resolution under which a third party would mediate between JAL and its creditors on an out-of-court debt restructuring, according to the source.

But creditors, which include the country's top three lenders and the state-owned Development Bank of Japan, have so far rebuffed the plans presented by the task force, arguing they are being asked to carry too much of the burden to revive JAL.

The task force, which has asked creditors for 250 billion yen in loan waivers and debt-for equity swaps, needs to offer details on the use of public funds and map out a better plan to cut pension obligations and boost margins, bankers have said.

JAL's two likely options for a public fund injection would be to tap a revised law used earlier this year to prop up struggling chipmaker Elpida Memory or a government-backed corporate turnaround organization established this month to buy the debt of and invest in struggling but viable firms.

Some creditors have suggested that JAL be forced to reduce its capital to clarify the responsibility of shareholders. One idea being floated is for JAL retire about 99 percent of its common shares but remain listed, the Nikkei newspaper said.

There are problems from the perspectives of the viability of the restructuring plan and the fairness of who shoulders the burden, a banker involved in the discussions told Reuters.

The task force's plan also includes JAL halving the number of subsidiaries and affiliates from 290 and about 8,000 job cuts, almost a fifth of its work force, the source said.

The negative net worth figure of 800 billion yen is significantly higher than a 600 billion yen estimate reported by the Nikkei this week and the 250 billion yen assumed by Citigroup Global Markets Japan in evaluating JAL's shares.

Citigroup halved its target price on JAL to 80 yen on Thursday. It rates the stock sell/high risk.

It is not certain whether JAL will go through a private reorganization or file for bankruptcy, but even if it stays clear of bankruptcy, we think value for existing shareholders will be substantially reduced on dilution accompanying a big capital increase, analyst Naoko Matsumoto wrote in a note to clients.

The task force believes its restructuring plan would allow JAL to cut its negative net worth to 270 billion yen and enable creditors to collect on 20-30 percent of their loans, as opposed to just 2 to 3 percent in a bankruptcy, the source said.

Despite its woes, JAL's extensive network in Asia and access to the Chinese market has made it attractive to U.S. airlines.

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.

AMR Chairman Gerard Arpey and other American Airlines executives met with JAL executives in Tokyo last week to continue discussions about bolstering their ties, a person with knowledge of the meeting said.

($1=91.29 Yen)

(Additional reporting by Taro Fuse, Nobuhiro Kubo, Yumiko Nishitani, Nathan Layne, Elaine Lies and Yoko Kubota; Editing by Lincoln Feast and Edwina Gibbs)