Japan Airlines' (JAL) <9205.T> net loss may balloon to about 500 billion yen ($5.5 billion) for the year to March as the heavily indebted carrier, Asia's largest by revenue, plans to book hefty restructuring charges, the Yomiuri newspaper reported on Thursday.

The forecast, which is almost eight times bigger than the firms' own earlier projected loss, has been included in a new turnaround plan being put together by a government-appointed taskforce and presented to creditor banks, the paper said.

JAL needs a bailout as it has been hammered by high costs and a sharp downturn in air freight and passenger traffic after the global financial crisis. A source familiar with the matter said this week that a previous rescue plan had been rejected by creditors because of the level of debt waivers required.

Shares in the airline, which some investors suggest should go bankrupt and then be rebuilt, fell 4 percent on Thursday after the report of the much bigger loss.

Until a final decision has been made, we really just don't know about it all, said Takashi Ushio, head of the investment strategy division at Marusan Securities.

But fundamentally, the government just can't let a company like JAL collapse.

JAL's operating loss is likely to be around 200 billion yen, almost four times an earlier company estimate of a loss of 59 billion yen, due to weak passenger demand amid the economic downturn, the Yomiuri reported.

The airline, weighed down by $15 billion in debt, also plans to book special charges for an early retirement program and the disposal of large aircraft, the paper said.

The Nikkei newspaper said the taskforce had asked JAL's largest creditor, the government-owned Development Bank of Japan, to commit to more than 50 billion yen in debt waivers and debt-for-equity swaps -- about 20 percent of what it was owed by the airline as at March 31.

Mizuho Financial Group <8411.T>, also a creditor, had been asked to agree to nearly 50 billion yen in debt waivers and debt-for-equity swaps, the paper said.

PREVIOUS PLANS REJECTED

Creditors rejected one bailout plan on Sunday and requested a new one with less debt forgiveness as well as clarity on how the airline will cut pension obligations and how much the state will provide in capital and loans, a source with knowledge of the meeting said.

JAL faces heavy political pressure to maintain unprofitable services to small centers and has a bloated cost base that makes it less efficient than rival All Nippon Airways Co <9202.T>.

Its shares, which traded at 121 yen on Thursday, have fallen nearly 30 percent in the past month.

The Development Bank of Japan was owed 230 billion yen as of March 31, while Mizuho is owed 53 billion yen. Other big Japanese banks owed money include Mitsubishi UFJ Financial Group <8306.T> with 57 billion yen and Sumitomo Mitsui Financial Group <8316.T> with 37 billion yen.

JAL has been restructuring under state supervision since it received a 100 billion yen government-guaranteed loan in June.

It put forward a plan last month that included axing 6,800 jobs and 50 routes and a 30 percent cut in operating costs, but the government said the steps were not enough.

The next plan, increasing the job cuts to around 10,000, did not satisfy creditors who felt they were being asked to carry too much of the burden.

CREDIT RISK

JAL's 5-year credit default swaps are quoted at around 2,000 basis points, compared with 120 basis points on the 5-year iTraxx Japan index series 12.

The high level suggests investors see a risk that restructuring could result in a credit event, triggering a payout on credit default swap contracts that insure against corporate failure.

Last week, ratings agency Standard & Poor's cut its long-term corporate credit rating on JAL by two notches to B- from B+ and warned it could lower it to SD or selective default if creditors exchange debt for equity or forgive debt.

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

The airline, a member of the Oneworld airline alliance, has held separate talks about a capital injection with AMR Corp's American Airlines, its alliance partner, and Delta Air Lines -- a member of the rival SkyTeam group.

($1=90.92 Yen)

(Reporting by Taiga Uranaka and Arundhati Ramanathan; Writing by Rodney Joyce; Editing by Hugh Lawson)

Japan Airlines