TOKYO - Debt-ridden Japan Airlines (9205.T) could get a $3.3 billion lifeline from a state-backed fund, provided the carrier files for bankruptcy and its banks agree to write off loans, a source familiar with the matter said.

The airline, weighed down by $16 billion of debt and mired in losses, applied in October to the Enterprise Turnaround Initiative Corp of Japan (ETIC), a body of specialists that can draw on state-guaranteed funds to aid ailing firms.

The ETIC is considering injecting about 300 billion yen ($3.3 billion) of fresh capital into JAL, though it has not made a final decision and its plans could change as it continues negotiations with the banks and the government with the aim of reaching a conclusion later this month, the source said.

The ETIC has asked JAL's creditors to forgive about 350 billion yen in debts, three sources with knowledge of the negotiations said. The sources asked not to be named because they are not authorized to speak to the media on the discussions.

The ETIC declined to comment.

SHOULDERING LOSSES

JAL's major creditors, which include the state-owned Development Bank of Japan (DBJ), Mizuho Financial Group (8411.T), Mitsubishi UFJ Financial Group (8306.T), and Sumitomo Mitsui Financial Group (8316.T), have been asked to shoulder about 70 percent of that amount, one of the sources said.

Including losses on other debts such as bonds and derivatives contracts, creditors could be on the hook for up to 700 billion yen, two of the sources said.

A bankruptcy would complicate JAL's talks with Delta Air Lines Inc (DAL.N) and American Airlines (AMR.N), both of which are courting it with promises of cash and revenue growth through membership of their rival global alliances.

The ETIC is planning to have JAL file for protection under the Corporate Rehabilitation Law, a process similar to Chapter 11 in the United States. This would dent the value of JAL shares, if not render them worthless, and likely trigger greater losses for creditors than in an out-of-court restructuring.

American said it would invest in JAL whether it files for bankruptcy or not, and that it could sweeten a $1.1 billion equity proposal made along with other members of the Oneworld airline alliance and private equity firm TPG.

We are looking at every possibility to make our proposal more attractive, Will Ris, American Airline's top lobbyist, told Reuters in an interview.

ONE STEP CLOSER

JAL was saddled with 1.5 trillion yen in total liabilities as of the end of September. At that level of debt, its bankruptcy would be the 6th biggest ever in Japan, ranking just below the 2001 collapse of retailer Mycal.

Some government officials have expressed worries over a bankruptcy, fearing it could hit ticket sales and make suppliers of fuel and other business partners wary of dealing with JAL, potentially grounding planes.

But the Nikkei newspaper reported earlier on Wednesday that the Development Bank of Japan (DBJ) and the finance ministry now support a bankruptcy as a transparent way to deal with its labor unions and various other issues complicating the process.

The Development Bank declined to comment. The Ministry of Finance said the bank would make its own decision on JAL.

I get the impression from the news that JAL has gone one step closer to a court-led bankruptcy, said Ryouta Himeno, transport analyst at Mitsubishi UFJ Securities.

The Nikkei report pushed JAL's stock down 6.7 percent to 84 yen, giving it a market value of about $2.5 billion.

VIOLENT SWINGS

The stock has swung violently in the past few weeks, surging 34 percent in the past two days on news the government sought to boost short-term funding from the DBJ. That followed a 24 percent tumble on the last trading day of 2009.

The DBJ said after the market closed on Wednesday it would double its credit line for JAL to 200 billion yen ($2.2 billion).

JAL's stock lost two thirds of its value in 2009 while the spread on its five-year credit default swaps, which are used to insure against debt default, have been quoted at extremely distressed levels above 7,000 basis points.

A bankruptcy is expected to hit JAL's business over the short term. In its discussions with banks, the ETIC has estimated JAL's revenues could drop 10 percent in the next financial year from April and another 5 percent the following year, sources said.

To help limit the damage to its operations after a bankruptcy filing, the ETIC plans to guarantee payment for fuel, parts and other commercial transactions. The ETIC is also considering a plan to keep JAL's shares listed on the Tokyo Stock Exchange, a source told Reuters earlier this week.

The fund is also looking at recruiting an outsider as JAL's next chief executive officer, a source said. Current CEO Haruka Nishimatsu has indicated he would resign once the course of JAL's restructuring plan is in place.

(Additional reporting by Taro Fuse, Yoshifumi Takemoto, Taiga Uranaka and Rie Ishiguro; Editing by Chris Gallagher, Edwina Gibbs, John Stonestreet)

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