Investors may be happy to ride on renovated JAL

August 3, 2012

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japan Airlines’ plans to raise roughly $8.5 billion in an IPO may seem a heavy lift amid weak global markets and a perennially limping aviation industry. But big funds will likely clamor for seats on a flight fueled by a mix of government largesse and one of Japan’s most promising turnaround stories.

Like PanAm and TWA, JAL prospered in aviation’s salad days but was not suited for a more competitive era. Cabin crew were given jet-set lifestyles, including company-paid taxis for the roughly $300 ride into Tokyo from the international airport. In 2010, with $25.6 billion in debt, JAL declared bankruptcy, a rare step in a stock market littered with zombie companies.

The JAL emerging from government-supervised restructuring has been re-tooled: its 50,000 employees reduced by a third, pensions slashed, non-core units sold, fleet trimmed and international routes cut. All that, plus $4.5 billion of taxpayer money and cost-cutting efforts by Kazuo Inamori, the Kyocera founder enlisted by the government, have turned JAL into the biggest earnings generator in the industry, with $2.4 billion in profits.

Participants in the 61-year-old carrier’s IPO will likely appreciate its new-plane smell. It still has roughly $2.7 billion in debt and is forecasting a 30 percent decline in profits in the year ending next March as global aviation lurches, but it can still count on $4.6 billion in tax credits, enough to create at least two years of almost tax-free earnings.

JAL’s underwriters at Daiwa are suggesting a price of 3,790 yen a share. That would make it the third largest airline by market capitalization, after Singapore Airlines and Air China. But at about 5 times the company’s projected earnings, the proposed valuation looks conservative. Rival All Nippon Airways trades near the regional median of 12 times.

But the September offering could go at a higher price. As a likely constituent of Japan’s benchmark Nikkei 225 Stock Average, JAL is likely to be must-have for both domestic pension funds and foreign funds focused on Japanese stocks. Despite a turbulent market for IPOs this year, JAL may find investors more than happy to come aboard.

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