Japan Airlines bankruptcy

Japan Airlines is expected to file for bankruptcy tomorrow, as speculation intensifies over which of its two U.S. suitors, Delta Air Lines or American Airlines, will be chosen to aid its rehabilitation.

Seiji Maehara, Japanese transport minister, said on Friday that Tuesday would be “X day” for JAL – the day a state-controlled corporate turnround body announces a plan to rebuild what is still Asia’s largest carrier by revenues, in spite of massive debts.

The first step in that process is a “pre-packaged” bankruptcy similar to that employed last year by General Motors, according to people familiar with the situation. JAL lost more than Y130bn ($1.4bn) in the six months to September and is more than Y1,400bn ($15.3) in debt.

A bankruptcy filing would make JAL, the country’s flag carrier which was founded in 1951, one of Japan’s largest corporate failures. The current record for a non-financial company is held by the Mycal department store group, which folded in 2001 with Y1,550bn ($17bn) in liabilities.

The government has pledged to keep JAL flying during its court-protected restructuring. The Enterprise Turnaround Initiative Corporation, which was given the task of formulating a rescue plan in October, is expected to provide some Y300bn ($3.2bn) in new capital and to arrange a Y600bn ($6.6bn) credit line for the carrier.

JAL was privatized in 1987 but fell into trouble when Japan’s stock and property bubble burst at the start of the 1990s. Its problems were exacerbated by the September 2001 terrorist attacks, the Iraq war, the Sars epidemic and the 2008 financial meltdown.

JAL’s strong links to China and other Asian destinations have nevertheless made it an attractive ally for U.S. carriers.

The Yomiuri newspaper reported at the weekend that JAL executives had accepted a proposal from Delta to leave American Airlines’ Oneworld alliance and join Delta’s rival SkyTeam grouping. Representatives from all three airlines said talks were ongoing.

Such a move would be a heavy blow to American, which relies on code-sharing and feeder traffic from JAL to bolster its otherwise sparse Asian network, as well as to Oneworld, which includes British Airways.

Delta, the largest U.S. carrier, already operates a large hub at Tokyo’s Narita airport and is believed to have the support of officials in the Japanese transport ministry. American, for its part, has argued that a Delta-JAL tie-up would be too dominant on U.S.-Japan routes and could be blocked by U.S. regulators