Four Lessons from the Demise of Japan Airlines

Monday, January 25th, 2010

Joseph Lee

On January 20, 2010, the New York Times and all major Japanese papers reported the bankruptcy filing of JAL (Japan Airlines). The crane that once symbolized Japan’s powerful national airline is no more. Not even privatization could help an airline run into the ground by arrogance and incompetence.

But this is actually old news—everyone knew this was coming. The activities of the Enterprise Turnaround Initiative Corporation of Japan (ETIC), a new government body “with broad powers and a five-year mandate to revitalize Japan’s ailing regional economies,” were being reported on in the media every day.

We knew that the old CEO was a goner when Kyocera Honorary Chairman Inamori, a well respected old-timer, was dragged out of retirement into the frenzy. The appointment was supposed to add credibility to the so-called management team.

Lesson 1: Getting Bill Gates to run a bankrupt United Airlines doesn’t make too much sense, does it?

Likewise, the government’s plan of slashing 15,700 employees, mothballing all of JAL’s 747’s, and drastically reducing the debt were, perhaps, necessary steps, but hardly the foundation of a successful enterprise. In fact, we have no idea what JAL will be doing to continue as a viable player in the airline community going forward.

JAL was going to “hold shareholders accountable” by wiping out the entire capital. The only problem was that a bunch of those shareholders were individuals whose worthless stock gave them the only thing that mattered to them—special discounts to fly JAL.

The ETIC was going to ask hard sacrifices from employees by eliminating a third of the work force. They could have saved even more money by eliminating 90% of the work force, but then there wouldn’t be enough people to wash the planes. Retirees were also arm-twisted into accepting sharp reductions in their pensions. By focusing so much on teaching existing stakeholders hard lessons, perhaps the ETIC forgot that it was turning the airlines biggest fans into, well, mere stakeholders.

Competitive Fall-Out

I’m sure Delta and KLM Royal Dutch Airlines are lobbying hard for JAL not to dump all the Asian routes so that the sky won’t fall off the Sky Team label. All Nippon Airways (ANA), which was lobbying for JAL’s “good routes,” immediately did the brotherly thing by issuing a press release announcing the unfairness of a rival carrier being propped up by government money without any accountability. But ANA should be happy that JAL is alive. Toyota found out the hard way that being number one is not a guarantee of profitability.

Lesson 2: Competition is always good—it keeps management on its toes.

In the world of corporate governance, we love to use the words transparency, accountability, and independence as if they are sacred. They’re like the holy grail, but better. The members of ETIC, all experts in their own right, reported back daily on what they were doing. They demanded that all those key words be satisfied. But perhaps they forgot what stood behind them—transparency is not a goal, and neither are accountability or independence.

Lesson 3: The goal should be for companies to have sound managers making sound business decisions for the benefit of its shareholders.

Soon, the Japanese tax payers will be the shareholders of the collapsing crane. The US bail-out of GM will look like an investment in gold compared to the deal that the folks in Japan will get.

Capitalism Always Wins

I wrote a novel 4 years ago about the Japanese airline industry except the roles were reversed: A US airline was failing and was rescued by a Japanese company. The plot revolved around a major US airbase being returned to Japan as part of a big conspiracy by two airlines to dominate the trans-Pacific routes. My publisher in Japan has now moved up the release date of the paperback version of my book a few months to capitalize on the excitement over JAL.

Lesson 4 (perhaps the greatest of them all): There’s always someone waiting in the wings to capitalize on other’s misfortunes.

Joseph Lee is an adjunct professor at the Graziadio School of Business and Management and Peter Drucker & Masatoshi Ito Graduate School of Management, where he teaches a course on management consulting. Read his blog at joe-lee.com/blog.html

Related in the GBR

Airline Industry Key Success Factors by Richard M. McCabe, PhD

Predicting Bankruptcy in the WorldCom Age by Nikolai Chuvakhin and L. Wayne Gertmenian, PhD

Women Entrepreneurship in Japan by Charla Griffy-Brown, PhD and Noriko Oakland

Topic: Bankruptcy, Japan, US Airline Industry
Tags: , , , , , ,

Comments

Debra Zimmer

January 26, 2010 at 10:24 AM

I love the lessons! Best of luck with your book!


John Wood

February 16, 2010 at 4:36 PM

Very insightful post. This whole mess is hard to understand sometimes.


Dallas Bankruptcy

February 26, 2010 at 9:53 AM

Great Post, do you think the GM bailout was a mistake, on one hand their business plan was obviously flawed. However the government stepped in to preserve jobs. Just curious what your thoughts are on this.


Graziadio Business Report

February 26, 2010 at 12:15 PM

Response:

Without getting into the whole argument of whether it is the government’s role to bail-out failed businesses, let me do my best to respond.

There are similarities between the JAL and GM bailouts in that: a) both had significant national symbolism, b) the failure of the entities could have triggered a cascade of unintended economic consequences in terms of unemployment and business interruption, and c) they both occurred at the outset of a new administration that had little choice but to carry on the policy of the former administration to avoid catastrophy.

Since the appointment of Mr. Inamori at JAL, steps have been taken to restore JAL’s alliance with One-World (instead of joining Delta’s Sky Team as the former management team had announced), international routes have been targeted for reduction, and a massive salary cut and head-count reduction has started (but not finished).

Only time will tell whether these steps are sufficient. If they aren’t, most people in Japan cannot imagine the former national carrier disappearing from the skies, so more government funds will be infused.

In the case of GM, there’s probably little question that an uptick in the economy, along with Toyota’s troubles, will give the automaker breathing room. In a couple of years, assuming the economy does better, it’ll repay the government and then look like it got out of the mess. It’s the “afterwards” that worries me. I’m reminded of Chrysler’s bailout 30 years ago, and Chrysler today. The problem with management is that no matter what happened in the past or may happen in the future, the penalties for failure are too miniscule compared to the rewards for massive success. Executives can never get paid less than zero, but their upside is… well, you know.

So, GM will go about building cars that will make the most money. In the old days, they were the SUVs. I guarantee that they will do that again until the next bailout.

A few years ago, I had a conversation with a Japanese auto executive who told me why they were opening SUV and Pick-Up Truck plants in the US. He told me, “Every time we sell 1 SUV or large pick-up truck, we can make three, four, or five times more than selling a passenger car. What would you do?”

Going back to your original point—whether the GM rescue was a mistake. No, I don’t think it was, especially given the psychological message it could have sent to Americans and those around the world at a time when the economy was on the verge of total collapse. I’m a graduate of the University of Chicago where free market theory reigns, but we often forget that there is really no such thing as a truly free market. Even the “let them go broke” chant, as great as it sounds, relies on a heavily regulated form of failure called bankruptcy which isn’t free market at all.

Hope this responds to your question, and stay engaged.
Joseph Lee


Thomas Tennison

March 23, 2010 at 12:36 AM

Thank you Professor Lee for very educative materials here. These lessons we can apply in many other aspects of life and business. Lesson no.4 is specially impressive.


Autoverzekering afsluiten

October 18, 2010 at 6:30 AM

I am from Holland and if i see the way KLM is going it wil not be any different then JAL. They already fused with Air-France and imho this was the worse decision they could ever make. Besides that the most part of Dutch people find the tickets way too overpriced and rather choose a different airline.


Mark Aalam

April 24, 2011 at 9:14 PM

Somebody is always ready to capitalize on the misfortunes of another company. It’s what the banks do. It’s what the airlines do. It’s the American way. Another company is facing bankruptcy, opportunistic companies with capital resources see an opportunity and step in.


Garrett Conser

April 12, 2012 at 3:52 PM

Keep up the superb piece of work, I read few posts on this website and I believe that your web blog is really interesting and contains circles of wonderful info .


Pura Gastonguay

May 26, 2012 at 6:51 AM

It is in reality a nice and useful piece of info. I am satisfied that you shared this useful info with us. Please keep us up to date like this. Thank you for sharing.


Trackbacks

  1. Perspectives » Blog Archive » Four Lessons from JAL’s Bankruptcy