December 5, 2023

DealBook: Stock Offering by Japan Airlines Is Overshadowed by Protests

TOKYO — Japan Airlines returned to the stock market on Wednesday after the biggest initial public offering this year since Facebook, but the carrier’s debut was overshadowed by anti-Japanese protests in China that has hurt travel between the two countries.

JAL shares failed to sustain a rally in their opening minutes on the Tokyo Stock Exchange, settling at around 3,830 yen ($48.56) after 90 minutes of trade, barely above its 3,790 ($48.05) offering price that valued the airline at $8.5 billion. That performance came as somewhat disappointing after JAL shares had jumped as much as 10 percent in the gray market and underscored investor anxiety over the airline’s potential in a notoriously volatile industry.

Shares in Japan’s former flagship carrier had been priced at the top of a range set deliberately low to stoke investor interest in the airline’s re-listing, just 30 months after its bankruptcy in 2010. By setting a low target, JAL hoped to avoid the fate of Facebook, which misjudged investor demand and saw its share price slump below its offering price on its second day of trade.

But Tokyo-based JAL also found itself under pressure to raise ample funds to return to state coffers the 350 billion yen ($4.4 billion) in bailout money it received to finance its corporate turnaround. With its I.P.O., JAL doubled the investment that a state-backed fund made in the carrier in 2010. That fund, the Enterprise Turnaround Initiative Corporation of Japan, is thought to have sold its 96.5 percent stake in JAL, netting a $4 billion profit.

JAL’s offering caps two years of intense reorganization that eliminated 21,000 jobs or about a third of the airline’s work force, cut pilots’ salaries by 30 percent, slashed pensions and retired the company’s prized jumbo jets. It dropped a third of its international routes and halved the number of its group companies.

Its balance sheet is now the envy of the industry, its 17 percent operating margin for the latest fiscal year are more than double that of the likes of Delta, United Continental and JAL’s domestic nemesis, All Nippon Airways.

But JAL has also become a far smaller airline with a more limited global reach and capacity that may be ill-positioned to tap into growth, especially in Asia, where the aviation industry is most likely to have its fastest growth. Earnings at the airline have shrunk in line with its cuts: operating revenue fell by almost 40 percent between 2008 and 2011 to 1.2 trillion yen, and a further drop in earnings is projected for the current fiscal year.

Reflecting its shrunken ambitions, JAL’s fleet of 169 aircraft is now made up of mid and small planes like the Boeing 787. The downsized fleet helps cut costs and raise profitability now but could limit growth in the long run, especially compared with regional rivals like the Emirates and Singapore Airlines, which are investing aggressively in their fleets.

JAL is also struggling to reposition itself against the rise of low-cost carriers in Asia, which are finally starting to make forays into Japan’s highly-protected domestic market. JAL introduced JetStar, a low-cost venture with Qantas Airways, just two months ago.

JAL benefited in its turnaround from a write-down of its fleet, government-arranged debt waivers and $4.5 billion in tax credits allowing the airline to offset corporate tax for almost a decade.

These measures have sparked intense criticism from All Nippon Airways, which has lobbied politicians to level the playing field by prioritizing it over JAL in coveted landing slot allocations at Tokyo’s airports. If Nippon is successful, JAL could lose air traffic.

In midterm financial targets, JAL has pledged to keep its operating margin at 10 percent. It issued 175 million shares in its I.P.O., of which 131.25 million have been allocated to Japanese investors and the remaining 43.74 million to investors overseas.

The I.P.O.’s of Facebook and JAL have ranked among the year’s most highly anticipated offerings. But both companies have faced some tough luck beyond their control. Facebook’s debut was marred by technical errors.

JAL’s first day of trade in Tokyo came amid raging anti-Japanese protests in China over competing claims to a set of disputed islands, a spat that threatens to depress travel between the two countries.

Both Chinese and Japanese officials have called for calm after protesters staged rallies in more than 100 Chinese cities, vandalizing Japanese businesses and forcing some Japanese manufacturers to suspend operations.

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