UPDATE: ANA President Warns JAL Aid May Undermine Fair Competition

Alarmed by the amount of government involvement in Japan Airlines Corp.'s (9205.TO) restructuring, the president of All Nippon Airways Co. (9202.TO) warned Wednesday that the state-supported revamp scheme could undermine competition in the airline industry.

ANA President and Chief Executive Shinichiro Ito said his greatest concern is that fierce price competition could break out once JAL receives a government-backed lifeline of $10 billion to support its ailing operations.

"For example, the (air ticket) market could be disrupted if discount tickets are offered as a result of JAL receiving public funds. That would be a problem," Ito told reporters after meeting with Ryuhei Maeda, the head of the transport ministry's civil aviation bureau.

Ito said he asked the government to adopt some rules introduced in Europe to maintain appropriate market conditions such as banning the provision of additional public funds to a company for 10 years once it has received aid. A company with government aid shouldn't be "a price leader," he added.

During the meeting, Maeda said that he believes the government aid is merely designed to help the struggling airline and won't result in an unfair competitive environment.

Ito shrugged off the question of whether two big carriers are needed in the international flight business in Japan raised by the transport minister Tuesday.

The top executive said JAL and ANA are seeking to enhance their competitiveness through their alliance partners, as the U.S. and Japan last month reached an "open skies" pact which will ease restrictions on cross-border flights and possibly open the door to far-reaching alliances among the countries' major airlines.

"Competition is intensifying amid the open-skies deals. It doesn't make sense (to discuss) whether (there should be) one company," Ito said.

Seiji Maehara, Japan's transport minister said Tuesday that the government will need to review whether two big carriers are needed in Japan to survive tough competition in the international flight business.

JAL filed for court-led restructuring Tuesday, under which the quasi-government Enterprise Turnaround Initiative Corp. of Japan will inject billions of yen into the carrier. The airline became Japan's largest non financial firm to file for court protection with liabilities totaling Y2.32 trillion.

After the filing, a number of Japanese companies said that they will book losses from their investment in the air carrier.

Sojitz Corp. (2768.TO) said Wednesday that it will book a valuation loss on its Y15 billion in JAL preferred shares as a special loss.

Shinkin Central Bank (8421.TO), a major credit union, said it may not be able to recover or may see a delay in collecting the Y25.5 billion that JAL owed the bank after the carrier filed for bankruptcy protection.

Still, rating agencies said that JAL's filing should have little impact on Japanese corporations and financial institutions.

Moody's Investors Service said that JAL will ask for debt waivers of about Y350 billion from its creditor banks. The additional losses may come to about Y100 billion for all lenders, which is "much less than their annual operating earnings," Moody's said.

Standard & Poor's Ratings Services said losses at creditor banks are likely to be at about a maximum of 10% of annual net operating profits, which would not have a substantial impact on their financial standings.

Among six trading houses holding preferred shares in JAL, Sojitz is likely to feel the largest impact on its profits and is expected to lower its Y27 billion net profit projection for this fiscal year through March.

In addition to preferred stock, some trading companies have other exposure, such as derivative contracts and aircraft leasing receivables, which could be affected. But S&P said these losses may have a limited impact on financial standings of these companies, given that their profitability is on a recovery track supported by favorable trends in the commodities markets.

The six trading houses with JAL preferred shares include Mitsui & Co. (8031.TO), Itochu Corp. (8001.TO), Sumitomo Corp. (8053.TO), Marubeni Corp. (8002.TO) and Mitsubishi Corp. (8058.TO).

-By Yoshio Takahashi, Dow Jones Newswires; 813-6269-2791; yoshio.takahashi@dowjones.com

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