Evangel's IB Economics Blog

Japan Airlines landing at London airport (Photo by Adrian Pingstone)

According to an article “Japan Airlines ‘hours away from bankruptcy’” in Guardian, the largest Asian airline by revenue, Japan Airlines (JAL) has been operating in bankruptcy with more than $25 billion since January. There are several factors that has lead to one of the country’s biggest corporate failures to date:

1. Lifelong payment: JAL has been offering a large sum of pension to its workers, supporting them in their lifetime. As more people have retired from their work in JAL, more money have had to be spent for the non-working workers. Certainly, JAL has not considered in the long term, the effect of lifelong payment.
2. Global recession: The whole world has been suffering for these few years from the global recession. Without doubt, the recession has hurt JAL. Because the cost of using JAL is expensive, the demand has fallen, unlike JAL has predicted. Because airlines company is inelastic, JAL has not been able to respond to the fall in demand quickly.
3. Government intervention: When the election of the leader of each Japanese provinces, the candidates has promised the citizens to build airports so that it is quicker for the citizens to travel from a place to another. Because of this, there are plenty of empty flights to these small airports that JAL has been gaining no profit from.

In consider of these factors, a restructuring plan has been set on January 19, 2010. The restructuring plan, posted in the article “Progress of JAL Group Medium Term Corporate Plan,”  is being orchestrated as part of a government-backed bail out. JAL has planned not only to reduce several domestic routes within Japan but also to reduce deals, giving cut rates to people who flew on their birthday.

With the restructuring plan, JAL is slowly crawling out of the bankruptcy. The recovery from bankruptcy is still a far reach for JAL. However, JAL is doing its best to shine as the best airline of Asia once again. It is now getting attention by creating a “premium economy” service on flights between Narita International Airport and Bangkok, according to a recent article “JAL Starts Premium Economy Service on Narita=Bangkok Route” from 朝日新聞. Premium economy class is a notch above economy class, aimed at business travelers. With better service as in larger table that can accommodate an A4-size notebook computer and a drink as well as a power outlet in each seat, premium economy class attracts more passengers, saving JAL from the bankruptcy.

Clearly, a company has to consider how elastic it is along with how elastic the demand for its product is in order to avoid sudden failure.