TOKYO—The in-house laundry service at Japan Airlines Co. still presses the cabin crews’ uniforms, but not their white shirts. Crew members now take care of that themselves. And JAL’s mechanics at Haneda Airport reuse their lunch bags to carry small aircraft parts, saving the company 7 to 11 yen per bag, or about a dime.
“We were able to reduce costs by 60 million yen [about $750,000] last year at this hangar,” says Shinichi Shimotori, a 26-year JAL veteran aircraft mechanic.
The yen-pinching culture shift at the country’s proud, once profligate national airline—part of a formal program called “JAL Philosophy”—is contributing to one of the more dramatic turnarounds in global aviation history.
Less than three years ago, JAL filed for bankruptcy with $30 billion in debt, becoming one of Japan’s largest ever corporate failures. This September, JAL plans to relist its stock in an ambitious $6 billion-plus initial public offering, the year’s second-largest IPO behind Facebook Inc. FB -11.70% and making it the first company ever to return to the main board of Tokyo’s stock exchange after going through Japan’s version of Chapter 11 bankruptcy. JAL is adding long-haul flights to the U.S., with a strategy of avoiding the crowded coastal airports.
The airline’s re-emergence could be a model for some of Japan’s struggling corporations, in part because of its success overcoming Japan’s traditional stigma against bankruptcy. It is also likely to transform the U.S.-Asia travel market, as JAL tightens its ties with partner AMR Corp.’s American Airlines. “Some of the trans-Pacific fares last decade were shockingly low,” says Will Horton of CAPA Centre for Aviation, an analysis firm. “Those days look well gone.”
One measure of JAL’s importance to its U.S. rivals: Delta Air Lines Inc. fought hard with AA in 2009 to lure away JAL as a partner. AA fought back and, in the end, JAL stayed true to American, which coincidentally followed JAL into bankruptcy-court protection late last year.
AA and JAL have deepened their relationship, with antitrust approval from regulators, and now jointly set schedules, price tickets and share revenue on flights between the U.S. and Japan. The ties run deep: JAL has even offered to train American’s cabin attendants in the ways of Japanese hospitality. AA executives have cited JAL as an important aspect of their own turnaround plan
JAL’s revival isn’t without controversy. The carrier benefited from a special government-coaxed $6 billion debt waiver, a $4 billion loan from a state-backed fund and tax exemptions stretching years into the future that irk rival airlines as well as critics of the government policy. Retirees and employees also accepted pension cuts representing a 30% reduction for retirees, and 50% for current employees.
Once a global symbol of Japan’s post-World War II economic revival, JAL’s decline tracked the country’s 20-year fade. Now, however, JAL is setting the pace for the global aviation industry with an operating-profit margin of 17%, two to three times that of rivals world-wide.
The U.S. market is central to JAL’s future blueprint. Flights to the U.S. mainland were spared in a drastic postbankruptcy cull that saw 40% of its international flights cut.
This year JAL launched its first new long-haul route since bankruptcy using newly acquired, cheaper-to-operate Boeing Corp. CAT +3.43% 787 jets to fly direct to Boston from Tokyo. Another route, to San Diego, is planned for December. JAL says there is demand for its direct flights to major cities that bypass saturated airports in New York and Los Angeles and connect with American Airline flights onward to smaller cities.
JAL critics, notably chief local rival All Nippon Airways Co., 9202.TO -0.56% say the turnaround has less to do with savvy management and more to do with government marketplace meddling that tilted the playing field in JAL’s favor. Real reform, they say, would have been to let JAL sink or swim on its own. “Can we really become globally competitive if we have something like two identical airlines in the Japanese market?” says ANA senior vice president Shinzo Shimizu.
Kazuo Inamori, the veteran executive who led JAL’s turnaround, says not only is the company’s recovery real, but it offers a possible turnaround model for other inefficient, once-dominant blue-chips. “I hope we can light the way for others,” Mr. Inamori said in a recent interview at JAL’s Tokyo headquarters.
For Mr. Inamori, a slight, gray-haired 80-year-old, JAL’s bankruptcy offered a test platform for the management ideas of a famously long-running career. An airline novice who was effectively retired, he was persuaded in January 2010 to take the JAL job by friends in Japan’s ruling political party.
He ranks among the last of a generation of revered postwar Japanese entrepreneurs, alongside Sony co-founder Akio Morita and auto-industry legend Soichiro Honda. Mr. Inamori founded technology giant Kyocera Corp. KYO +2.18% in 1959, and ran it for a half-century without a single money-losing year. In 1984, he helped launch what eventually became Japan’s second-biggest cellphone company, KDDI Corp. 9433.TO +1.13% He takes no salary at JAL.
Mr. Inamori also became a Buddhist monk, and his conversation is peppered with philosophical musings, making him the closest thing Japan has to a management guru. He has published several volumes of his thoughts on how to run a company, 2006′s “Amoeba Management” being one of the most widely read.
The gist, according to his book: “Divide the company into small, organized units, which I called ‘amoebas.’ ” Amoeba members plan for themselves and “pool their wisdom and effort to achieve targets.” In other words, it is a way to try to get workers to buy into top management’s vision—say, cost-cutting—and implement it.
At JAL, Mr. Inamori’s policies took the form of a 125-page booklet, “JAL Philosophy,” carried by all 32,000 remaining employees. Many workers say they were initially dubious, but now can cite a preferred passage. “We talk about ‘JAL Philosophy’ every day” at morning staff meetings, says Yuta Kawaguchi, 40, a manager responsible for parts supply at Haneda. He says his favorite passage is, “Discuss Frankly.”
Some phrases from the handbook sound almost like a self-help text: “Have a beautiful mind,” “Wrestle in the center of the ring,” “Make the best baton pass.” The JAL philosophy “is like a kind of code,” says Tetsuya Onuki, a managing executive officer.
At JAL headquarters, one of the core events in Mr. Inamori’s “Amoeba Management” system takes place once a month. In a large room reminiscent of a school sports hall, with a wood floor and spartan desks and chairs, about 80 senior executives gather with Mr. Inamori for a three-day examination of every line in the budget.
It is a level of scrutiny that was new to JAL managers when Mr. Inamori introduced it. Many say they have felt the rough edge of Mr. Inamori’s tongue in his meetings, either for falling short of targets, or setting targets he deems too soft.
“Mr. Inamori can become very hard on people,” says Mr. Onuki, if he sees too much “conservatism” in setting targets.
Some skeptics remain within the company. Says one co-pilot: “I discussed things frankly, like the philosophy says, then I was told, ‘You don’t have a beautiful mind.’ ” He declined to elaborate on what drew the rebuke.
And while the principal trade union, representing about 70% of unionized staff, broadly supports management, a coalition of five unions covering the remaining union members, including pilots, still protests some management moves. The group argues its members were unfairly penalized in the comparatively small number of layoffs—totaling 165—that did take place as part of the workforce shrinkage.
JAL says that even after trying to cut costs through early retirements and pay freezes, it had no choice but to do the layoffs.
JAL’s emergence from bankruptcy remains an anomaly in Japan. Struggling companies here have long shunned the Corporate Rehabilitation Law, considered the country’s closest, if not exact, equivalent to U.S. Chapter 11 bankruptcy protection. According to research firm Teikoku Databank Ltd., only 139 companies have filed for protection under the law since 1962, when its records began.
Teikoku Databank figures show that, including other bankruptcy-filing mechanisms, a total of 11,369 companies filed for bankruptcy in Japan in 2011. By comparison, in the U.S. last year, 47,806 businesses filed for bankruptcy, according to the American Bankruptcy Institute.
Japan’s relatively low bankruptcy count reflects a broader problem that many economists blame for bogging down Japan’s economy for decades: The thousands of “zombie” companies that have spent years reluctant or unable to restructure, but kept alive by fearful banks that provide cheap loans rather than risking fat write-offs.
To attack that problem, Japan in 2008 reformed its bankruptcy system to speed the process. JAL is the first sizable test case.
During its restructuring, JAL shed a third of its workforce, eliminated flights world-wide, and cut its operating costs in half. The vast majority of the 16,000 staff cuts didn’t come through layoffs, but from the sale of business units and voluntary retirements.
The cuts are paying off. For the year ended March, operating-profit margin was 17%. By comparison, its main rival in Japan, ANA, had a margin of 6.9% for the same period, and U.S. giants Delta Air Inc. and United Continental Holdings Inc. UAL -0.73% had margins of 5% to 6% for calendar 2011.
JAL itself expects that margin to drop in coming years as it invests in new jets. But it still sees its operating margin staying comfortably above 10% for at least the next two fiscal years.
One question hanging over JAL’s future is how it will fare once Mr. Inamori resumes his retirement, as he has vowed to do by early next year. This past January he named a successor, Yoshiharu Ueki, a charismatic former pilot and the son of a traditional Japanese Kabuki stage actor and movie star. Mr. Ueki, 59, will face the challenge of controlling costs in coming years as JAL prepares to invest in new aircraft.
The carrier is already forecasting costs will rise 10% in the fiscal year starting April 2013, compared with the year that started April 2011. Another challenge: Responding to the arrival of low-cost carriers in Japan for the first time, and Asian rivals like Singapore Airlines Group and Cathay Pacific Airways Ltd. 0293.HK +0.93% regionally.
After 35 years as a pilot, Mr. Ueki says he has much to learn from Mr. Inamori, who refers to him as “Ueki-kun,” or “young Ueki.” Few pilots now successfully make the transition from managing the cockpit to managing the boardroom. Mr. Ueki will be the first in JAL’s 61-year history.
Pilots-turned-CEOs have a reputation in the business for a focus on expanding routes rather than expanding profits. But Mr. Ueki made an early impression on Mr. Inamori, who then picked the ex-pilot to work out which routes to shut down. In April 2010, JAL announced a plan to cut 15 international and 30 domestic routes. It now operates more than 170 routes.
JAL hasn’t reported a full breakdown of its cost-cuts. Officials say just over 20% of the 1 trillion yen in savings between the fiscal year ended March 2009 and the year ended March this year can be attributed to job cuts. About 27% comes from fuel savings, helped by the elimination of inefficient older jets. Much of the rest is due to lower depreciation costs, aided too by scrapping old planes.
By the April-June quarter in 2011, JAL was in the black with an operating-profit margin of 6.7% and rising. That was a notable turnaround in less than two years: In JAL’s last quarter before bankruptcy for which it publicly disclosed results, October-December 2009, it had operating losses of 25 billion yen.
In February this year, Mr. Inamori hoisted Mr. Ueki to the board and named him JAL’s president. “I appointed Mr. Ueki because of his personality, that’s the quality I see in Ueki-kun,” says Mr. Inamori. As for his “ability to run the day-to-day business, I don’t think we need to worry much. He has been learning a lot about how to look all the numbers and how to steer the operations.”
With much to learn quickly, Mr. Ueki jokes, “At this moment, honestly speaking, I’m not enjoying this position.” Still, he says, “I am beginning to see a bit of light.”
—Susan Carey in Chicago contributed to this article.