Rethinking privatization

Japan Airlines, a leading Japanese company, filed for bankruptcy protection together with its subsidiary companies, Japan Airlines International and JAL Capital. If its application is accepted, it will go through an intensive restructuring process that will include a drastic reduction of its work force The company’s fate now rests in the hands of a state-sponsored corporation that will handle the restructuring plan.

The fall of JAL is predicated on its debt, which the company began amassing in 2008. The convergence of high oil prices and the global financial crisis increased the company’s costs and decreased its profits. But these are external factors that all airlines around the world have faced.

The fundamental reason that led JAL to bankruptcy is the accumulation of structural contradictions in its management structure.

JAL was privatized in 1987 but was left without an owner. With no large shareholder to take charge of governance, the company was always strongly influenced by the pressures of politics and government, even after its privatization. It got down on bended knee in front of former government officials appointed through connections made in the political arena.

It was privatized on the surface, but was actually unable to break away from the authorities who ruled its business management practices on the inside. With eight labor unions crowding round with various demands on top of that, it could not dream of restructuring.

As a result, it did not have the power to overcome crisis situations. In the end, it failed to overcome its declining balance sheet and is now facing bankruptcy.

The fall of JAL is the horrific result of privatization without ownership and labor unions madly eating their own flesh. It is an example demonstrating that government protection and support are of no use if a privatization scheme is not conducted properly.

Korea also has companies that have been privatized, such as Kookmin Bank, Posco and KT. These companies have not yet experienced any major failures of management, but there is lingering anxiety about management rights and suspicions that the companies have been influenced by the authorities because they have been privatized without ownership.

The situation surrounding KB Financial Group shows that the JAL case is not just a story in a land far away. We need to learn from the fall of JAL and create a sound corporate structure for our privatized public companies.