S&P confirms Japan Airlines, off watch

Standard & Poor's confirmed Japan Airlines Co. Ltd.'s ratings including its bonds at BB and removed it from CreditWatch negative. The outlook is negative.

The ratings were put on watch on March 19 amid concerns over the earnings impact from the war in Iraq and the outbreak of severe acute respiratory syndrome (SARS).

S&P said the confirmation reflects that the decline in passenger volume caused by SARS is likely to end in the near future, after the World Health Organization de-listed Taiwan, the last country on its warning list, on July 5; revenues from domestic flights, for which demand is more stable than international flights, have increased to nearly half of the Japan Airlines group's total air-transport passenger revenues; although the Japan Airlines group's equity base will be further eroded by huge net losses in fiscal 2003 (ending March 2004), the group maintains the ability to generate stable cash flows.

Over the next couple of years, the group's ratio of funds from operations to lease-adjusted total debt will hover around 10%, which is somewhat higher than that of its international peers.

The negative outlooks reflect the Japan Airlines group's weak financial profile, S&P added. Over the past two years, the profitability and equity base of the group have been considerably eroded by the events that have affected the global airline industry. At March 2003, Japan Airlines' ratio of total debt to capital stood at a high 86% (on a lease-adjusted basis), and is projected to deteriorate to about 90% at the end of current fiscal year.

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