JAL Hotels

Although no official announcement has been made by either company, the Japanese continues to widely report that Okura Hotels has agreed to take over JAL Hotels. Okura Hotels even explicitly notes there is no existing agreement to purchase JAL Hotels on its website (Japanese only). The decision for Japan Airlines to sell its hotel operations, branded under Nikko Hotels and Hotel JAL City, has long been expected by the investment community. That this decision took half a year FOLLOWING bankruptcy to be made highlights the political opposition within JAL and the government. Nonetheless, as a business decision this is a no-brainer.

Through the two brands, JAL Hotels currently operates 58 hotels, 41 domestic and 17 overseas. Its 2009 financials show JPY 13.8 billion in sales and JPY 0.2 billion in operating profit (Mainichi Shimbum in Japanese only). For any business manager, this is an unexceptable profit margin and the business should be jettisoned. This also stands in high contrast with Okura Hotels financials, which state JPY 55.1 billion in sales with JPY 2.1 billion operating profit for 21 hotels. Of course, from a Western perspective, Okura Hotels' operating margin is also nothing to boast of...

There are two points to make in this transaction. First, this transaction is to buy the JAL Hotels operating company and assume its 1,000 employees. Okura Hotels is only gaining two hotels - the rest were sold over the past several years to reduce its balance sheet and to free capital. This makes JAL Hotels' poor financial results look even worse. It also calls into question Okura Hotels' purchase price of JPY 6 billion (Asahi Shimbum in Japanese only). As a sale, this is undoubtedly a great price - and understandably, other potential buyers (private equity firms and domestic and international hotel operators) could not make this bid. But how does Okura Hotels justify this price?

This leads me to the second point - this is a transformational deal for Okura Hotels, adding 400% more hotels to its operations in one swoop. What is Okura Hotels motivation? Do they have the operational ability to increase profitability at JAL Hotels? Will they continue to operate the overseas hotels? Will they maintain the Nikko and JAL City brands?

Regardless of these answers, Okura Hotels will need to turn around this ship quickly; JAL Hotels already has forward commitments for two hotels in Suzhou, China.