If Only JAL Knew More About Options Trading

In the mid-1980s, Japan Airlines (JAL) made a series of financial decisions that would ultimately cost the company dearly. According to a voluntary association of former flight crew members, a lack of knowledge about financial derivatives—specifically forwards and options—played a pivotal role in the outcome.

The Decision

Between 1985 and 1986, JAL entered forward contracts to purchase U.S. dollars totaling 365 billion yen (about $2 billion at the time). On the surface, this made sense. The airline needed dollars for fuel and aircraft purchases, and hedging against a stronger dollar was a reasonable strategy.

The Missteps

What was not reasonable were the terms and follow-up actions:

• Excessive contract duration: The forward contracts were locked in for 11 years, far longer than typical risk management practice.

• Failure to adjust strategy: After the 1985 Plaza Accord, the dollar fell sharply, yet JAL chose not to adjust its forward contracts. (By 1987, simply capping contracts at existing levels could have saved about 43.4 billion yen in losses.)

• Ignoring alternatives: Beyond forward contracts, JAL could have used dollar call options. This would have provided protection against currency risk while still allowing flexibility.

The Cost

In practice, JAL ended up buying U.S. dollars at an average rate of 185 yen to the dollar over a decade, while the market rate eventually sank to 79 yen. The result? A staggering 220 billion yen in foreign exchange losses. Combined with another 130 billion yen loss from poor real estate investments, these mistakes contributed heavily to JAL’s bankruptcy filing in 2010.

The Lesson

The story is not just about one airline’s downfall—it’s about the importance of financial literacy at the leadership level. A better understanding of financial derivatives could have saved billions, preserved jobs, and perhaps even altered the trajectory of one of Japan’s most iconic companies.

👉 Takeaway: Knowledge of tools like options isn’t just for traders on Wall Street—it can mean the difference between stability and collapse for global businesses.

Originally posted on LinkedIn

Sources:

Ōshika, Yasuaki. The Fallen Wings: Documenting the Bankruptcy of JAL (堕ちた翼 ドキュメントJAL倒産). Asahi Shimbun Publications, 2010.

Japan Airlines OB Volunteer Crew Association. News – The Reality of Reckless Management (日本航空OB 乗員有志の会ニュース　放漫経営の実態).

Wikipedia, Japan Airlines