Japan Airlines (JAL) is a black swan, or more precisely, a red crane
called “tsurumaru” in the airline industry. It is nothing short of a
remarkable turnaround story, a rarity in a highly competitive industry
that saw national champions such as Malev go bankrupt and Air France,
Iberia and the likes struggle to compete against an onslaught of
low-cost carriers (LCCs) that have placed significant pressure on these
legacy carriers’ short-haul operations.
So when Japan Airlines (JAL) emerged from bankruptcy with its US$8.5 billion blockbuster re-list on the Tokyo Stock Exchange in September 2012 as the year’s second-largest initial public offering (IPO) behind Facebook, during which the quasi-governmental Enterprise Turnaround Initiative Corporation (ETIC) of Japan sold its 96.5% stake in the carrier and made a US$4 billion profit out of a ¥350 billion bailout, this made its turnaround legendary, much akin to its chairman-emeritus Kazuo Inamori, founder of electronics giant Kyocera Corp. brought out from retirement to save the ailing flag carrier.
Further taking into account that Japan Airlines (JAL) became the world’s most profitable carrier in 2011 with a ¥186.6 billion (US$1.84 billion) net profit merely a year since its January 2010 bankruptcy with US$25 billion of debts on its balance sheet, it is clear the reason why the “JAL Philosophy” handbook, authored by Inamori, has become a must-read for JAL managers.
The critics, including JAL’s arch-rival, All Nippon Airways (ANA) that has never received a single dime from the government for its 60 years in existence, cry foul of 4 government bailouts of JAL within a decade, as well as debt forgiveness from banks totalling ¥520 billion (US$5.1 billion) during the bankruptcy process. The ¥1.1 trillion loss carry-forwards, the critics claim, will yield a US$4.5 billion corporate tax break over the next 9 years that will significantly distort JAL’s underlying financial performance.
Still such criticisms fail to undermine the significance of the restructuring that forms the genesis of a reborn Japan Airlines (JAL). It cut 49 unprofitable international routes, sacked 15,700 employees, a third of the 47,000 total workforce at the time and withdrew its entire fuel-guzzling Boeing 747 fleet from an airline that was once the world’s largest 747 operator.
With a solid foundation, Japan Airlines now aims to grow with a three-part strategy: enhancing its brand, improving its international network with the mid-sized Boeing 787 Dreamliner as a cornerstone of its strategy and sustaining high profitability through boosts in cost competitiveness.
This laser focus on its core competency bodes well against its competitors and differentiates it from ANA’s capital-raising to possibly expand into other lines of business and invest in other Asian carriers, which may ultimately prove to be a deviation from its core competency with which it has competitive advantages.
Not a legacy carrier anymore
From a financial performance perspective, with a clean balance sheet owing to the forgiveness of debt during the restructuring, Japan Airlines (JAL) is not a legacy carrier saddled with an uncompetitive cost structure anymore. On the contrary, JAL has remained highly profitable since its exit from bankruptcy, especially so as it is expected to be the world’s most profitable carrier in 2012 for a second consecutive year.
Its operating revenue increased by 2.8% year-over-year from ¥1.205 trillion in FY2011 to ¥1.239 trillion in FY2012, primarily attributable to a 5.5% rise in international passenger revenue from ¥385.2 billion in the prior fiscal year to ¥406.6 billion this fiscal year while domestic passenger revenue remained largely unchanged with a marginal 0.9% or ¥4.1 billion increase to ¥485.2 billion in FY2012. This offset a 4.9% decline in cargo revenue to ¥75.5 billion in FY2012 from ¥78.8 billion in FY2011. Other revenues rose by 4.5% from ¥259.5 billion in the prior financial year to ¥271.4 billion in FY2012, as Jetstar Japan commenced its services on 3 July, 2012.
Though the modest increase in revenue was dwarfed by a 4.4% increase in operating expenses from ¥999.8 billion in FY2011 to ¥1.04 trillion in FY2012, thereby producing a 4.7% drop in operating profit from ¥204.9 billion in FY2011 to ¥195.2 billion and a 1.2% reduction in operating margin to 15.8% from 17%. Similarly, net income fell by 8% to ¥171.6 billion (US$1.69 billion) in 2012 from ¥186.6 billion (US$1.84 billion) in the prior year.
Passenger traffic measured in revenue passenger kilometres (RPKs) surged by 8.5% from 52.6 billion RPKs in FY2011 to 57.05 billion RPKs in the succeeding financial year, whereas passenger capacity rose proportionately less at a 3.3% pace to 81.2 billion available seat kilometres (ASKs) in FY2012 from 78.56 billion ASKs a year earlier, thus resulting in a 3.4% increase in load factor to 70.3% from 66.9% a year earlier.
This robust financial result was achieved against the backdrop of a territorial dispute with China over uninhabited islands in the East China Sea which negatively shaved ¥5 billion off international passenger revenue in FY2012 and the 787 grounding since 16 January which impacted the fourth-quarter international operation by ¥1.3 billion, with a ¥1.7 billion loss in revenue partially offset by a ¥0.4 billion saving in expenses. In total, Japan Airlines suffered a ¥4.8 billion and a ¥2.6 billion dent in total revenue and operating profit in FY2012, respectively, as a result of the worldwide Boeing 787 Dreamliner grounding as it is one of the launch customers of the game-changing 787 Dreamliner alongside All Nippon Airways (ANA) and operates 7 examples.
Absent these factors beyond JAL’s control, the airline would otherwise have recorded a 3.6% increase in revenue to ¥1.249 trillion instead of a 2.8% increase and a steady operating profit of ¥205.1 billion from FY2011′s ¥204.9 billion, rather than a 4.9% decline. Likewise, its FY2012 net income would have registered a significantly less 2.7% fall to ¥181.5 billion instead of a 8% drop.
The financial impact arising from the 787 grounding, in which multiple short-circuits in cell number 6 of the lithium cobalt-dioxide (Li-CoO2) battery in the aft electronics/equipment (E/E) bay onboard a Japan Airlines (JAL) Boeing 787-8 in Boston on January 7 led to an overheating and opened a pandora’s box preceding the 787′s 3 months-long grounding, was more prominent in the fiscal fourth quarter.
Japan Airlines’ revenue was marginally up by 0.4% year-over-year to ¥296.7 billion during the quarter despite a 2% increase in passenger traffic to 14 billion RPKs. While capacity soared even slower by 0.4% to 20.1 billion ASKs, this did little to halt a 14.3% slide in operating profit to ¥37 billion and a 23.6% plunge in net income to ¥31 billion. Excluding the 787 impact, JAL’s fourth-quarter operating profit would have dropped by 9.4% to ¥38.3 billion and net profit by 11.3% to ¥34 billion instead.
These results, benign on the surface, masked significant progress achieved in its operations, both domestically and internationally.
For instance, Japan Airlines (JAL) has commenced the operation of an expanded codeshare partnership and a joint business agreement with International Airlines Group (IAG) unit British Airways (BA) on 28 September last year, with 4 additional BA European routes and 9 extra JAL flights to 7 Japanese cities being added to the existing partnership, bringing the number of JAL codeshare routes on BA’s European network to 27.
JAL also expanded its codeshare partnerships with fellow oneworld alliance members American Airlines (AA) and S7 Airlines, with Japan Airlines placing its code on the former‘s flights from Dallas Fort Worth and New York John F. Kennedy international airport to both Sao Paulo and Rio de Janeiro and the latter‘s flights between Tokyo Narita and Khabarovsk as well as Vladivostok in Russia.
These partnerships are producing early results for the Japanese carrier, with load factors on North American and European flights increasing to 80.1% and 76.8%, respectively, up from 76.8% and 71.3% in the prior year. The number of international passengers carried rose by 9.9% from 6.84 million in FY2011 to 7.5 million in FY2012 and passenger traffic jumped by 12.3% from 30.3 billion revenue passenger kilometres (RPKs) in FY2011 to 34 billion RPKs a year later. Passenger capacity only rose by 4% from 43 billion available seat kilometres (ASKs) in FY11 to 44.7 ASKs in FY12, thereby producing a 5.6% increase in load factor to 76.1% in FY2012 from 70.4% in the prior fiscal year. Unit revenue rose by 1.5% to ¥9.1 from ¥9 a year ago, albeit yield, measured in revenue per revenue passenger kilometre (RPK), plummeted by 6% to ¥11.9 in FY2012 from ¥12.7 a year earlier.
The softness in the profitability measures carried into the
fourth-quarter of FY2012, which is traditionally a weak period for
business travel, only to be compounded by the 787 grounding this year,
with yield sliding another 2.2% year-over-year to ¥11.4 and unit revenue
slipping by 1.3% to ¥8.7 despite 1.7% more passengers being carried
during the period.
Domestically, the airline was boosted by ¥16.5 billion over the post-2011 Great East Japan earthquake recovery, with 3.6% more passengers being carried to 30 million in FY2012 from 28.97 million in FY2011 and 3.4% more passenger traffic to 23 billion revenue passenger kilometres (RPKs) from 22.3 billion RPKs, whereas passenger capacity rose by 2.6% to 36.4 billion available seat kilometres (ASKs) in FY2012 from 35.5 billion ASKs in the prior year period, thereby leading to a 0.5% higher load factor at 63.1%.
Though Japan Airlines (JAL) is facing an increasingly challenging domestic market with a plethora of low-cost carriers (LCCs) such as Jetstar Japan, AirAsia Japan and Peach Aviation commencing operations during FY2012, as well as an extension of the Shinkasen high-speed rail. This is highlighted by the 1.7% decline in unit revenue, measured in revenue per available seat kilometre (RASK), to ¥13.3 last fiscal year from ¥13.5 in the prior period, as well as a 2.4% decrease in domestic yield to ¥21.1 in FY2012 from ¥21.6 in FY2011.
“Meanwhile, the entry of low cost carriers (LCC) based in Narita and Kansai airports and an increase in LCC domestic and international services produced additional supply. A marked increase in LCC services was seen on short-haul routes, especially to/from Korea. In addition, other modes of transportation had great impact on demand (e.g. extended Shinkansen network), and depending on the route, demand shifted to Shinkansen express train services,” the airline said in its 2013-15 medium term management rolling plan.
The airline is actively realigning its product offerings to market demand, including suspending the Tokyo Narita-Osaka Kansai and Chubu-Ishigaki routes altogether and reducing flight frequencies on Tokyo Haneda-Osaka Kansai, Itami-Niigata, Fukuoka-Kagoshima routes while resuming the Fukuoka-Hanamaki and Niigata-Sapporo routes during FY2012.
Going forward, this will likely see Japan Airlines (JAL) focusing on profitable domestic routes from Tokyo Haneda and Osaka-Itami while letting its Jetstar Japan joint venture (JV) with Qantas Airways take over and fiercely compete on routes where yields are low and costs are high.
Examples include JAL’s newly-launched flights from Tokyo Haneda-Chubu and the airline upping flight frequencies on the Tokyo Haneda-Sapporo and Tokyo Haneda-Naha routes from 17 to 18 and from 13 to 14, respectively; while significantly increasing frequencies on flights from Osaka Itami to Sapporo, Fukuoka, Sendai, Hanamaki, Oita, Miyazaki and resuming services to Matsuyama, Hakodate and Misawa.
In doing so, not only could Japan Airlines avoid committing the same mistakes in the past in flying to small regional airports with losses, it could also improve the traffic mix and passenger yield by ensuring a satisfactory level of profitability on its mainline flying and focusing on last-minute price-inelastic business travellers who usually pay the full fare, while relying on Jetstar Japan to stimulate demand with its low fares supported by a low cost base to make profits on those routes as well.
This focus on profitable routes flying business travellers, with JAL introducing more business class and first class seats onto its domestic flights during the financial year, is partly attributable to a reversal of declining unit revenue trend in the fiscal fourth-quarter, with the measure rising 1.4% year-over-year to ¥12.8 despite a 1.5% decrease in domestic passenger traffic to 5.4 billion revenue passenger kilometres (RPKs) and a 0.7% drop in the number of passengers carried during the quarter to 7.07 million passengers.
Simply put, the flexibility and laser focus on its core competency of carrying business traffic the airline has shown, the result of which yields are maximised while reducing costs by shedding unprofitable domestic routes, have symbolised Japan Airlines is now a nimble carrier.
Cost leadership & revenue premium against ANA
In the meantime, ANA produced a stellar record FY2012 profit, with an astonishing 53.1% increase in net profit to ¥43.1 billion (US$424.1 million) from ¥28.1 billion in FY2011, buoyed by a 7% rise in operating profit to ¥103.8 billion in FY2012 from ¥97 billion in the prior fiscal year, as a result of operating revenue rising by 5.1% from ¥1.41 trillion in FY2011 to ¥1.48 trillion in FY2012, slightly outpacing a 5% increase in operating expense from ¥1.31 trillion in FY2011 to ¥1.38 trillion in FY2012. Operating margin, as a result, rose marginally by 0.1% to 7%.
Similar to its rival, All Nippon Airways (ANA) suffered adversely in the FY2012 fourth-quarter owing to the worldwide Boeing 787 Dreamliner grounding, of which it is the launch customer of the revolutionary carbon-composite jet and has 17 examples in its fleet when the grounding took place.
ANA took a ¥9 billion hit to its operating revenue as a result of the grounding, with ¥5 billion less in domestic revenue and ¥1 billion less in international revenue.
Absent the 787 grounding, ANA would have broken even in FY2012 fourth-quarter instead of losing ¥9 billion, worsened from the ¥5.6 billion loss recorded in the prior fiscal year period. Operating revenue during the quarter rose by 2.8% to ¥351.4 billion from ¥341.7 billion a year earlier, which was dwarfed by a twice as fast increase of 5.7% in operating expense to ¥355.1 billion from ¥335.8 billion in the year-ago period.
For the quarter and the year, the international part of ANA’s business was on a more upbeat note, with passenger revenues for the FY2012 and fiscal fourth quarter rising 8.8% and 6.7%, respectively, to ¥348.3 billion and ¥83.3 billion. Passenger traffic for the financial year rose by 12.6% to 28.5 billion revenue passenger kilometres (RPKs) from 23.35 billion RPKs in the preceding financial year, and the airline carried 6.7% more passengers to 6.28 million from 5.88 million a year ago, while passenger capacity rose by 10.3% to 28.5 billion available seat kilometres (ASKs) in FY2012 from 25.4 billion ASKs in the prior fiscal year, thus generating a 1.5% rise in load factor from 73.7% in FY2011 to 75.2% in FY2012.
The Star Alliance carrier more than doubled its revenue in the trans-pacific partnership with United Airlines and its European partnership with Lufthansa now includes Swiss International Air Lines and Austrian Airlines from 1 April onwards while its “Is Japan Cool?” and “ANA 60th Anniversary Eco-wari Youth” campaigns both contributed to the surge in international passenger traffic in FY2012. Though this resulted in a yield and revenue dilution, as the unit revenue dropped by 1.3% year-over-year to ¥9.2 per available seat kilometre (ASK) from ¥9.3 per ASK in the prior year period, while yield declined by 3.3% to ¥12.2 per revenue passenger kilometre (RPK).
This strength in its international business carried into the first 3 months of this year, despite a ¥2 billion charge against reduced China flights due to the territorial disputes and a ¥9.5 billion charge for the whole FY2012. Passenger revenue during the quarter rose by 6.7% year-over-year to ¥83.3 billion with 5.8% higher passenger traffic at 7.15 billion RPKs, albeit the number of passengers carried dipped by 3.1% to 1.507 million and capacity increased by 9.8% to 9.7 billion ASKs, thereby resulting in a 2.7% lower load factor of 73.5%. Unit revenue slid by another 2.8% to ¥8.6 per ASK although yield remained more or less stable at ¥11.7 per RPK, a 0.8% year-over-year growth.
For its domestic business, an increase in low-cost capacity, coupled with the extension of high-speed rail Shinkasen line, weighed during the year, such that while there was a 5.3% increase in the number of passengers being carried to 41 million in FY12 from 39 million in FY11, domestic passenger revenue only rose by 2.2% to ¥665.9 billion in FY12 from ¥651.5 billion in FY11. Domestic passenger revenue further decreased by 2.8% during FY12 fourth-quarter to ¥149.8 billion, with a 3.6% drop in passenger yields to ¥17.7 per RPK.
Yet these solid financial results are not indicative of the work lying ahead of All Nippon Airways (ANA) to enhance its competitiveness and restore its cost leadership that it once had. After all, bigger is not better, a lesson ANA should have learned and recognised over the years for being the underdog in the Japanese airline industry.
Crucially, Japan Airlines (JAL) has both a cost advantage and revenue premium against All Nippon Airways (ANA). For 2012, JAL’s cost per available seat kilometre (CASK) was ¥11.5 per ASK whereas ANA’s is 3.36% higher at ¥11.9 per ASK while JAL’s unit revenue, measured in revenue per available seat kilometre (RASK) was ¥10.98 per ASK compared to ANA’s ¥10.47 per ASK, a 4.87% lower figure.
When combined, these make Japan Airlines (JAL) having a 8.23% advantage in unit profitability. A noteworthy point is All Nippon Airways (ANA) takes a subtly but meaningfully different approach in calculating its unit costs by only dividing the passenger operating expense against all outputs measured in available seat kilometre (ASK) whereas JAL adopts an approach of dividing total operating expenses against ASK.
While it is understandable that ANA’s method may produce a fairer representation of passenger unit cost, one should caution the way each airline splits its cargo expenses, especially underbelly cargoes carried by passenger aircraft, to passenger and cargo segments differently. Such a difference may inadvertently distort either the unit cost of the passenger operation or the cargo operation.
In light of this difference and the limited availability of information, the aforementioned calculation by Aspire Aviation adopts JAL’s method by dividing total operating expenses against total ASKs produced during the period.
While ANA currently plans to slash cost by ¥100 billion over the next 2 years, thereby reducing its passenger unit cost in CASK by ¥1 to ¥9.09 per available seat kilometre (ASK) despite the passenger unit cost is expected to increase marginally to ¥9.53 per ASK in FY2013, this was insufficient to recover the lost ground in terms of unit costs against Japan Airlines (JAL).
Aspire Aviation estimates ANA’s cost per available seat kilometre (CASK) to be ¥11.4 per ASK by FY2014, a 4.3% reduction from FY13 to FY14, whereas Japan Airlines (JAL) will have an estimated CASK of ¥11.27 per ASK by FY2014, assuming a run-rate of ¥10 billion per year in cost saving of the ¥50 billion cost reduction programme laid out in its 2012-2016 medium term management rolling plan, spread over a 4.2% higher total capacity in FY2013 over the preceding financial year and a 4.5% higher figure in FY14 versus FY13.
Japan Airlines aims to achieve a CASK of ¥8 per ASK excluding fuel and ¥11.1 per ASK including fuel by FY2016 through more than tripling its number of air transport companies from 6 to 32 of which each business unit will seek to maximise its cost saving as an independent effort while investing ¥517 billion in new aircraft by FY2016.
JAL retired its entire MD90 fleet, as well as 1 Boeing 767-300 and 2 737-400s during FY2012, while receiving 2 Embraer E170s, 5 Boeing 787-8 Dreamliners and 8 737-800s during the period. It will also retrofit 6 Boeing 767-300ERs with winglets in FY2013 and start retiring early 777s and 767s under the medium term management rolling plan.
ANA, on the other hand, withdrew 3 Boeing 747-400s, 6 Boeing 767-300s, 3 Airbus A320s, 2 Boeing 737-700s and 2 Dash 8-300 turboprops while adding 4 fuel efficient 737-800s and 11 787-8 Dreamliners to its fleet in FY2012.
Interestingly, both the cost bases of ANA and JAL remain chronically high against its international competitors even with these cost reduction programmes.
On a like-for-like basis, JAL’s 2012 cost per available seat kilometre (CASK) of 11.32 US cents per ASK (¥11.5/ASK) was 14.3% higher than Cathay Pacific’s 9.7 US cents per ASK (HK$0.753/ASK) and a staggering 28.6% higher than Emirates’ 8.08 US cents per ASK (AED 0.2969/ASK). It was also 13.7% higher than Qantas’ 9.76 US cents per ASK (9.73 Australian cents/ASK) figure. ANA fared even worse with its 11.71 US cents per ASK figure being 16.7% higher than Qantas’, 17.2% higher than Cathay Pacific’s, and a whopping 30.9% higher than Emirates’.
Moreover, such a picture characterised hitherto does not take into account the significant product investment Japan Airlines (JAL) is making, which further enhances its ability to command a revenue premium for its services.
Make no mistake, it is indeed impressive for All Nippon Airways (ANA) to have received the 5-star ranking from London-based Skytrax, of which the airline launched its international premium economy services in FY2012.
However, Japan Airlines countered ANA’s “Inspiration of Japan” with “JAL New Sky” product line-ups, including a fully flat bed in business class and a premium economy class and economy class that boast the world’s largest seat pitches.
The 8 “JAL Suite” first class seats onboard JAL’s Boeing 777-300ER “777 Sky Suite” aircraft boast a 78.5-inch bed length and 33-inch bed width and its 49 business class “JAL Sky Suite” seats feature a 74-inch bed length and a 25.5-inch maximum width with a base width of 21 inches. In comparison, All Nippon Airways’ first class seats on board the Boeing 777-300ER feature a 76-inch pitch and 33-inch width whereas its business class seats feature 62-inch pitch and 21-inch width.
Likewise, Japan Airlines’ new premium economy class seats, dubbed “JAL Sky Premium”, feature a 42-inch pitch and 19-inch width, while its new economy class seats, “JAL Sky Wider”, have a seat pitch and width of 33-34 inches and 18 inches, respectively. In contrast, ANA’s premium economy class seats onboard the 777-300ER have a seat pitch and width of 38-inch and 18.5-inch, respectively, while its economy class seats feature a 31-inch seat pitch and a 16.5-inch seat width.
Coupled with its Sky Wi-Fi in-flight connectivity deployed on JAL’s New York, Chicago, Los Angeles and Jakarta routes; a new in-flight entertainment (IFE) system on all aircraft that enables in-flight sales on private television screen, this fully demonstrates JAL’s determination to drastically improve its international service offering. JAL has already announced that its Sky Suite 777 service will extend to the Tokyo Narita-New York route from 1 May onwards, as well as flights to Paris, Los Angeles and Chicago from Tokyo Narita beginning July, November 2013 and January 2014, respectively.
Low-cost revolution
Meanwhile, one of the most significant paradigm shifts in the Japanese airline industry is the recent low-cost revolution, where the low-cost capacity share of total Japanese domestic seats skyrocketed to 20.3% in 2012 from 9% and 8.8% in the two previous years, from just 1% in 2001, OAG data shows.
The low-cost sector is where Japan Airlines (JAL) and All Nippon Airways (ANA) differ in strategy, with ANA adopting a multi-brand strategy through the establishment of its ANA Holdings Inc. holding company and Osamu Shinobe being appointed as ANA president in addition to Shinichiro Ito becoming ANA Holdings Inc.’s chief executive.
Its Tokyo Narita-based joint venture (JV) AirAsia Japan carried 340,000 domestic passengers over 599 million domestic capacity in available seat kilometres (ASKs) and 382 million revenue passenger kilometres (RPKs) since it began operation on 1 August, 2012, as well as 60,000 international passengers over 113 million ASKs and 70 million RPKs, thus leading to a domestic and international load factor of 63.9% and 61.9%, respectively.
AirAsia Japan now has 4 Airbus A320 aircraft flying from Tokyo Narita to Kuala Lumpur, Taipei Taoyuan, Seoul, Busan whereas its domestic destinations include Sapporo, Nagoya, Okinawa, Fukuoka and plans to add Kumamoto and Okayama to its network later 2013 with 6 aircraft by the end of June 2013.
At the same time, ANA’s Osaka Kansai-based Peach Aviation has 8 Airbus A320s in its fleet and flies from Osaka Kansai to Sendai, Sapporo, Naha, Seoul Incheon, Fukuoka, Nagasaki, Kagoshima, Ishigaki, Taipei Taoyuan and Hong Kong, with the addition of Osaka Kansai-Busan and Naha-Ishigaki routes from September 2013 onwards.
Whereas ANA employs a localisation strategy with AirAsia Japan and Peach Aviation specialising in price-sensitive leisure traffic from their respective hubs at Tokyo Narita and Osaka Kansai, as well as possibly from Naha to Bangkok, Ho Chi Minh City and Hanoi, according to a Centre for Aviation (CAPA) report, Jetstar Japan adopts a simplistic but effective single-brand strategy.
Jetstar Japan currently flies from Tokyo Narita to Osaka Kansai, Oita, Fukuoka, Okinawa, Sapporo; and Kagoshima and Matsuyama from 31 May and 11 June onwards, respectively. The low-cost carrier (LCC) also flies from Osaka Kansai to Tokyo Narita, Fukuoka, Sapporo and Okinawa and from Nagoya to Sapporo and Fukuoka, in addition to Osaka Kansai and Nagoya from Fukuoka.
As Jetstar Japan further expands in a large domestic market which is 6 times larger than the domestic Australian market with 13 aircraft whereas Peach Aviation has 10 examples by the end of June, it will be able to leverage on the strength of the Jetstar brand and the frequent flyer programmes (FFPs) of Qantas and Japan Airlines (JAL), of which JAL codeshares on Jetstar Japan flights originating from Tokyo Narita, Osaka Kansai and Nagoya Chubu.
With Jetstar Japan utilising the Sabre global distribution system (GDS), this will lure first-time domestic passengers to connect onto Japan Airlines’ international flights through 50% cheaper fares and international passengers onto Jetstar Japan’s domestic flights, thereby maximising connecting traffic on both carriers.
Furthermore, as Jetstar Japan seeks to expand to possibly as many as 100 aircraft and its chief executive Miyuki Suzuki says low-cost capacity may account for as much as a 35% domestic share by 2020, the pent-up demand unleashed by the proliferation of low-cost carriers (LCCs) as the Japanese economy remains depressed and is plagued by a decade-long endless deflation, with low fares making air travel affordable from a consistently declining disposable income; ensures Jetstar Japan will have a bright future.
In addition, ANA’s fragmented collection of domestic low-cost carriers (LCCs) will invariably help Jetstar Japan, not least because of its lower selling, administration, training and maintenance cost which are all standardised while ANA’s plethora of domestic partners each have individual systems, fleet, etc. These include Starflyer which is 17.97% owned by ANA and specialises in flying to Kyushu from Tokyo Haneda, Solaseed Air with which it codeshares on flights from Tokyo Haneda to Miyazaki and Air Do on flights from Tokyo Haneda to Hokkaido.
Consolidating these brands will significantly strengthen AirAsia Japan’s competitive position, particularly with these partners’ precious slots at Tokyo Haneda and bolster AirAsia Japan’s domestic LCC capacity share to 7% from under 1% at press time. At present, Air Do has a 2.9% capacity share, whereas Solaseed Air and Starflyer hold a 2.5% and 1.7% share, respectively.
In contrast, Jetstar Japan holds a 1.8% domestic capacity share, while Japan Airlines (JAL) and All Nippon Airways (ANA) hold a 26.9% and 48.4% domestic capacity shares, respectively. Other JAL subsidiaries Japan Transocean Air (JTA) and Japan Air Commuter (JAC) hold another 3% and 2.2% capacity shares.
Looking beyond Japan
Though both Japan Airlines (JAL) and All Nippon Airways (ANA) are not over-relying on Japan for their future, as a consumption tax rise from the existing 5% to 8% in April 2014 and to as high as 10% in October 2015 threatens to cause disposable income to dwindle and there is an inherent risk the crowding-out effect of Japan’s unsustainably high public debt over which gross debt-to-GDP ratio is expected to reach 240% soon and the Japanese government used more than half of its tax revenue to service its national debt alone last year, will weigh on the domestic economy and thus air travel market heavily.
In response to this impending fiscal crisis and in light of the market reality that while low-cost carriers (LCCs) will create a large amount of new air travel demand, it will nevertheless cannibalise on some of the mainline carriers’ domestic trunk routes, both ANA and JAL are setting their sights on Asia.
In particular, an increase in the number of slots at both Tokyo Narita and Haneda airports is a rare opportunity on which JAL and ANA are capitalising to expand internationally in a highly slots-constrained market.
The number of slots at Tokyo Haneda will increase to 447,000 by end-FY2013 at the earliest from the current level of 390,000 through the use of a new runway whilst the number of slots at Tokyo Narita will increase to 300,000 by FY2014 from 270,000 at the moment through the simultaneous operation of take-off and landing at the airport.
“We regard the increase of departure and arrival slots in Tokyo metropolitan area (Haneda and Narita) as our biggest business opportunity. In particular, we will allocate our aircraft to mid/long haul international routes (Europe, North America, and Southeast Asia), and rapidly improve the route network,” Japan Airlines said in the medium-term management rolling plan. The airline plans to launch the Tokyo Haneda-Shanghai Pudong and Tokyo Haneda-Guangzhou routes subject to government approval.
Key to this international expansion is the Boeing 787 Dreamliner, with which both JAL’s and ANA’s futures are inextricably intertwined. The revolutionary game-changing aircraft chiefly made from carbon fibre reinforced polymer (CFRP) that is 35% made in Japan, has enabled carriers to launch long-haul thin routes that would otherwise be economically unfeasible.
Its 21% lower block fuel burn has been used to JAL’s fullest advantages by launching Tokyo Narita-Boston and Tokyo Narita-San Diego routes whereas ANA launched the Tokyo Narita-San Jose route using the aircraft.
Following the resumption of 787 commercial flights with a three-layered protection contained in Boeing’s battery modification plan (“Boeing 787 is a dream come true, again.“, 26th Apr, 13), JAL plans to reinstate the 787 beginning 1 June on routes such as Tokyo Narita to Boston, San Diego, Singapore and Delhi from 12 July onwards. It also plans to deploy the Boeing 787 Dreamliner on routes to Moscow starting from 1 September, Sydney and Bangkok from 1 and 2 December, respectively. Flights from Tokyo Haneda to Singapore and Beijing using the aircraft will begin on 1 June while flights between Haneda and San Francisco will start on 1 September.
At press time, Japan Airlines has completed the battery modification on all 7 of its 787 aircraft whereas ANA completed the modification on 11 of its 17 aircraft as of May 13, the Star Alliance carrier said in a daily update.
ANA also plans to reinstate the 787 Dreamliner on the temporarily suspended Tokyo Narita-San Jose route and Tokyo Haneda-Frankfurt route as well as the Haneda-Beijing route starting from 1 June while also deploying the aircraft for the first time on the Tokyo Narita-Beijing, Tokyo Narita-Shanghai Pudong and Haneda-Taipei (Songshan) routes.
Unlike JAL, All Nippon Airways (ANA), Asia’s largest carrier by sales, is planning to establish an investment management company in June 2013 in Singapore in order to explore new growth and strategic investment opportunities presented by the fast-growing region.
“We’re considering various options, including acquisitions or collaboration with a partner if we find one. Our main focus is southeast Asia. We haven’t made any decisions yet,” ANA president Osamu Shinobe said in a Bloomberg interview.
“The strategy we decide on will vary depending on whether we team up with an airline, or whether it’s with an investor. New investments will be decided by the holding company,” Shinobe explained.
While growing in Asia is paramount to ensuring ANA’s future success, such strategic investment does not make sense unless it bolsters its own Tokyo Narita and Haneda hubs which carries a considerable amount of risks. Such risks have to be justified and provide a sufficient return on investment in order to outweigh the opportunity cost involved.
For Japan Airlines (JAL), it could focus on further deepening its partnership with fellow oneworld member Malaysia Airlines (MAS), with which it already codeshares on MAS’s 11 weekly Kuala Lumpur-Tokyo flights and 6 times weekly Kuala Lumpur-Osaka flights. Such a deepening in alliance will significantly expand the scope of co-operation between the carriers and could include transpacific flights to Vancouver, Boston, Chicago, New York, Dallas, San Francisco, San Diego, thereby granting instant access to MAS to these destinations which it currently does not serve and complementing its existing Los Angeles flights via Tokyo Narita.
In doing so, Japan Airlines (JAL) could further improve the passenger yields on its transpacific flights, especially on those existing and future long-haul thin routes to North America operated by its 186-seat Boeing 787-8 Dreamliner with connecting MAS passengers from not only Kuala Lumpur, but also Penang, Kota Kinabalu, Langkawi, Kuching and Kuantan already covered under the existing codeshare partnership.
Last but not least, while Japan Airlines (JAL) forecasts a 31.2% fall in FY2013 net profit to ¥118 billion and a 28.2% slump in this year’s operating profit to ¥140 billion despite a 2.7% increase in total revenue to ¥1.27 trillion, by no means does this symbolise a decline in the company’s fortunes. Quite the opposite is true: with an unbelievable 0% debt-to-equity ratio and a still unparalleled profitability, it could finance its growth, significant product investment in JAL’s “New Sky” seat designs, at the same time putting a laser focus on cutting costs and enhancing its ability to charge customers a revenue premium for services one class above its competitors’ that they are willing to pay.
Under the leadership of JAL’s president Masaru Onishi and chairman Yoshiharu Ueki, which is already a hard act to follow, let alone that of its chairman emeritus Kazuo Inamori, Japan Airlines (JAL) is flying high into a new, but often turbulent sky and is determined to prevail in it against all odds the future may hold.
So when Japan Airlines (JAL) emerged from bankruptcy with its US$8.5 billion blockbuster re-list on the Tokyo Stock Exchange in September 2012 as the year’s second-largest initial public offering (IPO) behind Facebook, during which the quasi-governmental Enterprise Turnaround Initiative Corporation (ETIC) of Japan sold its 96.5% stake in the carrier and made a US$4 billion profit out of a ¥350 billion bailout, this made its turnaround legendary, much akin to its chairman-emeritus Kazuo Inamori, founder of electronics giant Kyocera Corp. brought out from retirement to save the ailing flag carrier.
Further taking into account that Japan Airlines (JAL) became the world’s most profitable carrier in 2011 with a ¥186.6 billion (US$1.84 billion) net profit merely a year since its January 2010 bankruptcy with US$25 billion of debts on its balance sheet, it is clear the reason why the “JAL Philosophy” handbook, authored by Inamori, has become a must-read for JAL managers.
The critics, including JAL’s arch-rival, All Nippon Airways (ANA) that has never received a single dime from the government for its 60 years in existence, cry foul of 4 government bailouts of JAL within a decade, as well as debt forgiveness from banks totalling ¥520 billion (US$5.1 billion) during the bankruptcy process. The ¥1.1 trillion loss carry-forwards, the critics claim, will yield a US$4.5 billion corporate tax break over the next 9 years that will significantly distort JAL’s underlying financial performance.
Still such criticisms fail to undermine the significance of the restructuring that forms the genesis of a reborn Japan Airlines (JAL). It cut 49 unprofitable international routes, sacked 15,700 employees, a third of the 47,000 total workforce at the time and withdrew its entire fuel-guzzling Boeing 747 fleet from an airline that was once the world’s largest 747 operator.
With a solid foundation, Japan Airlines now aims to grow with a three-part strategy: enhancing its brand, improving its international network with the mid-sized Boeing 787 Dreamliner as a cornerstone of its strategy and sustaining high profitability through boosts in cost competitiveness.
This laser focus on its core competency bodes well against its competitors and differentiates it from ANA’s capital-raising to possibly expand into other lines of business and invest in other Asian carriers, which may ultimately prove to be a deviation from its core competency with which it has competitive advantages.
Image Courtesy of Yoshidyaji
From a financial performance perspective, with a clean balance sheet owing to the forgiveness of debt during the restructuring, Japan Airlines (JAL) is not a legacy carrier saddled with an uncompetitive cost structure anymore. On the contrary, JAL has remained highly profitable since its exit from bankruptcy, especially so as it is expected to be the world’s most profitable carrier in 2012 for a second consecutive year.
Its operating revenue increased by 2.8% year-over-year from ¥1.205 trillion in FY2011 to ¥1.239 trillion in FY2012, primarily attributable to a 5.5% rise in international passenger revenue from ¥385.2 billion in the prior fiscal year to ¥406.6 billion this fiscal year while domestic passenger revenue remained largely unchanged with a marginal 0.9% or ¥4.1 billion increase to ¥485.2 billion in FY2012. This offset a 4.9% decline in cargo revenue to ¥75.5 billion in FY2012 from ¥78.8 billion in FY2011. Other revenues rose by 4.5% from ¥259.5 billion in the prior financial year to ¥271.4 billion in FY2012, as Jetstar Japan commenced its services on 3 July, 2012.
Though the modest increase in revenue was dwarfed by a 4.4% increase in operating expenses from ¥999.8 billion in FY2011 to ¥1.04 trillion in FY2012, thereby producing a 4.7% drop in operating profit from ¥204.9 billion in FY2011 to ¥195.2 billion and a 1.2% reduction in operating margin to 15.8% from 17%. Similarly, net income fell by 8% to ¥171.6 billion (US$1.69 billion) in 2012 from ¥186.6 billion (US$1.84 billion) in the prior year.
Passenger traffic measured in revenue passenger kilometres (RPKs) surged by 8.5% from 52.6 billion RPKs in FY2011 to 57.05 billion RPKs in the succeeding financial year, whereas passenger capacity rose proportionately less at a 3.3% pace to 81.2 billion available seat kilometres (ASKs) in FY2012 from 78.56 billion ASKs a year earlier, thus resulting in a 3.4% increase in load factor to 70.3% from 66.9% a year earlier.
This robust financial result was achieved against the backdrop of a territorial dispute with China over uninhabited islands in the East China Sea which negatively shaved ¥5 billion off international passenger revenue in FY2012 and the 787 grounding since 16 January which impacted the fourth-quarter international operation by ¥1.3 billion, with a ¥1.7 billion loss in revenue partially offset by a ¥0.4 billion saving in expenses. In total, Japan Airlines suffered a ¥4.8 billion and a ¥2.6 billion dent in total revenue and operating profit in FY2012, respectively, as a result of the worldwide Boeing 787 Dreamliner grounding as it is one of the launch customers of the game-changing 787 Dreamliner alongside All Nippon Airways (ANA) and operates 7 examples.
Absent these factors beyond JAL’s control, the airline would otherwise have recorded a 3.6% increase in revenue to ¥1.249 trillion instead of a 2.8% increase and a steady operating profit of ¥205.1 billion from FY2011′s ¥204.9 billion, rather than a 4.9% decline. Likewise, its FY2012 net income would have registered a significantly less 2.7% fall to ¥181.5 billion instead of a 8% drop.
The financial impact arising from the 787 grounding, in which multiple short-circuits in cell number 6 of the lithium cobalt-dioxide (Li-CoO2) battery in the aft electronics/equipment (E/E) bay onboard a Japan Airlines (JAL) Boeing 787-8 in Boston on January 7 led to an overheating and opened a pandora’s box preceding the 787′s 3 months-long grounding, was more prominent in the fiscal fourth quarter.
Japan Airlines’ revenue was marginally up by 0.4% year-over-year to ¥296.7 billion during the quarter despite a 2% increase in passenger traffic to 14 billion RPKs. While capacity soared even slower by 0.4% to 20.1 billion ASKs, this did little to halt a 14.3% slide in operating profit to ¥37 billion and a 23.6% plunge in net income to ¥31 billion. Excluding the 787 impact, JAL’s fourth-quarter operating profit would have dropped by 9.4% to ¥38.3 billion and net profit by 11.3% to ¥34 billion instead.
These results, benign on the surface, masked significant progress achieved in its operations, both domestically and internationally.
For instance, Japan Airlines (JAL) has commenced the operation of an expanded codeshare partnership and a joint business agreement with International Airlines Group (IAG) unit British Airways (BA) on 28 September last year, with 4 additional BA European routes and 9 extra JAL flights to 7 Japanese cities being added to the existing partnership, bringing the number of JAL codeshare routes on BA’s European network to 27.
JAL also expanded its codeshare partnerships with fellow oneworld alliance members American Airlines (AA) and S7 Airlines, with Japan Airlines placing its code on the former‘s flights from Dallas Fort Worth and New York John F. Kennedy international airport to both Sao Paulo and Rio de Janeiro and the latter‘s flights between Tokyo Narita and Khabarovsk as well as Vladivostok in Russia.
These partnerships are producing early results for the Japanese carrier, with load factors on North American and European flights increasing to 80.1% and 76.8%, respectively, up from 76.8% and 71.3% in the prior year. The number of international passengers carried rose by 9.9% from 6.84 million in FY2011 to 7.5 million in FY2012 and passenger traffic jumped by 12.3% from 30.3 billion revenue passenger kilometres (RPKs) in FY2011 to 34 billion RPKs a year later. Passenger capacity only rose by 4% from 43 billion available seat kilometres (ASKs) in FY11 to 44.7 ASKs in FY12, thereby producing a 5.6% increase in load factor to 76.1% in FY2012 from 70.4% in the prior fiscal year. Unit revenue rose by 1.5% to ¥9.1 from ¥9 a year ago, albeit yield, measured in revenue per revenue passenger kilometre (RPK), plummeted by 6% to ¥11.9 in FY2012 from ¥12.7 a year earlier.
Image Courtesy of Japan Airlines
Domestically, the airline was boosted by ¥16.5 billion over the post-2011 Great East Japan earthquake recovery, with 3.6% more passengers being carried to 30 million in FY2012 from 28.97 million in FY2011 and 3.4% more passenger traffic to 23 billion revenue passenger kilometres (RPKs) from 22.3 billion RPKs, whereas passenger capacity rose by 2.6% to 36.4 billion available seat kilometres (ASKs) in FY2012 from 35.5 billion ASKs in the prior year period, thereby leading to a 0.5% higher load factor at 63.1%.
Though Japan Airlines (JAL) is facing an increasingly challenging domestic market with a plethora of low-cost carriers (LCCs) such as Jetstar Japan, AirAsia Japan and Peach Aviation commencing operations during FY2012, as well as an extension of the Shinkasen high-speed rail. This is highlighted by the 1.7% decline in unit revenue, measured in revenue per available seat kilometre (RASK), to ¥13.3 last fiscal year from ¥13.5 in the prior period, as well as a 2.4% decrease in domestic yield to ¥21.1 in FY2012 from ¥21.6 in FY2011.
“Meanwhile, the entry of low cost carriers (LCC) based in Narita and Kansai airports and an increase in LCC domestic and international services produced additional supply. A marked increase in LCC services was seen on short-haul routes, especially to/from Korea. In addition, other modes of transportation had great impact on demand (e.g. extended Shinkansen network), and depending on the route, demand shifted to Shinkansen express train services,” the airline said in its 2013-15 medium term management rolling plan.
The airline is actively realigning its product offerings to market demand, including suspending the Tokyo Narita-Osaka Kansai and Chubu-Ishigaki routes altogether and reducing flight frequencies on Tokyo Haneda-Osaka Kansai, Itami-Niigata, Fukuoka-Kagoshima routes while resuming the Fukuoka-Hanamaki and Niigata-Sapporo routes during FY2012.
Going forward, this will likely see Japan Airlines (JAL) focusing on profitable domestic routes from Tokyo Haneda and Osaka-Itami while letting its Jetstar Japan joint venture (JV) with Qantas Airways take over and fiercely compete on routes where yields are low and costs are high.
Examples include JAL’s newly-launched flights from Tokyo Haneda-Chubu and the airline upping flight frequencies on the Tokyo Haneda-Sapporo and Tokyo Haneda-Naha routes from 17 to 18 and from 13 to 14, respectively; while significantly increasing frequencies on flights from Osaka Itami to Sapporo, Fukuoka, Sendai, Hanamaki, Oita, Miyazaki and resuming services to Matsuyama, Hakodate and Misawa.
In doing so, not only could Japan Airlines avoid committing the same mistakes in the past in flying to small regional airports with losses, it could also improve the traffic mix and passenger yield by ensuring a satisfactory level of profitability on its mainline flying and focusing on last-minute price-inelastic business travellers who usually pay the full fare, while relying on Jetstar Japan to stimulate demand with its low fares supported by a low cost base to make profits on those routes as well.
This focus on profitable routes flying business travellers, with JAL introducing more business class and first class seats onto its domestic flights during the financial year, is partly attributable to a reversal of declining unit revenue trend in the fiscal fourth-quarter, with the measure rising 1.4% year-over-year to ¥12.8 despite a 1.5% decrease in domestic passenger traffic to 5.4 billion revenue passenger kilometres (RPKs) and a 0.7% drop in the number of passengers carried during the quarter to 7.07 million passengers.
Simply put, the flexibility and laser focus on its core competency of carrying business traffic the airline has shown, the result of which yields are maximised while reducing costs by shedding unprofitable domestic routes, have symbolised Japan Airlines is now a nimble carrier.
Image Courtesy of Bloomberg
In the meantime, ANA produced a stellar record FY2012 profit, with an astonishing 53.1% increase in net profit to ¥43.1 billion (US$424.1 million) from ¥28.1 billion in FY2011, buoyed by a 7% rise in operating profit to ¥103.8 billion in FY2012 from ¥97 billion in the prior fiscal year, as a result of operating revenue rising by 5.1% from ¥1.41 trillion in FY2011 to ¥1.48 trillion in FY2012, slightly outpacing a 5% increase in operating expense from ¥1.31 trillion in FY2011 to ¥1.38 trillion in FY2012. Operating margin, as a result, rose marginally by 0.1% to 7%.
Similar to its rival, All Nippon Airways (ANA) suffered adversely in the FY2012 fourth-quarter owing to the worldwide Boeing 787 Dreamliner grounding, of which it is the launch customer of the revolutionary carbon-composite jet and has 17 examples in its fleet when the grounding took place.
ANA took a ¥9 billion hit to its operating revenue as a result of the grounding, with ¥5 billion less in domestic revenue and ¥1 billion less in international revenue.
Absent the 787 grounding, ANA would have broken even in FY2012 fourth-quarter instead of losing ¥9 billion, worsened from the ¥5.6 billion loss recorded in the prior fiscal year period. Operating revenue during the quarter rose by 2.8% to ¥351.4 billion from ¥341.7 billion a year earlier, which was dwarfed by a twice as fast increase of 5.7% in operating expense to ¥355.1 billion from ¥335.8 billion in the year-ago period.
For the quarter and the year, the international part of ANA’s business was on a more upbeat note, with passenger revenues for the FY2012 and fiscal fourth quarter rising 8.8% and 6.7%, respectively, to ¥348.3 billion and ¥83.3 billion. Passenger traffic for the financial year rose by 12.6% to 28.5 billion revenue passenger kilometres (RPKs) from 23.35 billion RPKs in the preceding financial year, and the airline carried 6.7% more passengers to 6.28 million from 5.88 million a year ago, while passenger capacity rose by 10.3% to 28.5 billion available seat kilometres (ASKs) in FY2012 from 25.4 billion ASKs in the prior fiscal year, thus generating a 1.5% rise in load factor from 73.7% in FY2011 to 75.2% in FY2012.
The Star Alliance carrier more than doubled its revenue in the trans-pacific partnership with United Airlines and its European partnership with Lufthansa now includes Swiss International Air Lines and Austrian Airlines from 1 April onwards while its “Is Japan Cool?” and “ANA 60th Anniversary Eco-wari Youth” campaigns both contributed to the surge in international passenger traffic in FY2012. Though this resulted in a yield and revenue dilution, as the unit revenue dropped by 1.3% year-over-year to ¥9.2 per available seat kilometre (ASK) from ¥9.3 per ASK in the prior year period, while yield declined by 3.3% to ¥12.2 per revenue passenger kilometre (RPK).
This strength in its international business carried into the first 3 months of this year, despite a ¥2 billion charge against reduced China flights due to the territorial disputes and a ¥9.5 billion charge for the whole FY2012. Passenger revenue during the quarter rose by 6.7% year-over-year to ¥83.3 billion with 5.8% higher passenger traffic at 7.15 billion RPKs, albeit the number of passengers carried dipped by 3.1% to 1.507 million and capacity increased by 9.8% to 9.7 billion ASKs, thereby resulting in a 2.7% lower load factor of 73.5%. Unit revenue slid by another 2.8% to ¥8.6 per ASK although yield remained more or less stable at ¥11.7 per RPK, a 0.8% year-over-year growth.
For its domestic business, an increase in low-cost capacity, coupled with the extension of high-speed rail Shinkasen line, weighed during the year, such that while there was a 5.3% increase in the number of passengers being carried to 41 million in FY12 from 39 million in FY11, domestic passenger revenue only rose by 2.2% to ¥665.9 billion in FY12 from ¥651.5 billion in FY11. Domestic passenger revenue further decreased by 2.8% during FY12 fourth-quarter to ¥149.8 billion, with a 3.6% drop in passenger yields to ¥17.7 per RPK.
Yet these solid financial results are not indicative of the work lying ahead of All Nippon Airways (ANA) to enhance its competitiveness and restore its cost leadership that it once had. After all, bigger is not better, a lesson ANA should have learned and recognised over the years for being the underdog in the Japanese airline industry.
Crucially, Japan Airlines (JAL) has both a cost advantage and revenue premium against All Nippon Airways (ANA). For 2012, JAL’s cost per available seat kilometre (CASK) was ¥11.5 per ASK whereas ANA’s is 3.36% higher at ¥11.9 per ASK while JAL’s unit revenue, measured in revenue per available seat kilometre (RASK) was ¥10.98 per ASK compared to ANA’s ¥10.47 per ASK, a 4.87% lower figure.
When combined, these make Japan Airlines (JAL) having a 8.23% advantage in unit profitability. A noteworthy point is All Nippon Airways (ANA) takes a subtly but meaningfully different approach in calculating its unit costs by only dividing the passenger operating expense against all outputs measured in available seat kilometre (ASK) whereas JAL adopts an approach of dividing total operating expenses against ASK.
While it is understandable that ANA’s method may produce a fairer representation of passenger unit cost, one should caution the way each airline splits its cargo expenses, especially underbelly cargoes carried by passenger aircraft, to passenger and cargo segments differently. Such a difference may inadvertently distort either the unit cost of the passenger operation or the cargo operation.
In light of this difference and the limited availability of information, the aforementioned calculation by Aspire Aviation adopts JAL’s method by dividing total operating expenses against total ASKs produced during the period.
While ANA currently plans to slash cost by ¥100 billion over the next 2 years, thereby reducing its passenger unit cost in CASK by ¥1 to ¥9.09 per available seat kilometre (ASK) despite the passenger unit cost is expected to increase marginally to ¥9.53 per ASK in FY2013, this was insufficient to recover the lost ground in terms of unit costs against Japan Airlines (JAL).
Aspire Aviation estimates ANA’s cost per available seat kilometre (CASK) to be ¥11.4 per ASK by FY2014, a 4.3% reduction from FY13 to FY14, whereas Japan Airlines (JAL) will have an estimated CASK of ¥11.27 per ASK by FY2014, assuming a run-rate of ¥10 billion per year in cost saving of the ¥50 billion cost reduction programme laid out in its 2012-2016 medium term management rolling plan, spread over a 4.2% higher total capacity in FY2013 over the preceding financial year and a 4.5% higher figure in FY14 versus FY13.
Japan Airlines aims to achieve a CASK of ¥8 per ASK excluding fuel and ¥11.1 per ASK including fuel by FY2016 through more than tripling its number of air transport companies from 6 to 32 of which each business unit will seek to maximise its cost saving as an independent effort while investing ¥517 billion in new aircraft by FY2016.
JAL retired its entire MD90 fleet, as well as 1 Boeing 767-300 and 2 737-400s during FY2012, while receiving 2 Embraer E170s, 5 Boeing 787-8 Dreamliners and 8 737-800s during the period. It will also retrofit 6 Boeing 767-300ERs with winglets in FY2013 and start retiring early 777s and 767s under the medium term management rolling plan.
ANA, on the other hand, withdrew 3 Boeing 747-400s, 6 Boeing 767-300s, 3 Airbus A320s, 2 Boeing 737-700s and 2 Dash 8-300 turboprops while adding 4 fuel efficient 737-800s and 11 787-8 Dreamliners to its fleet in FY2012.
Interestingly, both the cost bases of ANA and JAL remain chronically high against its international competitors even with these cost reduction programmes.
On a like-for-like basis, JAL’s 2012 cost per available seat kilometre (CASK) of 11.32 US cents per ASK (¥11.5/ASK) was 14.3% higher than Cathay Pacific’s 9.7 US cents per ASK (HK$0.753/ASK) and a staggering 28.6% higher than Emirates’ 8.08 US cents per ASK (AED 0.2969/ASK). It was also 13.7% higher than Qantas’ 9.76 US cents per ASK (9.73 Australian cents/ASK) figure. ANA fared even worse with its 11.71 US cents per ASK figure being 16.7% higher than Qantas’, 17.2% higher than Cathay Pacific’s, and a whopping 30.9% higher than Emirates’.
Moreover, such a picture characterised hitherto does not take into account the significant product investment Japan Airlines (JAL) is making, which further enhances its ability to command a revenue premium for its services.
Make no mistake, it is indeed impressive for All Nippon Airways (ANA) to have received the 5-star ranking from London-based Skytrax, of which the airline launched its international premium economy services in FY2012.
However, Japan Airlines countered ANA’s “Inspiration of Japan” with “JAL New Sky” product line-ups, including a fully flat bed in business class and a premium economy class and economy class that boast the world’s largest seat pitches.
The 8 “JAL Suite” first class seats onboard JAL’s Boeing 777-300ER “777 Sky Suite” aircraft boast a 78.5-inch bed length and 33-inch bed width and its 49 business class “JAL Sky Suite” seats feature a 74-inch bed length and a 25.5-inch maximum width with a base width of 21 inches. In comparison, All Nippon Airways’ first class seats on board the Boeing 777-300ER feature a 76-inch pitch and 33-inch width whereas its business class seats feature 62-inch pitch and 21-inch width.
Likewise, Japan Airlines’ new premium economy class seats, dubbed “JAL Sky Premium”, feature a 42-inch pitch and 19-inch width, while its new economy class seats, “JAL Sky Wider”, have a seat pitch and width of 33-34 inches and 18 inches, respectively. In contrast, ANA’s premium economy class seats onboard the 777-300ER have a seat pitch and width of 38-inch and 18.5-inch, respectively, while its economy class seats feature a 31-inch seat pitch and a 16.5-inch seat width.
Coupled with its Sky Wi-Fi in-flight connectivity deployed on JAL’s New York, Chicago, Los Angeles and Jakarta routes; a new in-flight entertainment (IFE) system on all aircraft that enables in-flight sales on private television screen, this fully demonstrates JAL’s determination to drastically improve its international service offering. JAL has already announced that its Sky Suite 777 service will extend to the Tokyo Narita-New York route from 1 May onwards, as well as flights to Paris, Los Angeles and Chicago from Tokyo Narita beginning July, November 2013 and January 2014, respectively.
Image Courtesy of Japan Airlines
Meanwhile, one of the most significant paradigm shifts in the Japanese airline industry is the recent low-cost revolution, where the low-cost capacity share of total Japanese domestic seats skyrocketed to 20.3% in 2012 from 9% and 8.8% in the two previous years, from just 1% in 2001, OAG data shows.
The low-cost sector is where Japan Airlines (JAL) and All Nippon Airways (ANA) differ in strategy, with ANA adopting a multi-brand strategy through the establishment of its ANA Holdings Inc. holding company and Osamu Shinobe being appointed as ANA president in addition to Shinichiro Ito becoming ANA Holdings Inc.’s chief executive.
Its Tokyo Narita-based joint venture (JV) AirAsia Japan carried 340,000 domestic passengers over 599 million domestic capacity in available seat kilometres (ASKs) and 382 million revenue passenger kilometres (RPKs) since it began operation on 1 August, 2012, as well as 60,000 international passengers over 113 million ASKs and 70 million RPKs, thus leading to a domestic and international load factor of 63.9% and 61.9%, respectively.
AirAsia Japan now has 4 Airbus A320 aircraft flying from Tokyo Narita to Kuala Lumpur, Taipei Taoyuan, Seoul, Busan whereas its domestic destinations include Sapporo, Nagoya, Okinawa, Fukuoka and plans to add Kumamoto and Okayama to its network later 2013 with 6 aircraft by the end of June 2013.
At the same time, ANA’s Osaka Kansai-based Peach Aviation has 8 Airbus A320s in its fleet and flies from Osaka Kansai to Sendai, Sapporo, Naha, Seoul Incheon, Fukuoka, Nagasaki, Kagoshima, Ishigaki, Taipei Taoyuan and Hong Kong, with the addition of Osaka Kansai-Busan and Naha-Ishigaki routes from September 2013 onwards.
Whereas ANA employs a localisation strategy with AirAsia Japan and Peach Aviation specialising in price-sensitive leisure traffic from their respective hubs at Tokyo Narita and Osaka Kansai, as well as possibly from Naha to Bangkok, Ho Chi Minh City and Hanoi, according to a Centre for Aviation (CAPA) report, Jetstar Japan adopts a simplistic but effective single-brand strategy.
Jetstar Japan currently flies from Tokyo Narita to Osaka Kansai, Oita, Fukuoka, Okinawa, Sapporo; and Kagoshima and Matsuyama from 31 May and 11 June onwards, respectively. The low-cost carrier (LCC) also flies from Osaka Kansai to Tokyo Narita, Fukuoka, Sapporo and Okinawa and from Nagoya to Sapporo and Fukuoka, in addition to Osaka Kansai and Nagoya from Fukuoka.
As Jetstar Japan further expands in a large domestic market which is 6 times larger than the domestic Australian market with 13 aircraft whereas Peach Aviation has 10 examples by the end of June, it will be able to leverage on the strength of the Jetstar brand and the frequent flyer programmes (FFPs) of Qantas and Japan Airlines (JAL), of which JAL codeshares on Jetstar Japan flights originating from Tokyo Narita, Osaka Kansai and Nagoya Chubu.
With Jetstar Japan utilising the Sabre global distribution system (GDS), this will lure first-time domestic passengers to connect onto Japan Airlines’ international flights through 50% cheaper fares and international passengers onto Jetstar Japan’s domestic flights, thereby maximising connecting traffic on both carriers.
Furthermore, as Jetstar Japan seeks to expand to possibly as many as 100 aircraft and its chief executive Miyuki Suzuki says low-cost capacity may account for as much as a 35% domestic share by 2020, the pent-up demand unleashed by the proliferation of low-cost carriers (LCCs) as the Japanese economy remains depressed and is plagued by a decade-long endless deflation, with low fares making air travel affordable from a consistently declining disposable income; ensures Jetstar Japan will have a bright future.
In addition, ANA’s fragmented collection of domestic low-cost carriers (LCCs) will invariably help Jetstar Japan, not least because of its lower selling, administration, training and maintenance cost which are all standardised while ANA’s plethora of domestic partners each have individual systems, fleet, etc. These include Starflyer which is 17.97% owned by ANA and specialises in flying to Kyushu from Tokyo Haneda, Solaseed Air with which it codeshares on flights from Tokyo Haneda to Miyazaki and Air Do on flights from Tokyo Haneda to Hokkaido.
Consolidating these brands will significantly strengthen AirAsia Japan’s competitive position, particularly with these partners’ precious slots at Tokyo Haneda and bolster AirAsia Japan’s domestic LCC capacity share to 7% from under 1% at press time. At present, Air Do has a 2.9% capacity share, whereas Solaseed Air and Starflyer hold a 2.5% and 1.7% share, respectively.
In contrast, Jetstar Japan holds a 1.8% domestic capacity share, while Japan Airlines (JAL) and All Nippon Airways (ANA) hold a 26.9% and 48.4% domestic capacity shares, respectively. Other JAL subsidiaries Japan Transocean Air (JTA) and Japan Air Commuter (JAC) hold another 3% and 2.2% capacity shares.
Image Courtesy of Abram Chan
Though both Japan Airlines (JAL) and All Nippon Airways (ANA) are not over-relying on Japan for their future, as a consumption tax rise from the existing 5% to 8% in April 2014 and to as high as 10% in October 2015 threatens to cause disposable income to dwindle and there is an inherent risk the crowding-out effect of Japan’s unsustainably high public debt over which gross debt-to-GDP ratio is expected to reach 240% soon and the Japanese government used more than half of its tax revenue to service its national debt alone last year, will weigh on the domestic economy and thus air travel market heavily.
In response to this impending fiscal crisis and in light of the market reality that while low-cost carriers (LCCs) will create a large amount of new air travel demand, it will nevertheless cannibalise on some of the mainline carriers’ domestic trunk routes, both ANA and JAL are setting their sights on Asia.
In particular, an increase in the number of slots at both Tokyo Narita and Haneda airports is a rare opportunity on which JAL and ANA are capitalising to expand internationally in a highly slots-constrained market.
The number of slots at Tokyo Haneda will increase to 447,000 by end-FY2013 at the earliest from the current level of 390,000 through the use of a new runway whilst the number of slots at Tokyo Narita will increase to 300,000 by FY2014 from 270,000 at the moment through the simultaneous operation of take-off and landing at the airport.
“We regard the increase of departure and arrival slots in Tokyo metropolitan area (Haneda and Narita) as our biggest business opportunity. In particular, we will allocate our aircraft to mid/long haul international routes (Europe, North America, and Southeast Asia), and rapidly improve the route network,” Japan Airlines said in the medium-term management rolling plan. The airline plans to launch the Tokyo Haneda-Shanghai Pudong and Tokyo Haneda-Guangzhou routes subject to government approval.
Key to this international expansion is the Boeing 787 Dreamliner, with which both JAL’s and ANA’s futures are inextricably intertwined. The revolutionary game-changing aircraft chiefly made from carbon fibre reinforced polymer (CFRP) that is 35% made in Japan, has enabled carriers to launch long-haul thin routes that would otherwise be economically unfeasible.
Its 21% lower block fuel burn has been used to JAL’s fullest advantages by launching Tokyo Narita-Boston and Tokyo Narita-San Diego routes whereas ANA launched the Tokyo Narita-San Jose route using the aircraft.
Following the resumption of 787 commercial flights with a three-layered protection contained in Boeing’s battery modification plan (“Boeing 787 is a dream come true, again.“, 26th Apr, 13), JAL plans to reinstate the 787 beginning 1 June on routes such as Tokyo Narita to Boston, San Diego, Singapore and Delhi from 12 July onwards. It also plans to deploy the Boeing 787 Dreamliner on routes to Moscow starting from 1 September, Sydney and Bangkok from 1 and 2 December, respectively. Flights from Tokyo Haneda to Singapore and Beijing using the aircraft will begin on 1 June while flights between Haneda and San Francisco will start on 1 September.
At press time, Japan Airlines has completed the battery modification on all 7 of its 787 aircraft whereas ANA completed the modification on 11 of its 17 aircraft as of May 13, the Star Alliance carrier said in a daily update.
ANA also plans to reinstate the 787 Dreamliner on the temporarily suspended Tokyo Narita-San Jose route and Tokyo Haneda-Frankfurt route as well as the Haneda-Beijing route starting from 1 June while also deploying the aircraft for the first time on the Tokyo Narita-Beijing, Tokyo Narita-Shanghai Pudong and Haneda-Taipei (Songshan) routes.
Unlike JAL, All Nippon Airways (ANA), Asia’s largest carrier by sales, is planning to establish an investment management company in June 2013 in Singapore in order to explore new growth and strategic investment opportunities presented by the fast-growing region.
“We’re considering various options, including acquisitions or collaboration with a partner if we find one. Our main focus is southeast Asia. We haven’t made any decisions yet,” ANA president Osamu Shinobe said in a Bloomberg interview.
“The strategy we decide on will vary depending on whether we team up with an airline, or whether it’s with an investor. New investments will be decided by the holding company,” Shinobe explained.
While growing in Asia is paramount to ensuring ANA’s future success, such strategic investment does not make sense unless it bolsters its own Tokyo Narita and Haneda hubs which carries a considerable amount of risks. Such risks have to be justified and provide a sufficient return on investment in order to outweigh the opportunity cost involved.
For Japan Airlines (JAL), it could focus on further deepening its partnership with fellow oneworld member Malaysia Airlines (MAS), with which it already codeshares on MAS’s 11 weekly Kuala Lumpur-Tokyo flights and 6 times weekly Kuala Lumpur-Osaka flights. Such a deepening in alliance will significantly expand the scope of co-operation between the carriers and could include transpacific flights to Vancouver, Boston, Chicago, New York, Dallas, San Francisco, San Diego, thereby granting instant access to MAS to these destinations which it currently does not serve and complementing its existing Los Angeles flights via Tokyo Narita.
In doing so, Japan Airlines (JAL) could further improve the passenger yields on its transpacific flights, especially on those existing and future long-haul thin routes to North America operated by its 186-seat Boeing 787-8 Dreamliner with connecting MAS passengers from not only Kuala Lumpur, but also Penang, Kota Kinabalu, Langkawi, Kuching and Kuantan already covered under the existing codeshare partnership.
Last but not least, while Japan Airlines (JAL) forecasts a 31.2% fall in FY2013 net profit to ¥118 billion and a 28.2% slump in this year’s operating profit to ¥140 billion despite a 2.7% increase in total revenue to ¥1.27 trillion, by no means does this symbolise a decline in the company’s fortunes. Quite the opposite is true: with an unbelievable 0% debt-to-equity ratio and a still unparalleled profitability, it could finance its growth, significant product investment in JAL’s “New Sky” seat designs, at the same time putting a laser focus on cutting costs and enhancing its ability to charge customers a revenue premium for services one class above its competitors’ that they are willing to pay.
Under the leadership of JAL’s president Masaru Onishi and chairman Yoshiharu Ueki, which is already a hard act to follow, let alone that of its chairman emeritus Kazuo Inamori, Japan Airlines (JAL) is flying high into a new, but often turbulent sky and is determined to prevail in it against all odds the future may hold.
Image Courtesy of Bloomberg
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