FOXTROTS
Fox – sly. Trots – left-leaning (Trotsky) plus its more insalubrious meaning.
Foxtrots – leading the industry in a dance.
2009 March 02
Japan Airlines. Revival for survival.
Japan Airlines, Asia’s biggest airline by some measures, devised a ‘revival plan’ in 2007 running up to fiscal 2010 (through March 2011). It has now updated the plan.
The shocking factor is following a trend seen in some other high-cost airlines, such as Qantas with Jetstar – moving flights and/or growth to a lower-cost subsidiary. At the end of F2007 (thru March 2008), 25% of the JAL group international flights were operated by non-JAL airlines (JALways and JAL Express). By F2010, the target is 38%, meaning ‘only’ 62% for the brand Japan Airlines. Similar changes for domestic routes – 25% now, and targetted to be 41% F2010 (so 59% for the main brand).
The other main points of ‘revival’ are:
[] Aircraft downsizing, see Table 3. Large aircraft will fall from 58% of international fleet to 38% in F2010. Fleet is due to change. In 2007 JAL said that its fleet would change from nine types and 279 aircraft to eight and 296 in F2010, and then later down to 5/6 types. It is now at 272, but aircraft types are back at nine in F2010, albeit down to 291 aircraft.
[] Shifting to high profit routes. A task much easier to say than effect. How, for instance, to start new routes – which are usually lossmaking for at least the first year? And why was this not done before; surely it is a natural business move if there is little hope of profitability?
[] Staff is being cut, but not by much – 8%. That would take it to 48,800 by end F2008.
[] Some improvements are coming from incremental changes that are unstartling in themselves:
-Adding first-class on more domestic flights, and ‘premium economy class’ on more international flights.
-Moving and adding flights from Tokyo’s mostly-domestic Haneda airport. The relative proximity of Haneda means that JAL can introduce more early-morning and late-night departures. Plus, of course, late-night arrivals; JAL does not note this advantage, but late-night arrivals at Haneda would not necessarily mean post-midnight hotel arrival.
-Others, including expanding lounges, encouraging more bookings through the internet.
I believe some other changes are needed:
[] Fewer airlines in the group. I proposed this one year ago, and since then Japan Asia Airways has been shut down. Another step would be to merge JALways and JAL Express into one, perhaps including J-Air as well.
[] Although JAL has sold shares in peripheral companies – golf clubs, trading, and aircraft-accessory manufactures – there is still further to go.
Its subsidiaries in hotels (Nikko Hotels) and tour-operating (Jalpak) are underperforming in their market sectors. JAL needs either to fix the problems, or get out. Hotels are a good business, but only if run as a hotel operation; Nikko is run as an after-thought airline-subsidiary. Jalpak is in a dying business, which can be saved only if it moves to an internet-based operation.
[] In 2007 I noted that JAL’s forecasts were based on a too-low price for oil – although even I did not expect it to move as fast from the forecast US$75/barrel to over US$100. JAL’s new forecast is based on US$110 over the three years of the plan; hopefully, prices will not go higher.
I am also better than JAL at forecasting the yen exchange rate, although I based that on a rising yen rather than what actually happened, a falling dollar; I was right, but for the wrong reasons. JAL forecast the yen would fall from US$1 to ¥112 in fiscal 2005, to ¥120 in F2010. Now it forecasts ¥110 for the three years left in the plan.
Some results for the airline’s fiscal year through March 2008 do not look encouraging however:
[] Overall operating revenue in the year just ended, see Table 1, did not reach the forecast, even though the forecast was made only two months before year-end. International passenger revenue, however, was higher than expected.
For the current financial year, a further 2% decline is forecast in total revenue, but international revenue is forecast to increase 7%. If that forecast was based on traffic growth, then it would be too high. But JAL is trying to increase yield – by adding or increasing business class, adding a class between economy and business, etc – see above.
[] There was a fall of ‘only’ 1% in seat sales, see Table 2. But there has been an average annual fall this decade. Some route-regions are disaster – Europe down an average 2% annually this decade.
However, the largest route-region, Southeast Asia, has been growing an average 3%. And China has been growing at an average 12% to take it above Korea, which has also been growing comfortably.
Table 1
Financial profile of Japan Airlines
|
Item
|
Yr-Mar 09
|
Yr-Mar 08
|
Yr-Mar 08
|
|
|
forecast
|
actual
|
forecast
|
|
Operating revenue,US$bn*
|
21.8
|
22.3
|
22.4
|
|
Growth,%
|
-2.1
|
-3.1
|
-2.8
|
|
AAGR,%
|
6.7
|
7.8
|
7.8
|
|
intl passenger,US$bn*
|
8.1
|
7.5
|
7.5
|
|
Growth,%
|
7.0
|
4.1
|
3.3
|
|
AAGR,%
|
3.1
|
2.7
|
2.7
|
Notes: AAGR = average annual growth rate, from 2000. *Converted at US$1 to //y 100. Source: company.
Table 2
Seat sales of Japan Airlines, year to Mar 08
|
Item
|
Number,mn
|
Growth*,%
|
AAGR,%
|
|
Southeast Asia
|
4.3
|
2.8
|
2.8
|
|
TransPacific
|
2.7
|
-7.7
|
-5.6
|
|
China
|
2.0
|
3.6
|
12.2
|
|
Korea
|
1.9
|
11.0
|
3.4
|
|
Europe
|
1.3
|
-4.1
|
-2.3
|
|
Guam
|
0.5
|
2.5
|
-9.0
|
|
Oceania
|
0.5
|
-27.9
|
-5.0
|
|
Total
|
13.4
|
-0.7
|
-0.2
|
Notes: Some results are Travel Business Analyst calculations from JAL data. AAGR = average annual growth rate, 2000-08. *Over previous year. Source: company.
Table 3
Japan Airlines fleet plan
|
Type
|
FY2010
|
FY 2005
|
|
Large
|
B747-400, B777-300
|
B747, B747-400, B777-300
|
|
Medium
|
B787, B777-200, B767, A300-600
|
B777-200, B767, A300, A300-600
|
|
Small
|
B737, EMB170, MD90
|
B737, MD80, MD90
|
|
Total
|
291
|
279
|
Source: company.
The Fox
