INTERVIEW: Japan Airlines CEO Masaru Onishi

Kuala Lumpur
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Masaru Onishi has taken part in four marathons in recent years, but preparing for and completing them is a cinch compared with his day job. "Marathons? Not as tough as running Japan Airlines," the Oneworld carrier's chairman says with a laugh at the accession event in Kuala Lumpur marking Malaysia Airlines' entry into the alliance.

It has been a gruelling few years for Onishi and his colleagues. Following several years of losses and after amassing $25 billion in debt, JAL filed for bankruptcy in January 2010.

Japan's flag carrier also received a Y350 billion ($3.8 billion) government bail-out, its fourth aid package since 2001.

Tokyo, in return, imposed a slew of stringent conditions that led the airline to slash its workforce by a third to 31,000, retire fuel-guzzling aircraft such as the Boeing 747-400, cut pension payouts, and slash costs throughout its operations.

This was done amid a global financial meltdown and a chronically anaemic Japanese economy, a devastating earthquake and nuclear fall-out in Japan, and now the grounding of the Boeing 787 aircraft that are integral to its international business.

The results were beyond anyone's belief. JAL came out of rehabilitation and raised $8.5 billion in a successful IPO in 2012. The government sold its stake via the IPO for $7 billion, allowing it to double its 2010 investment. Net profits for the nine months to 31 December were $1.5 billion on sales of $10 billion, and full-year profits are projected to be 16% higher than an earlier forecast at $1.8 billion.

"The airline business is volatile. We cannot do anything about it and must accept it. We realised, however, that it is important to develop a financial structure that is very strong, and enables us to survive and generate profits despite the challenges or events that might take place," says Onishi.

Eliminating any factor that could cause such a failure once again has been foremost on the mind of JAL's management. Key to this, says Onishi, is changing the mindsets at a company which, pre-bankruptcy, had been run much like a government bureaucracy that served vested political interests despite its privatisation in 1997.

Much of the credit for the mindset change goes to Kazuo Inamori, a 78-year-old retired industrialist parachuted into JAL as its chairman by the government in 2010. Kyocera, the conglomerate Inamori founded, had never made a loss in 53 years. The government wanted him to transform JAL completely into a proper profit-making venture with operations and mindsets to match.

Onishi, who joined JAL as an engineer and was running JAL subsidiary Japan Air Commuter during the bankruptcy, was appointed president and made responsible for the day-to-day operations.

That was a major shift as previous heads of JAL knew how to play internal politics. Onishi, despite his 32 years in the company, was not really a member of the inner circle. Which was what the government wanted.

Inamori set about trying to impose a new set of values in the company, encapsulated in a pocket-sized booklet entitled JAL Philosophy, which all employees were required to dutifully study. The management went to work trying to bring around those sceptical to their views.

Onishi, who became chairman in January 2012 when Inamori was appointed chairman emeritus, says he was "honoured" to have worked with the veteran industrialist. Inamori's ideas, he adds, helped the company and management "part with our past" and learn a new "way of thinking and progressing".

"Previously, we lacked any sense of being a purely private company. We had a sense of security that we will never go bankrupt. If we were the JAL of old, we would have just blamed the bankruptcy on external factors.

"Instead, we realised that we needed to change ourselves, change our business structure and, most importantly, our way of thinking. In order to bring about drastic change, we declared internally and externally that we needed to completely part from the past. And we succeeded in doing that."

JAL also survived because the Japanese government decided it was too big to fail: it employed too many people, a large number of domestic businesses were dependent on it, it played a vital role in linking the country with air services, and it was crucial to Japan's position as an international transport hub.

Criticism of the bail-out persists. Some, including JAL's rival, All Nippon Airways, say that injecting public funds into the airline distorted the market. The money could have been better used to reduce taxes and stimulate air travel, they add. Onishi likes to address this criticism in two parts.

Initially, there were some concerns about whether the money was enough to turn around the airline and if a second bankruptcy may be necessary. There were also questions of whether the airline will go far enough with its reforms. These, he points out, were legitimate concerns given JAL's history.

However, after JAL began to turn around its operations some of its rivals sniped that the success was inevitable because of the money pumped into the airline. ANA's executives, for example, like to proudly point out they have become roughly the equal of the now-smaller JAL in terms of network, passenger numbers and revenues without any help.

"Of course what we achieved was possible only with the support from many sectors, including the government," concedes Onishi. "But what I hope is that the public will realise how hard we have worked during the rehabilitation process. That is why our results are much better than was expected. It is not only because of the government."

The government is also responsible for something else - a string of liberalising measures in the airline industry which mean JAL now faces a very different market from the one it operated in pre-bankruptcy.

Restrictions on operations at Tokyo's bottlenecked Narita and Haneda airports were eased, leading to additional departure and arrival slots for international services.

The green light was finally given for domestic low-cost carriers, allowing three new airlines including Jetstar Japan - JAL's joint venture with Australia's Qantas Airways - to begin operations in 2012.

It also allowed joint ventures on routes across the Pacific and to Europe, allowing JAL to start partnerships with American Airlines and British Airways. This allows it to build on its strength as a network carrier that connects the rest of Asia to these two continents.

These "drastic changes" have spurred new demand, says Onishi. JAL can take advantage by playing to its strengths - being a network carrier that focuses on medium-to-long-haul routes, leaving the low-cost carriers and other second-tier full-service airlines to compete in the short-haul international market.

"The market has expanded and this has enabled customers to have more choice," says Onishi. "This is a business chance, something that can be advantageous to us. We should put emphasis on the areas where we are strong in so that we can appeal to our core customers."

One challenge is the domestic market, where the weak economy and declining population mean there is little growth potential. Onishi says the airline is unlikely to invest much more in this segment and will stick to its existing network, leaving the low-cost carriers to fight for and mop up a new generation of passengers.

High fuel prices and foreign exchange fluctuations, as well as unforeseen events such as natural disasters or terrorist attacks, remain issues the airline will continue to grapple with.

However, Onishi says the biggest battle is ensuring JAL's employees never go back to their old ways: "We have been successful so far in changing the mindset, but we have to do this constantly and we can never stop doing this." JAL's employees, he adds, must continue to find innovative ways to tackle the problems they face themselves and without the government's help.

This is probably the mindset that is helping JAL to cope with the grounding of its 787s, which the airline says are crucial to its future. Onishi is unable to provide any more details about the root cause of the battery fire on a JAL aircraft that landed in Boston.

He is also reluctant to criticise Boeing, saying the airframer has been very forthcoming with information and is in constant contact with the airline's operations, engineering and senior management executives.

Given that JAL has only seven 787s, compared with ANA's 14, it is not as badly affected as its rival. It will cope by deploying its older 777s and 767s on some of the 787 routes.

"Of course, we are causing trouble and inconvenience to our customers, but I consider this is still under control," says Onishi.

Boeing, however, would do well not to take a loyal customer for granted. Onishi says the airline, which only operates Boeing widebodies, will soon start to look at replacements for its 777 fleet. In addition to the proposed 787-10 and the successor to the 777s, dubbed the 777-X, JAL will also assess the Airbus A350.

"We have plenty of time to study the options - and we will seriously study all of the options available to us," says Onishi. "In my mind, we will begin to retire the 777 three years from now, and that is the time we have to introduce new types of aircraft."

JAL, one of the largest operators of Boeing 747-400s before retiring all of them during its rehabilitation, is not interested in new quad-engined aircraft such as the 747-8 or Airbus A380 unless the market changes dramatically, says Onishi. Until then, medium- and long-haul services will continue to be served by the far more efficient twin-engined widebodies.

Additional regional jets will be needed, however, to replace its ageing Bombardier CRJ 200s and the airline is leaning towards ordering Embraer E-Jets, especially since the re-engined variants will provide much better economics than the existing aircraft.

Asked if JAL will consider the domestically designed and produced Mitsubishi MRJ, which has been delayed and is reportedly more expensive than competing aircraft, Onishi pointedly says: "No comment."

That, if anything, is a marked change from the JAL of old. Previously, under government pressure, the airline would probably have been one of the first to sign up for the MRJ. Instead, ANA was the launch customer and Mitsubishi officials have their work cut out trying to convince JAL about their aircraft's advantages.

So in this new operating environment, with a new corporate structure and mindset, what should JAL aspire to? Previously, its management was obsessed with being number one in Japan and one of the top airlines in the world. Now, profitability rather than size is the focus. Customers, rather than vested interests, are the driving factor.

"There a lot of ways of defining number one. Is it a company's scale?" asks Onishi.

"What I would like is for my company to be number one in providing the best service to the customers. I want to be the airline of choice. If we do that, everything else will fall into place. That is where JAL should be - number one."