Nicholas Ionides TOKYO
Isao Kaneko took as chief executive at Japan Airlines three years ago as the group hit record losses. He has since helped guide the group back to profitability, but the restructuring is far from over.
Isao Kaneko has a confession to make. He never set out to become an airline executive and certainly not chief executive at Japan Airlines (JAL). Basketball was his first love. And although he recognised that he was not going to make it as a professional player, he dreamt of a career as a basketball coach after leaving university. In the meantime, he took a job with the Japanese flag-carrier's cargo department. Forty years later and, not only has Kaneko got to run the company, but he also fulfiled another ambition when he was named honorary president of JAL's basketball team. "I have found that both jobs are equally challenging," he jokes, adding that both can equally cause a "stomachache" at times.
When Kaneko took up the reins at JAL three years ago he clearly needed all the humour he could muster, not to mention a sense of perspective about the scale of the task ahead. There was precious little to laugh about at JAL in mid-1998. The mighty Japanese economy was in the grip of a serious economic crisis, as it is again today. The Japanese yen was steadily losing value against the US dollar, asset prices were plummeting and the country's giant corporations were racking up massive losses - with JAL chief among them.
Airline revenues were in decline, foreign currency debt was at a record high and JAL's leisure investments had turned sour. As the crisis mounted, shareholders were asked to approve the biggest write-off in Japanese corporate history - some ´155 billion ($1.3 billion)to cover losses, mainly from the hotel and resort activities, and to eliminate debt. President Akira Kondo and chairman Susumu Yamaji accepted responsibility and stood down.
Not only was the economy weak, but the airline also faced, and still faces, the threat of new low-cost start-ups at home after domestic market liberalisation, and additional international competition from a more liberal air services agreement with the USA. On top of that are the perennial battles over cost, including Japan's notoriously high airport fees and a heavy wage bill.
Kaneko, now 63, nevertheless seems remarkably calm about the progress being made. He jokes that he is not naturally patient - normally a prerequisite for operating within the Japanese environment - but had to learn the skill from "bench-warming" while trying unsuccessfully to play basketball at university, where he was a self-declared "lazy student". Whether patient or not, the remarks point to Kaneko's other assets in the form of humour and humility.
He adds that his business philosophies borrow heavily from the example set by two very different people: former top Japanese statesman Masaharu Gotoda and celebrated US capitalist, General Electric chairman Jack Welch. By studying these two men, he says he has learned to put the company interest first, accept and report bad news quickly, take responsibility for all actions and not compete if there is no competitive advantage.
"I insist on transparency in our business," he says, supporting the claim by noting that he publishes the carrier's safety record on JAL's website. "If there is any irregularity in flight operations, people can read what happened. We are accountable to the public, our shareholders, our customers and our employees," he says. The apparent mix of Western and Japanese styles seems to work for Kaneko, who says he is content in the fact that "we are going in a very good direction" at JAL.
Restructuring effort
Certainly, restructuring efforts have made their mark on the business since the depth of the crisis three years ago. Kaneko points back further still to the turnaround achieved since the early 1990s when JAL first began to tackle restructuring. "Of course we have to appreciate the economic recovery, both in Japan and Asia, but our efforts to restructure our business, which we started in 1992, have been successful," he says. "We have been able to reduce our unit costs by 38%, compared to 10 years ago - especially for the labour costs and personnel expenditure, where there is an almost 48% decrease."
Kaneko was well-positioned to see that reform in action, spending most of the last decade leading industrial relations and human resources at JAL. He points out that staff numbers have been trimmed, despite the labour laws - employment contracts can only be for either one year or on an indefinite basis. These conditions of "lifetime employment" make it tough for employers to convince staff to leave or enforce cuts.
JAL has nevertheless reduced its workforce through natural attrition and by hiring cabin attendants and other employees on rolling one-year contracts for up to three years. After that they either become permanent staff or leave the airline. Since March 1999, when 36,000 were employed, it has cut back to 33,000 staff, and aims to get down to the level of 31,800 by the end of the 2002/3 financial year. The group also continues to out source many of its operations, such as ground handling, information technology and some maintenance activities. At the same time the company has begun to employ more foreign crews and changed working rules for pilots and flight attendants to require extra hours per month. Productivity too has risen.
Kaneko adds that change was a necessity. One of his immediate goals upon being promoted to president was to revive some confidence and enthusiasm among JAL's long-suffering shareholders. Investors had not seen dividends for six years, and so he set a target for these payments to restart from that current fiscal year to March 1999. Not only did JAL manage to do this as planned, but has done so each year since.
Management changes were also ordered across the group - which includes nearly 300 subsidiaries. At the top, the board of directors was halved to only 15, while throughout there has been a renewed focus on key operations, leading ultimately to the decision to withdraw from the non-core market areas such as hotel ownership.
New subsidiary airlines were set up with lower cost bases alongside regular route network reorganisations. Three-year-old JAL Express now operates Boeing 737s on domestic flights using lower-paid pilots, while JALways - formerly Japan Air Charter - is today a scheduled carrier operating to resort destinations such as Hawaii, Guam and Saipan, using foreign pilots and cabin attendants. Common maintenance and sales companies cater for these and the other airline subsidiaries JAL is assigning routes. Flight catering operations are being consolidated, and the group is sharing finance and accounting, human resources, ground handling and reservations functions.
Sell-offs planned
Long-troubled JAL Hotels is focusing on management rather than ownership. JAL Trading, which trades aircraft and other goods, is due to be listed on the Tokyo stock exchange this year - the first of its "independent standalone businesses" to be floated separately from its parent. This will be followed "hopefully in 2003 or 2004," says Kaneko, by a listing of JAL Hotels, which operates 55 properties around the world. There were also plans to float JAL's IT arm but this move has been reconsidered following an outsourcing deal with IBM that includes equity.
JAL now has clear designs for how the group should look and is in the process of implementation says Kaneko. "We still have room to cut costs and improve efficiency in the coming years," he says, "Our average cost will decrease some more in the years ahead. By combining products and sales forces we can be more effective and efficient - not instantly, but gradually we can have the results."
Fleet rationalisation is also an ongoing process. JAL decided late last year to sell all its MD-11s back to Boeing in return for more 767 and 777 types. It is also retiring all McDonnell Douglas DC-10s and some older Boeing 747s. In the coming years, Kaneko predicts that five aircraft types will be operated in its 150-strong fleet. He stresses, however, that the carrier is simultaneously reducing its investment in aircraft purchases and other items which draw heavily upon financial resources. The aim is to cut interest-bearing debt by ´350 billion "in actual terms" by the end of the 2002/3 financial year compared with that he inherited in 1998/99.
The latest set of interim results from JAL (for the six months to September) suggest the restructuring is finally paying dividends. The best news was that airline revenues were growing strongly again, rising by 7.7% while operating expenses were up just 3.4% - despite the hike in fuel costs. That made for markedly improved group profits at net and operating level. On half-year revenues of ´874 billion, the group managed a respectable net margin of nearly 5% and an operating margin of 8%. Admittedly this is the better half of JAL's year and the group will have to take heed of the current warnings for economic decline in Japan and the world, but it is a sign of success that questions over JAL's financial condition are now more rarely asked.
Another question that is still regularly put to Kaneko is whether JAL will join a multilateral alliance. Its main home-based competitor, All Nippon Airways (ANA), is a member of the Star Alliance. JAL is being heavily courted by members of the rival oneworld grouping, led by British Airways and American Airlines, but which already includes Cathay Pacific and Qantas in Asia-Pacific. The Japanese carrier would also represent a major capture for SkyTeam, although Air France and Delta Air Lines already have Korean Air in the group.
Despite attempts to entice JAL, Kaneko remains coy about the prospect of joining oneworld. He says that JAL is studying the "merits and demerits" but for now is happy with its many bilateral relationships. "I think we have been very successful as far as our alliance strategy has been concerned, to be focused and to put the emphasis on bilateral partnerships and on specific markets," he says. "For example, in the market between France and Japan we have partnered with Air France and to Australia with Qantas, so that makes very clear that both partners can have definite merits. Of course we are not against the idea of a multilateral alliance, and we are always studying the pros and cons of joining a global alliance. But no, we are not specifically [any closer to a decision]. We are not in a hurry."
Alliance decisions
JAL currently has bilateral passenger alliances with 13 carriers and cargo alliances with eight. Although its partner list includes members of all major groupings, JAL is much closer to oneworld. It has extensive ties with all founding members, who began targeting JAL even before their alliance was formally established.
The group has also formed technical alliances with ANA and third Japanese major Japan Air System (JAS) in recent years. These cover areas such as IT, joint purchasing and repair of Boeing 777 spare parts. Ties also encompass joint 'shuttle' services between Tokyo and Osaka, Internet-related ventures, and codesharing with JAS on flights between Tokyo and Seoul. The JAL chief sees more room for co-operation among Japanese carriers in the years ahead and says the three majors are open to studying new tie-ups as they continue to adapt to changing economic conditions and a deregulated domestic market.
Kaneko also notes that Japanese carriers have grouped together in another way - to call for changes in the Japanese operating environment, such as pushing for high fuel taxes to be cut, landing charges to be reduced and Tokyo's busy Narita international and Haneda domestic airports to be expanded.
High fees, airport congestion and general bureaucracy which delays infrastructure improvements cause constant headaches for all of Japan's carriers - including two new players which launched in 1998 but which have had little real impact on the majors. Kaneko sees some light at the end of the tunnel in certain areas, however. In the current 2001/2 fiscal year there will be cuts to domestic landing charges and while "not by a satisfactory amount, it is at least a little progress".
In terms of its infrastructure improvements, Narita is receiving a long-delayed second runway next year and while also positive, it will be shorter than planned, at just 2,180m (7,150ft), allowing for only limited operations. In February, Haneda, the world's sixth busiest airport with three runways, began accepting limited international charter flights during overnight hours, but the airlines want more. They also want ground transport links to be improved to allow overnight international charters.
While Haneda regularly handles international flights from Taiwan's China Airlines and EVA Airways, this is for political reasons and services are only operated during daytime hours. China considers Taiwan a "renegade province" and the Japanese Government does not want to offend authorities in Beijing. Flights by mainland Chinese airlines operate to Narita.
"We want to make sure that the second runway in Narita, which will open in 2002, is extended to at least 2,500m. We also are requesting that Haneda airport, which is at capacity for domestic operations, has another runway." As to a long-considered third airport for the Tokyo area, Kaneko explains: "My position is that first the capacity of Haneda, as well as Narita, should be enlarged, and then beyond that we should think about the third airport - or expand Haneda and Narita more. But it should be discussed openly by professionals and experts, and it should have the kind of grand design for the 21st century of the Japanese aviation industry."
Seeing through that particular vision may prove to take even more time and patience than that which Kaneko has already shown in helping to coach JAL back to health.
Isao KanekoIsao Kaneko was elected president of Japan Airlines on 26 June 1998 after the president and chairman resigned to take responsibility for the biggest write-off in Japanese corporate history. He joined JAL in April 1960 after graduating from Tokyo University's Law Department. After a stint with the international cargo department he joined the industrial relations department. In 1968 he was posted to JAL's American Region headquarters in New York, where he was involved in local labour issues. He returned to Tokyo in 1972. In December 1980 he became deputy vice-president of industrial relations. In 1985 he became vice-president of international relations and in 1995 managing director and senior vice-president for human resources. In 1997 he was made senior managing director and senior vice-president for human resources, before becoming president and chief executive a year later. In June 2000 he was elected chairman of IATA's influential Strategy and Policy Committee. Kaneko was born 1 March 1938 and spent the first few months of his life in China. Married, with one daughter, he is an avid reader and horse-racing fan. His favourite sport is basketball.
Source: Airline Business
