The Japanese airline industry is facing its biggest shake-up in more than 40 years, as the result of domestic deregulation and growing international competition. In response, the country's two leading carriers, Japan Airlines (JAL) and All Nippon Airways (ANA), have unveiled new corporate five-year plans.
A combination of rising fuel charges and a drop in the value of the yen over the past 12 months has served again to remind Japanese carriers of their financial vulnerability. The Japanese airline industry, having struggled to recover from the huge financial losses of the early 1990s, had been hoping for brighter prospects ahead, but recent events have indicated that they are not yet out of the woods.
What was more startling for the airlines was that, unlike in the early 1990s, there was little apparent warning of a rise in fuel charges. The cost per barrel rocketed from around $21 at the start of 1996 to $35 a barrel by the end of the year. "We thought prices would remain stable for the medium term and suddenly, in 1996, for reasons not yet known to us, they started to climb," says JAL corporate-planning manager Toru Mizuno.
The problem was exacerbated by the fall in the yen, which further inflated the cost of purchasing fuel in US dollars. The yen's depreciation had the additional effect of cutting the number of Japanese tourists travelling overseas. The result was that the "Japanese bubble" burst, surmises Yoshiyuki Nakamachi, ANA senior corporate-planning managing director.
Overseas effect
JAL has been the worst affected, relying as it does on the overseas market for some 60% of its total traffic, of which 72% of passenger revenue is generated by Japanese travellers. JAL has revised its earlier projected ´1 billion net profit for the 1996/7 financial year ending 31 March, and is now warning that it will instead suffer a net loss of ´14 billion.
ANA appears to be in a better position, partly as it is less exposed to international competition and the effects of foreign-exchange fluctuations. The airline carried a total of 39.37 million passengers in 1996, of which only 7% was international traffic. The airline's performance remains sluggish nonetheless, with revised projected net profit for 1996/7 of ´3.4 billion against a turnover of ´880 billion.
A key facet of both JAL's and ANA's new five-year plans is a renewed drive to cut costs. The two airlines are already in the middle of implementing earlier austerity programmes. ANA's on-going "P-1521" plan is intended to increase revenues by 15%, reduce personnel costs per seat-kilometre by 20% and boost ßeet utilisation by 10% by March 1998.
"I am satisfied with our performance with respect to our P-1521 goals, but that is not enough," warns Nakamachi. ANA now intends to pursue a further 20% cut in costs per seat, largely through improved productivity. Salaries are being restructured and new contracts introduced. This has met with industrial action from ANA's 14,660-strong workforce.
JAL's "Challenge 21" plan has produced a broad range of savings in the areas of ticket sales, customer services, maintenance and inflight services. A range of new measures is now under consideration, including a zero-based budget review of all cost items, restructuring and contracting out of work and examining existing work practices and job automation.
The primary focus of JAL's renewed drive on spending are staff costs, which account for some 25% of the overheads. "The range of expenses we can manage is limited. Little can be done with things like fuel and landing charges. We have to focus on personnel costs," says Mizuno.
JAL plans to cut 400 administrative jobs by March 2000, in addition to 400 "non-core" positions already due to be eliminated by the end of this Ìnancial year. The overall number of employees will fall to 17,400 by 31 March, 1998, down from nearly 22,000 in early 1994 (Flight International, 16-22 April, P18).
Natural wastage
Much of this has had to be achieved through natural wastage, a freeze on new recruitment, introducing early-retirement schemes ahead of the mandatory retirement age of 60, and hiving off divisions. "It's extremely difficult for us to lay people off, it is simply not the way of doing business in this country," explains Mizuno.
For the past three years, JAL has not recruited any new cabin crew on the old-style lifetime contracts. It has instead introduced new short-term contracts, under which salaries have been cut and crews required to perform some ground-handling duties. A cabin attendant on the new pay scale, with one year's service, now typically earns ´250,000 a month, compared to ´400,000 previously.
Other measures have included stepping up recruitment of cheaper non-Japanese crew for JAL and its subsidiary carrier, Japan Air Charter (JAZ). JAL has flightcrew stationed in Los Angeles, California, and Anchorage, Alaska, while JAZ relies on pilots from Hawaii and cabin attendants from Thailand. "Their costs are extremely low compared to those of their Japanese colleagues," claims Mizuno.
ANA and JAL are introducing new performance-based pay schemes for management in place of the more traditional age- and seniority-adjusted remuneration system. "The entire corporate culture needs to be changed, we need to promote self-responsibility-We will improve the quality of people, by rewarding good performance," according to Nakamachi.
The ultimate goal of ANA and JAL's mid-term plans is to prepare the two carriers better for increased competition on both the international and home fronts. The long-awaited completion of a second parallel runway at Tokyo's Narita International Airport "around 2000", along with an expected new bilateral air-services agreement with the USA, is expected to create new opportunities, as well as to open the door to more competition.
The development of ANA's international network over the past 11 years has been constrained by the situation at Narita and the airline's lack of incumbent status under the existing Japanese-US bilateral. The airline has 69 weekly slots only and a 6.3% share of outbound traffic from Narita Airport, while access to mainland USA is restricted to Los Angles, New York and Washington DC.
"Since we began international operations in 1986, we haven't been able to develop as much as we wanted and, until now, our networking has been insufficient. With the opening of new runways, we can improve this-we want to become a global airline," states Nakamachi.
Much of this hinges on finding international partners. ANA already has a memorandum of understanding with Delta Air Lines to market and co-ordinate scheduling jointly, but a final go-ahead awaits agreement between Tokyo and Washington on a new bilateral treaty. It is also in search of a partner in Europe and has held discussions with Air France, British Airways, Lufthansa and Swissair.
Under its mid-term plan, ANA plans to expand overseas operations from 30% to 50% of total seat-kilometre capacity by 2001. The bulk of its planned 16-17% annual growth in international routes is focused on Asia. ANA plans to launch new services to Hanoi, in Vietnam, and Chengdu, Changqing, Shenyang and T'ienching in China, while increasing frequencies to Bangkok, Beijing, Hong Kong, Jakarta, Kuala Lumpur, Shanghai and Singapore (Flight International, 7-13 May, P14).
JAL is similarly placing increasing emphasis on the region. "Asia has showed significant growth, in spite of the depreciation of the yen. We're shifting fairly large amounts of resources to Asia from other destinations. India and Vietnam, for example, have a huge potential for growth," suggests Mizuno.
Aside from restarting its service to Delhi from Kansai and increasing flights to Ho Chi Minh in Vietnam to a daily frequency, JAL plans to launch new routes to Hanoi, Pulau and additional points in China. Services to Copenhagen, Munich, Seattle and Washington have been discontinued and resources instead concentrated on other "high-demand" destinations, such as Amsterdam, Frankfurt, London and Paris.
To get around slot constraints at Tokyo, JAL is looking to increasing economy-class seating on its Boeing 747-400s by reconstructing the galley areas, as well as pursuing a possible global alliance. One suggestion being made is that JAL may develop its codeshare arrangement with Qantas and cargo co-operation with American Airlines into a broader relationship involving British Airways. The airline also has an extensive codeshare tie-up with Air France, seven other carriers, and is in discussion with South African Airways.
Recent moves by the Japanese transport ministry to liberalise the country's domestic airline industry has prompted JAL to refocus attention on the home market. Reforms now in prospect include scrapping Japan's system of double and triple tracking on domestic routes and the eventual abolition of zone air fares.
Domestic imbalance
JAL, in particular, is keen to address the imbalance in the domestic market, which has left it struggling to compete on yields and frequencies. ANA, along with its subsidiary, Air Nippon (ANK), controls 51% of the Japanese home market, compared to JAL's 23% share.
Mizuno explains: "We're trying to rely more on domestic, rather than international, routes because international services are so vulnerable to foreign-exchange fluctuations." He concedes, however, that capacity constraints at the country's two main domestic hubs, Osaka and Tokyo's Haneda airports, severely limit JAL's room for growth in the near future.
The pent-up demand for extra capacity was no better illustrated than by the recent battle between ANA, JAL, Japan Air System and start-up carriers for 40 new daily slots at Haneda. JAL did better than most, emerging with 12 slots, which it will use to launch services to Kochi, Memambetsu and Obihiro. No more additional slots will be available at Haneda before 1999 and the completion of a third runway.
JAL also plans to strengthen its domestic presence by launching a low-cost subsidiary carrier, JAL Express (JEX). Rather than try to compete head-on on main trunk routes with ANA and other planned start-ups, such as Hokkaido International Airlines and Skymark Airlines, JEX will focus on smaller, low-capacity, destinations.
JEX will begin operations in March 1998, initially with two Boeing 737-400s. The airline will operate from Osaka to destinations on Kyushu Island.
ANA, similarly, plans to continue to use ANK's feet of Airbus A320s, 737-500s and Nihon YS-11s to develop new entry-level routes and strengthen the domestic network. ANA has also signalled its willingness to assist Skymark in getting off the ground, by providing engineering and training support and help with its airworthiness application. New airlines will not necessarily take market share away, but rather expand it," says ANA.
Source: Flight International
