Put the agendas of Japan's two major carriers side-by-side and draw a line between them. This may not produce an exact mirror-image but it would certainly reflect the inversely proportional nature of Japan Airlines' and All Nippon Airways' aspirations.
Since 1986, when policy makers decided to promote competition between Japan's carriers, JAL and ANA have coveted each other's international and domestic dominance, respectively. One JAL official describes this battle as 'a matter of life and death.'
JAL complains about ANA's 'rapid' global expansion, while it suffers restraints on domestic growth. The gripe could just as easily come from ANA, although president and chief executive Seiji Fukatsu puts a slightly different spin on it: 'JAL is saying it would like to increase its domestic market share up to a third, but as a flagship company of Japan there is a lot more that JAL can do in international development.' Fukatsu points to the fact that Sao Paulo is the only point served in South America and the absence of any services to the Middle East and eastern Europe, and suggests ANA could help explore those opportunities. But JAL maintains it is limited in tapping these markets either because of lack of demand - in the case of the Middle East and eastern Europe - or because extremely limited beyond rights from the US make only one South American destination viable.
There's the rub, or one of them. Expansion for either carrier is limited by two mitigating factors: the imbalance of opportunities in the US-Japan bilateral, which gives US carriers a disproportionate share of third, fourth and fifth freedom services, and airport congestion at both Tokyo/Haneda - the major domestic airport - and Tokyo/Narita - the main international gateway.
Indeed, JAL would argue that the US carriers' disproportionate share of slots at Narita is a major contributing factor to congestion at the airport. US carriers hold some 800 of the 2,400 weekly slots at Narita against 860 for all Japanese carriers, explains JAL's president Akira Kondo. 'It is exceptional that another country's airlines should enjoy almost the same share of slots as the national carriers at another nation's key international airport,' he adds. Even allowing for competition, transpacific services account for 30 per cent of Japan's total inbound and outbound traffic and this should, in theory, be shared between US and Japanese carriers. Clearly, US carriers' 30 per cent share of slots at Narita is too high, reasons Kondo.
A significant proportion of those slots is used by the three incumbent US carriers, Northwest Airlines, United Airlines and FedEx, for their fifth freedom operations. This is a major bone of contention and the Japanese want a 50 per cent cap on fifth freedom traffic carried on the beyond sectors. 'Beyond Japan rights are our biggest concern,' says Kondo, adding that US carriers operate 140 fifth freedom flights per week, against JAL's two. The two incumbent US passenger carriers are accused of carrying up to 80 per cent of Japanese originating traffic on their fifth freedom sectors.
Fukatsu, on the other hand, is focusing on eliminating the difference between the four incumbent carriers, including JAL, which enjoy almost unlimited rights and the restricted MoU carriers: ANA, American, Delta and Continental. Because of the 'major differences' between the two countries over fifth freedoms, Fukatsu suggests this issue be put to one side in any talks, although he does support limitations.
Initial talks between the two sides were expected to start in early June, after the DOT in early May cleared JAL's Tokyo-Kona, Hawaii service and the MOT approved United's fifth freedom service between Kansai and Seoul and cleared a frequency increase on Los Angeles-Tokyo. This followed President Bill Clinton's mid-April summit in Japan, which most Japanese officials had pessimistically predicted would do little to ease the impasse.
The much-heralded accord reached in the air cargo talks prior to Clinton's visit lay behind the downbeat mood in Tokyo. Kondo says he is 'very pleased' with the cargo agreement, but privately JAL officials admit the carrier doesn't have the capacity to take advantage of the increased frequencies. ANA's Fukatsu is more forthcoming and admits he is 'still dissatisfied with the outcome of the cargo talks' because inequalities remain between incumbents and MoU carriers.
Shinsuke Endoh, senior officer for air talks at the MOT, is confident that the two sides will reach a compromise on the fifth freedom issue through an increase for JAL and limits on the US incumbents' beyond rights. Kondo goes further and suggests JAL should receive eighth freedom rights in the US: 'Japanese beyond rights are on the same business scale as US domestic rights.' But he tempers this by saying access should be granted through codesharing.
ANA received an apparent boost in mid-April when the MOT indicated it would support its application to start codesharing with Delta from September on Tokyo-Los Angeles - the first step in a wider codesharing alliance which has been on hold for almost 12 months. One banking source suggests the MOT has made any support for ANA in US talks conditional on the carrier retaining price stability in the domestic market following deregulation (see p61).
Although there is no indication of whether the US DOT will approve the proposed codeshare, the move certainly puts more pressure on Washington to act. There is no codesharing framework in the current bilateral, but Endoh believes this could be circumvented by a separate agreement if necessary. Nevertheless, when Northwest turned on its fellow incumbent United in March for provoking an 'unnecessary dispute' by asking the DOT to block JAL's Tokyo-Kona, Hawaii, application, the DOT began to look increasingly like an extension of the Chicago-based carrier's international affairs department. Northwest may not have gone as far as backing the US MoU carriers' support for talks, but the Minneapolis-based carrier has certainly scored brownie points in Tokyo.
Compare this to the low esteem in which United's chief executive, Gerald Greenwald, is held. With the diplomatic finesse of a bull elephant, Greenwald has enraged Japanese aviation officials and politicians with his comments criticising the earlier block on United's planned Osaka/Kansai-Seoul service. The Japanese may not show their emotions, but as one airline official put it: 'We have very strong feelings kept inside. United is an international carrier and to operate in foreign markets its management has to understand different cultures.' Greenwald should have chosen his words better. The nearest equivalent to accusing the MOT of having 'no intention of honouring its obligations' would be telling an American that the Constitution 'sucks'.
Running in parallel with the bilateral dispute is the issue of congestion at Narita and the drawn-out battle to build extra runway capacity (see box). Congestion at Narita is blocking further expansion by ANA and JAL. But with ANA aggressively pushing for more international rights as JAL gains more domestic routes, a banker suggests that JAL has a vested interest in keeping the 'favourable supply and demand balance' that exists currently. Moreover, with the two US incumbent carriers enjoying such liberal access under the current bilateral, any expansion of Narita before the air service agreement is renegotiated will benefit Northwest and United considerably. But Endoh hints this could be prevented by reappraising slot allocation procedures.
Likewise, constraints at Haneda are limiting JAL's access to some of the more lucrative domestic routes. But with the new parallel runway opening next year, JAL is in a better position there than ANA is at Narita. The carriers are already staking their claims but there is no set procedure for the MOT to allocate the extra capacity. The current share of slots gives ANA 49 per cent, JAS 30 per cent and JAL 21 per cent, and Kondo is quite clear how he would like the allocation to fall next year: 'We would like to see a balance with ANA.' But Yuzuru Masumoto, ANA senior vice president legal and general affairs, says if the extra capacity is oversubscribed he wants 'a reasonable transparency in the process' and, not surprisingly, suggests one method would be to allocate on current market share.
Resolution of both the bilateral impasse with the US and the issue of domestic and international slot constraints will have a significant effect on future strategies. Central to success for either carrier, however, is the continued implementation of their restructuring programmes as Japanese carriers struggle with average unit costs 60 per cent higher than their Asian rivals.
JAL is planning annual capacity growth of 3-5 per cent up to 2000, but is alternating the focus. During 1996, international capacity will be boosted by 5 per cent with no growth domestically. Conversely, following the opening of the new Haneda runway in 1997, the carrier will aim for 4 per cent capacity growth at home through to 1998 and only 2 per cent on international routes.
Similarly, the potential doubling of Narita's capacity at the end of the decade will require a reversal of JAL's drive to shrink its capital expenditure over the past four years of restructuring. Once Narita's expansion is confirmed, JAL plans to place further aircraft orders, most probably for B777s to replace more of the ageing and larger B747-100s - although the carrier does have 18 B747-400s on order with no fixed delivery dates. This should take capital expenditure to some Y100 billion annually, compared to 1995's capital outlay of Y60 billion, which is set to fall further this year.
Although the yen is beginning to stabilise and there have been signs of an economic upswing since the unveiling of the government's Y14,000 billion recovery plan, the carrier is still targeting a headcount reduction from 21,650 to 17,400 by 1998. JAL also started using part-time domestic cabin staff last year and aims to increase the number of foreign cabin crew to 30 per cent by 1997.
Kondo's claims of a successful financial restructuring are somewhat overshadowed by the group's consolidated net losses of US$147.7 million in 1994/95 (see graphs). There have been improvements at the core airline where net losses were cut drastically from Y25.3 billion in 1993/94 to Y1.2 billion (US$12.1 million) in 1994/95. However, a large proportion of this came from a below-the-line gain of Y26.6 billion in 'aircraft purchase incentives' or manufacturer discounts. The large discrepancy between the airline-only losses and the consolidated losses comes from a difference in interest income and payments between JAL and the group respectively.
According to Kondo, the carrier returned to profit in 1994/95 based on the 'current' profit which excludes extraordinary items. The group rise in operating expenses was kept down to 5.8 per cent at Y1,361 billion on the back of a 10.6 per cent increase in ASKs. The increase in capacity and expenses was mainly due to the expansion of operations out of Kansai, which opened in September 1994.
Kondo says the carrier will report another profit in fiscal 1995/96, but six-month results showed net profits down 21 per cent to Y9.2 billion compared to the same period the previous year. Nevertheless, the airline is forecasting an operating profit of Y15 billion - the first for four years - and a 'current' profit of Y3 billion, up 7 per cent on last year. Operating revenues are expected to reach Y1,110 billion. Airline forecasts for 1996/97 predict revenue growth of 5.1 per cent and a rise in operating profits to Y40 billion. Operating costs will jump only 2.9 per cent.
While stressing that cost-cutting will continue, the focus over the next two years will fall on the 'aggressive boosting of revenues,' says Kondo. This includes network growth, downsizing aircraft, and a major relaunch of business class under the company's latest restructuring plan Challenge 21, which targets revenues of Y1,300 billion by the start of the new millennium.
Domestic expansion is obviously on hold until the Haneda issue is resolved but the aim is to increase the use of smaller aircraft on thinner domestic routes. The carrier has another four B737-400s on order. Since Kansai opened, JAL has boosted the number of domestic routes from 33 to 51 and the first three B777-200s, which arrived earlier this year, have been put on to some of the denser domestic sectors. The carrier has 10 B777-200s and five -300s on order.
Internationally, JAL grasped the opportunity presented by the opening of Kansai to launch new services to London, Paris, Los Angeles, Brisbane, Sydney and Ho Chi Minh City. If the claims by one banking source that China services are the only profitable operations for ANA and JAL are correct, it becomes clear why JAL wants improved access to ANA's domestic cash cow. But JAL, which currently deploys roughly 25 per cent of its total capacity domestically, claims its international operations are profitable. On the downside, however, JAL not only foresees a further decline in international yield once Narita expands, but predicts a similar pattern domestically, as price competition intensifies.
Not surprisingly, JAL is eyeing three further Chinese destinations on top of Beijing and Shanghai: Dalian, Tianjin and Xi'an. Other destinations under consideration are Myanmar, Delhi, Phnom Penh and Hanoi. If JAL receives more US beyond rights, the carrier also plans to expand its Latin American coverage.
JAL is looking to cut costs internationally by expanding the wet-lease operations of subsidiary Japan Air Charter (JAZ). Shinzo Suto, chairman and president of JAZ, says his costs are up to 30 per cent lower than JAL's. The main savings appear to come on labour, as 90 per cent of the cabin crew are Thai nationals earning a tenth of the salary of Japanese attendants.
JAZ currently operates scheduled services to Hawaii and Bangkok under wet-lease to JAL, on top of charters. Suto estimates that 90 per cent of JAZ's services are under wet-lease to its parent and says it is 'quite possible' to expand the arrangement to destinations like Guam, Saipan and Australia.
Alliances do not appear to figure too highly in JAL's plans. The carrier already has a number of route specific codeshares in Asia-Pacific and Europe and has linked its frequent flyer programme with those of Air France and American Airlines. Yet Kondo hints that once the US bilateral dispute is resolved, a wider alliance with American could be considered. Apart from the FFP link, the two carriers also have a cargo alliance and have formed a joint venture CRS company in Japan, as American affiliate Sabre took a 25 per cent stake in JAL's Axess CRS.
JAL is also understood to be considering the use of more third-party cargo capacity. The carrier has sold and leased-back its five B747Fs and has another three on lease, but has no plans to increase dedicated cargo capacity directly and is looking for a 3 per cent capacity increase this year through more efficient use of belly-space. In the wake of the cargo agreement with the US, however, one official says the planned freeze on cargo capacity up to 2000 will have to be reconsidered.
ANA, on the other hand, with almost 75 per cent of its capacity on domestic sectors, has fared rather better than JAL. The core airline bounced back from its only loss in recent years in 1993/94 of Y2.9 billion to a net profit of Y4.2 billion (US$42 million) last year on revenues of Y803 billion. But both results were buoyed by below-the-line gains on the sale of property and equipment of Y28 billion in 1994/95 and Y14 billion the previous year. Losses at other subsidiaries converted this profit to a consolidated net deficit of Y7.5 billion ($75.3 million) in 1994/95.
Fukatsu says the carrier is on track to meet the targets of its three-year restructuring plan by the end of the 1997/98 financial year. The carrier aims to boost revenues to Y910 billion, while cutting labour costs per ASK by 20 per cent to Y2.2. Aircraft utilisation rates will rise by around 11 per cent from 2,700 hours annually in 1994/95 to 3,010 hours.
Fukatsu aims to protect the current domestic market share of 52 per cent. ANA received 54 per cent of the domestic slots at Kansai and the three-year plan targets domestic capacity growth of 2 per cent annually, against projected passenger growth of 3 per cent. Internationally Fukatsu sees passenger growth averaging 7-8 per cent, although outbound demand is expected to grow by as much as 20 per cent up to 1997/98. As a result ANA is planning to boost capacity by 20 per cent annually, chiefly through new route development out of Kansai. By the end of the three-year plan international services will account for 35 per cent of total capacity, up from the current 25 per cent.
First half results for 1995/96 suggest the carrier is on track. Net profits rose by a massive 689 per cent to Y6.3 billion on the same period the previous year as revenues jumped 6.8 per cent to Y429 billion.
The opening of Kansai meant ANA's international passenger numbers leapt 28.1 per cent to just over 1 million against a 26.9 per cent increase in capacity. RPKs rose 20.1 per cent against a 21 per cent rise in revenues. ANA attributes the gains to the strong yen which stimulated more foreign travel but noted an unspecified fall in net yield. Domestic capacity rose 5.9 per cent in the same period and overall the carrier managed to keep cost increases down to 5 per cent. The carrier was predicting full year operating revenues of Y837 billion.
Last year, the carrier launched new services out of Kansai to Bangkok, Kuala Lumpur, Shanghai, London and Rome and resumed flights to Singapore from Narita. ANA has also launched Vienna services from Kansai under a codeshare with Austrian Airlines and plans to launch further services to Frankfurt, Milan, Yangon, Honolulu, Ho Chi Minh, Bombay and Delhi.
Domestically, the carrier has launched a few new services, but has primarily focused on introducing the first two B777-200s into service and reducing aircraft size on the thinner routes with the delivery of a further three A320s. The carrier also brought in a B767-300 and a B747-400. The carrier is set to take delivery of a further six aircraft this year: four B777-200s and two B767-300s. In the run-up to the further liberalisation of domestic fares this year, ANA took advantage of an initial relaxation on discounting in December 1994 by launching 28 day advance fares to undercut the bullet train.
With low penetration in the international market, ANA is relying on alliances to bolster its presence. The carrier is already planning more codeshare flights with partner-in-waiting Delta and, on top of the Kansai flights, operates three weekly codeshare flights with Austrian on Tokyo-Vienna. But Fukatsu admits the Austrian alliance is limited by the very nature of his partner's home market and he still has his sights set on British Airways. In the past, BA has denied speculation of a linkup, and Fukatsu admits there are still a number of sticking points.
BA's partner USAir has a block-space agreement with ANA on its Orlando flights connecting with ANA's services to Washington and New York. The carrier is also discussing a strategic alliance with Air Canada, including codesharing and FFP links. Participation in ANA's FFP already has already been extended to the three Asian carriers in the Passages FFP, BA, Austrian and Swissair in Europe, and USAir and Delta in the US.
Competition is only just starting to take hold domestically, but yields will continue to fall in international markets. Even if JAL and ANA attain the respective parities they want, the potential gains could be disappointing financially. JAL may have the most to lose: as its domestic access increases, ANA could use its dominant position to turn the screw on its rival. Cost control, however, remains the key, particularly if either is to compete internationally.
Competition is only just starting to take hold domestically, but yields will continue to fall in international markets. Even if JAL and ANA attain the respective parities they want, the potential gains could be disappointing financially. JAL may have the most to lose: as its domestic access increases, ANA could use its dominant position to turn the screw on its rival. Cost control, however, remains the key, particularly if either is to compete internationally.
Congestion questions
Geography makes Japan a natural market for air travel, but airport congestion is inevitable in a country that supports a domestic market of some 130 million passengers with a landmass 20 times smaller than the US.
No other country in the developed world has as many major airport projects underway or close to approval. Apart from the extension of both Tokyo/Narita and Haneda, the Y3,650 billion (US$34 billion) budget for the MOT's five-year airport building plan to 2001 has provisions for Kansai's second runway and Tokyo's third airport.
The first stage of the Haneda runway project is closest to completion. The parallel runway C will open by mid-1997, and cross-runway B is due for completion in 2000. With C open, slot capacity will increase by 10 per cent from the current 200,000 and the addition of the cross-runway will add an extra 10 per cent capacity, explains Katsuhiro Yamaguchi, deputy director for aviation at the MOT. No decision has been taken on how to divide the spoils between Japan's three domestic operators, but there is speculation that some of the extra capacity could be kept back to act as a carrot to ensure ANA maintains pricing stability in the domestic market. The airport will handle 58 million passengers annually once the east passenger terminal is finished, but there is no completion date as yet.
The controversial extension of Narita is still on hold, but the indications are that the dispute with the renowned farmers is almost settled: 'We are beyond the delicate stage and are now talking amicably about compensation,' says Yamaguchi. The general consensus is that the two new runways will be completed by the end of the decade, increasing the number of slots from the current 120,000 to 220,000.
There is some speculation that the completion date may be firmer than any Japanese officials are admitting, but the last thing the MOT, ANA and JAL want is to almost double the capacity of its major international hub and let the incumbent US carriers swallow up more than what the Japanese perceive is a fair share of slots.
A second parallel runway was originally conceived at Kansai, which is already close to capacity, together with a cross-runway. One source claims the original financing of the airport had taken account of the cost of the second runway, but that these funds are no longer available. Indeed, the financial weakness of Kansai International Airport Company has led the government to establish a new development company to oversee the second stage. The new company is a joint venture between KIAC and the local government, with KIAC's half of the Y500 million startup capital coming from a central government interest-free loan. Total costs for the second phase, which includes the construction of a satellite terminal, are Y1,560 billion with land reclamation costs accounting for 75 per cent. The MOT has put aside Y723 billion in the five-year plan for the project, with most of the financing for the runway and satellite due to come from the private sector.
The most delicate and grandiose project of them all is the proposed third Tokyo airport. MOT officials refuse to comment on the chances of the project going ahead or whether it will be a mixed domestic and international airport, because it could affect negotiations over the Narita extension. But there is no doubt extra international capacity is needed. 'Even after the completion of Narita there will be a lack of international capacity, so we will have to find that at the third airport,' says Yamaguchi. The MOT has put aside Y200 billion for this project in the five-year plan, which Yamaguchi stresses is only a small proportion of the total projected cost.
Source: Airline Business
