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Andrzej Jeziorski/TOKYO

Japan's dominant Big Three carriers face radical change in domestic and international markets, at a time when the Asia-Pacific region is still wrestling with its economic woes.

Japan Airlines (JAL) is the oldest of the three, and the biggest in revenue terms - in fiscal year 1997 (from April 1997 to March 1998, inclusive) JAL brought in ´1,218 billion ($10.7 billion), compared with All Nippon Airways' ´910 billion and Japan Air Systems' ´325 billion.

Until the current crisis, these airlines had been comfortable in the knowledge that the lack of slot availability at the crowded Tokyo airports of Haneda and Narita, combined with Japan's post-Second World War economic growth in Japan, had created a stability in the market that other airlines would envy. But no longer.

Since the beginning of the 1990s, JAL has suffered a 30%fall in yields, in terms of international passenger revenue per unit passenger kilometre. In the first half of FY1998, JAL's international yields fell again, by 5.3%, compared with the previous year's figure, while domestic yields dropped by 4.9%.

JAL president and chief executive Isao Kaneko attributes these latest drops to a passenger shift from more expensive first and business class seats into economy class, and the intensification of competition in the domestic market. This competition has increased with the September launch of Japanese domestic start-up Skymark Airlines, closely followed by the December debut of Air Do, competing on two of the busiest air routes, domestic or international, anywhere in the world - Tokyo-Fukuoka and Tokyo-Sapporo, respectively.

These newcomers are due to be joined in early 2000 by Pan Asia Airways, planning to operate between Fukuoka and Naha.

The new arrivals have sucked JAL and ANA into a price war, albeit limited to these two key routes. In March, JAL plans to slash fares on half its 24 weekly flights to Fukuoka by 50%, and will introduce a 32% markdown on the same number of its Sapporo services. This was a clear challenge to Air Do and Skymark, whose fares are already close to the reduced JAL prices, and have since been matched almost exactly by ANA.

UPHEAVAL

International services could face an upheaval with the proposed opening of a second runway at Tokyo's crowded Narita international airport. If the opening goes ahead in early 2001, as planned, this will increase annual aircraft movements at the airport from 125,000 now to about 200,000. A passenger terminal expansion is also planned, allowing a 50% increase in passengers handled annually from the 1997 figure of 25.2 million.

While sections of the new runway are complete, the project has been snarled up since 1993 in a land dispute with local farmers. Two groups still refuse to sell a small area of land, which prevents the completion of the project. Japanese transport minister Jiro Kawasaki is trying to set up meetings between the opposing parties, hoping to reach an agreement by April.

Once the deal is done, JAL, and to a lesser extent the more domestically oriented ANA and JAS, face what is for them the alarming prospect of a gush of new slots being snatched up by international rivals. Such a thing has been almost unheard of up to now: last August, the transport ministry completed its first slot allocation at Narita in seven years. This saw 202 weekly slots distributed among carriers from14 countries, with a comfortable 43% of them going to the Big Three home team - which complained that they had expected more - closely followed by US carriers, which claimed an unusually high 37%.

These slots were freed by reallocating unused positions and converting daily charter slots to scheduled ones. But this was nothing on the scale of what could happen in 2001.

On top of this, the Japanese economy shrank by 0.7% in FY1997, with the predicted figure for FY1998 revised downwards from 1.9% growth to as low as a negative 2.2%. Some analysts believe that the national slump will then bottom out, with the International Monetary Fund predicting 0.5% growth in calendar year 1999. Kaneko - in typically colourful terms - advocates caution.

"The Japanese economy is in the worst situation since the Second World War, like a thunderstorm bursting over Japanese commerce. Even after the rain stops, the playing field remains muddy," he warns.

Encouraged by signs of economic recovery in South Korea and Thailand, which should stimulate air traffic, he nevertheless remarks that other countries in the region, such as Indonesia and Malaysia, could take "a couple of years" to recover. Kaneko adds that some of JAL's yield shrinkage is a result of what he calls a "psychological recession" in Japan.

Kaneko says Japanese consumers have enough money, but are not spending it because of their fears about the future, including: the threat of unemployment (previously practically unheard of), pay and pension cuts, and low stock market indices. This caution is affecting Japanese businesses, and exacerbating the situation. In the words of a recent article in The Economist, "Japan's nerves are shot to pieces".

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TAX REFORMS

"Government action is urgently needed to reinstate the credibility of the financial sector by cutting income tax boldly and taking other necessary measures," says Kaneko. In a move to prime minister Keizo Obuchi is proposing tax reforms, and recently promised to create a million new jobs by March 2000.

Analysts fear, however, that to create these jobs the government may adopt the tried-and-mistrusted, distinctly temporary, strategy of pumping money into the building industry via a public works scheme. "The Japanese Government's traditional response to a recession is to start pouring concrete," as one JAL official puts it. With the expense and complexity of this ´1 trillion job-creation scheme, along with numerous other government proposals for reforming the labour market, The Economist writes that the tax reforms could fall by the wayside.

In the face of all this, the airline predicts nevertheless that this fiscal year will see it paying its first shareholder dividends in six years. Taking into account worsening economic forecasts, JAL is counting on a ´16 billion operating profit and a ´10 billion net profit, after having had to spend ´130 billion of capital reserve at the end of FY1997 to write off the company's accumulated deficit, plus losses in its hotel and resort subsidiaries.

Since 1990, JAL has been playing cat-and-mouse - in Japanese terms "itachi-gokko" (weasel game) - with falling revenues. "While we have been successful in trimming the operating costs, yield - unit revenue - has been eroded even faster," says Kaneko. According to airline figures, FY1997 finally saw a crossover, with costs expected to fall faster than revenue in FY1998.

Overall operating costs have been cut by 30% since 1991, while labour costs alone have been slashed by 40%. In FY1997, JAL staffing was reduced by 2,500 to about 10,000. Some 2,300 more employees are to go by 2001- as with last year's cuts, ground staff will be the worst hit. More cost reductions have been achieved by bringing in foreign cabin staff on renewable, one-year contracts. This has slashed average pay for cabin staff by 10%.

A similar cut in cockpit crew salaries has been achieved by the introduction of new pay scales, bringing a Boeing 747-400 captain's salary in line with US standards, while JAL Boeing 737 captains still earn substantially more than their US counterparts. In Japan, pilots' pay is independent of the aircraft type they are assigned to.

LOW COST SUBSIDIARY

The start of JAL Express (JEX), a new low-cost subsidiary, last July, has given its parent airline another way around this. The new carrier has its own pay scale, paying its 737 captains about half of what JAL does. In its latest route strategy, JAL is shifting an increasing number of its regional routes to JEX, which is adding to its two-aircraft fleet with the delivery of two 737s in FY1999. On top of this, JAL is also proposing to employ more foreign flightcrews, with some based overseas.

According to Kaneko, the airline is targeting a further 10% cut in operating costs by the end of FY2000, "-when we'll get very close to the international average". This deadline has been brought forward one year compared with previous planning.

Included in this accelerated austerity plan are moves to cut unprofitable routes and improve aircraft utilisation. This has led to a cut in calculated fleet needs of up to 10 aircraft.

In March 1997, JAL was planning for a 153-aircraft fleet in March 2000. A year later, this was revised downwards, with four order deferrals and the sale of two 737-400s to JEX. Three more aircraft due for delivery in 2001 were deferred last September, with no new delivery date fixed.

Four 747 Classics and one McDonnell Douglas DC-10-40 are being retired this year, and nine new aircraft will be delivered, including four 747-400s, two Boeing 777-300s and two 737-400s.

In further cost-cutting efforts, JAL plans to shift emphasis from buying to leasing its aircraft. It is also pushing the Japanese Government to lower fees at Narita and Osaka-Kansai airport - where the cost of landing a 747-400 is more than 10 times the level at London Heathrow - and plans to expand its cargo operation, and establish more cargo partnerships to increase yields.

More passenger partnerships are also on the cards, with JAL planning to expand overseas services based on "-closer co-operation with overseas airlines and the development of opportunities provided by the revised US/Japan aviation agreement". Codesharing with American Airlines is due to start in May, and with British Airways and Cathay Pacific from the third quarter.

Together with co-operation with Qantas and Canadian Airlines, these major tie-ups with the key members of the oneworld alliance mean that JAL is perfectly positioned to become a full member of the airline group. JAL, however, is holding back, concerned about maintaining its individuality, about the complexities and costs of merging frequent flier schemes and ground facilities with at least five partners, and about the probable loss of its many existing bilateral ties with non-oneworld airlines.

With all these factors to consider, probably the last thing the airline needs is for its president and entire board of directors to resign. Yet that is what JAL's largest single shareholder - 4% owner Eitaro Itoyama - called for recently, in an apparent appeal to the Japanese tradition of taking blame honourably by self-immolation.

The call has been met with resounding indifference. The board has, after all, still got a formidable task ahead of it.

Source: Flight International