ANA must show “Inspirations of Japan”

  • ANA disproportionately impacted by depreciation of yen due to larger domestic operation
  • ANA 35.4% larger than JAL domestically in FY2013 H1 by no. of passengers
  • Domestic rationalisation to close domestic unit revenue gap of 15.3%
  • ANA personnel still more productive than JAL
  • ANA’s ¥100 billion cost reduction to close CASK gap with JAL
  • Boeing 787-10 availability crucial to bridging 777X gap
  • Boeing 777X frontrunner in ANA order race: sources
  • Japan Airlines still needs 777X for growth under constraints
  • ANA should acquire Starflyer, eliminate a hybrid player being squeezed
  • ANA could transfer Starflyer’s A320s to fast-track Vanilla Air’s expansion

It is more than a red crane. The oneworld carrier’s logo that adorns every Japan Airlines (JAL) jet symbolises a phoenix rising from the ashes, with the company revising its FY2013/14 financial forecast upwards, citing falling fuel prices and ongoing cost reduction initiatives that continue to bear fruit. On the other hand, Japan’s biggest carrier All Nippon Airways (ANA) trimmed its FY2013/14 full-year financial forecast with a 45.5% cut in projected operating income to ¥60 billion from ¥110 billion whereas projected full-year net profit was cut to ¥15 billion, a third of the ¥45 billion previously envisioned.

This added to the disappointment of the financial market as only ¥10 billion of costs were cut in the FY2013/14 first-half versus a full-year cost-cutting goal of ¥25 billion. Likewise, its net profit in the fiscal first-half slumped by 45.7% from ¥36.9 billion in FY12/13 first-half to ¥20 billion a year later on 5.9% higher operating revenues of ¥797.6 billion from ¥753.2 billion in the prior-year period. But a Japanese yen depreciation led to a 24.8% higher fuel cost of ¥180.3 billion in the April-September period from ¥144.5 billion a year earlier, which resulted in a disproportionately faster 11.3% increase in operating expenses to ¥754.3 billion from ¥677.9 billion in FY11/12 first-half, thereby producing a 42.5% year-over-year lower operating profit of ¥43.3 billion, down from the ¥75.3 billion posted a year ago.

Combined with the redeployment of 30% staff to support expansion, this spells the unmistakable need of a restructuring that has long been overdue. As ANA relaunches its Tokyo Narita-based low-cost carrier (LCC) as Vanilla Air on 1st November, it is paramount that ANA learn from its past mistake by loosening its iron grip on the management of Vanilla Air while expanding its distribution channels and streams of ancillary revenues.

Yet it would arguably be a mistake in betting against ANA, the very same company that came into existence 61 years ago and ultimately became Japan’s biggest carrier against a plethora of naysayers and strong government support for its arch-rival Japan Airlines (JAL) that provided a ¥350 billion bailout with a debt forgiveness from banks totalling ¥520 billion (US$5.1 billion) during the bankruptcy process as well as ¥1.1 trillion in loss carry-forwards significantly trimming the oneworld carrier’s tax expenses by US$4.5 billion over the next 9 years.

Indeed, with the table now being turned under the administration of Japanese prime minister Shinzo Abe, ANA could seize this precious opportunity to utilise the 11 slots at Tokyo Haneda awarded to the Star Alliance carrier versus 5 received by its nemesis to rebalance the mix of its network, while gaining the first-mover advantage in Asia/Pacific by acquiring a 49% stake in Myanmar’s Asia Wings Airways (AWA).

Above all, ANA must show “Inspirations of Japan” itself by doubling down on investments in its core products, including cabin upgrades, in-flight connectivity, fronts on which it has lagged behind its rival, in order to restore its leadership in profitability and take the carrier to new heights.

Image Courtesy of Boeing

Japan Airlines: bigger is not better
Interestingly, rather than expanding aggressively, Japan Airlines (JAL) is heading in the opposite direction, in targeting to become a smaller but more efficient and more profitable airline. It is only expected to increase its international capacity, measured in available seat kilometres (ASKs), by 2.2% in FY2013/14 second-half and 3.3% for the full-year, as well as domestic capacity by 1.9% and 2.5% in the corresponding periods. In comparison, ANA plans to grow its international capacity by 10.2% and 10.4% in the second-half and for the full-year, respectively, whereas its domestic capacity is forecast to grow by 3.4% and 4.8% in the corresponding periods.

This is highlighted by the more subtle change taking root at Japan Airlines’ management in deriving better passenger mix and higher yields from a widely well-received product which JAL dubs the “New Sky”. It has markedly improved the airline’s operating metrics internationally, where the product was introduced on the New York John F. Kennedy and Paris markets during the first-half (“Japan Airlines flies into a ‘New Sky’, 14th May, 13).

International passenger revenue soared by 5.7% to ¥222.2 billion in FY2013/14 first-half from ¥210.3 billion in the prior-year period, on the back of only 1.8% more passengers at 3.85 million from the 3.78 million it carried a year ago. International passenger yield improved by 1.6% to ¥12.6 per revenue passenger kilometre (RPK) from ¥12.5, backed by a 0.1% higher load factor at 76.3% as passenger traffic increased by 4.5% from 16.85 billion RPKs in FY12/13 first-half to 17.6 billion RPKs in FY13/14 first-half. Capacity, meanwhile, matched the increase in passenger traffic with a 4.4% year-over-year addition to 23.09 billion available seat kilometres (ASKs) in this year’s fiscal first-half from 22.1 billion ASKs last year.

The result was also spectacular in the fiscal second-quarter, with the “New Sky” product leading to improved passenger mix in its European operation, having achieved a 92% load factor during the peak summer travel period in August. International passenger revenue during the June-September period rose by 7.8% year-over-year to ¥123.2 billion on 4.6% more passenger carriage at 2.07 million, primarily driven by a 1.6% improvement in passenger yield to ¥13.1 per revenue passenger kilometre (RPK). Load factor was 0.8% higher at 79.7% as a 6% year-over-year higher passenger traffic at 9.4 billion revenue passenger kilometres (RPKs) outpaced a 4.9% addition in capacity at 11.8 billion available seat kilometres (ASKs).

Worryingly for All Nippon Airways (ANA), Japan Airlines (JAL) managed to pull a 1% higher international unit revenue at ¥10.4 per available seat kilometre (ASK) than ANA’s ¥10.3 per ASK in the June-September period despite its first-half figure, at ¥9.6 per ASK, was still 1% lower than ANA’s ¥9.7 per ASK.

JAL also intends to build on its recent gain with the “New Sky” products, not only by extending it to its 199-seat international Boeing 767-300ER fleet equipped with 24 “Sky Suite II” flat-bed business class seats in a 1-2-1 configuration and 175 “Sky Wider” economy class seats on the Tokyo Narita-Vancouver and Tokyo Narita-Kuala Lumpur routes from this month and next month onwards, respectively, but also by deploying its flagship “Sky Suite 777” on the Tokyo Narita-Los Angeles beginning December 2013 and on Tokyo Narita-Chicago route beginning next month.

Given its successful international roll-out, it is a “no-brainer” for Japan Airlines (JAL) to extend the “New Sky” products to its domestic operation in order not only to extract better yields from a mature market but also further differentiate itself from the spurt of low-cost carriers (LCCs) that threatens to chip away the low end of its lucrative domestic business. It now plans to refurbish a total of 77 aircraft in its domestic fleet, including a mix of 777-200s, -300s, 767s and 737-800s with new leather domestic business class seats as well as the “Sky Wider” economy class seats, alongside other new features such as the first Ka-band satellite in-flight connectivity in the world provided by Gogo Inc., mood lighting and new carpets. These will be progressively rolled out from May 2014 onwards, whereas the in-flight connectivity will become available starting from summer 2014.

This will be vital as signs are setting in that domestic yields are coming under pressure, with JAL’s FY2013/14 second-quarter figure declining by 2.7% year-over-year to ¥22.1 per revenue passenger kilometre (RPK) and to ¥21 per RPK for the first-half as a whole. Domestic revenue was largely stable with a 0.5% increase to ¥251.7 billion in FY13/14 first-half from ¥250.4 billion in the year-earlier period despite the fact that the airline carried 3.7% more passengers in the fiscal first-half to 15.78 million from 15.2 million in the prior-year period.

On a combined basis, operating revenue increased by 4% to ¥659.3 billion in FY2013/14 first-half, from ¥634.2 billion a year ago, although operating expenses rose at a brisk 7.9% pace to ¥563.4 billion from ¥522 billion a year ago, thereby producing a 14.6% lower operating profit of ¥95.8 billion from the ¥112.1 billion posted in the year-earlier period. Net profit in the fiscal first-half decreased by 17.8% to ¥81.9 billion from ¥99.7 billion in FY12/13 first-half.

Image Courtesy of Japan Airlines

Image Courtesy of Japan Airlines

Going forward, Japan Airlines’ (JAL) will be facing significant constraints in international growth, as a result of the slot allocation at Tokyo Haneda airport, where it was allocated only 5 out of 16 new slots by Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT) that significantly constrained its future growth potential in the international market.

“Decisions regarding the allocation of national assets such as departure and arrival slots were not made from the standpoint of maximisation of passenger convenience and the national interest. Additionally, no rational reason was given by MLIT as to how the current allocation would bring about such benefits. We received the explanation that this decision was made based on whether or not the criteria pertained to the establishment of a given new route. It has not been specifically explained why new criteria have been abruptly established, why it is that routes established at Tokyo Haneda airport are to be regarded as ‘new’, or how they might impede or distort an appropriate competitive environment,” Japan Airlines contends in a statement.

Remarkably, Japan Airlines (JAL) is now mulling a lawsuit against the Japanese government over the perceived skewed slot allocation, a step that was unprecedented and unthinkable just a few years ago due to its once cozy ties with the government, although such a lawsuit is all but futile given the track record that the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has never overturned its decisions, especially after the authority upheld the latest decision with its director Shigenori Hiraoka saying “it’s water under the bridge”.

“It’s one of the steps we might take in the future. There are times when you will take actions because you are trying to achieve a particular result, and sometimes you will take actions even knowing that you might not be able to get a particular result. Sometimes things have to be said, sometimes things have to be done,” Japan Airlines president Yoshiharu Ueki asserted in a Reuters interview.

Ironically, a solution to this growth constraint is to order the aircraft that fell out of its favour – the 400-seat Boeing 777-9X when it placed a firm order for 18 Airbus A350-900s and 13 A350-1000s on 7th October, in what Boeing Capital Corporation (BCC) managing director (MD) Kostya Zolotusky characterised as “a heartbreak”, exactly replacing Japan Airlines’ 13 777-300ERs, 11 -200ERs and 7 -300s in one fell swoop.

The US$9.5 billion order further signalled Japan Airlines’ break from its past and its emergence as a fully independent, private business, which industry observers believed the Boeing 787’s fiasco had played a decisive role – the 3 months’ long grounding, fuel leaks, the 8th November incident involving a warning sign of the auxiliary power unit (APU) lithium-ion battery after which no problems were found, as well as the General Electric GEnx-1B engine icing issue that prevented JAL’s 787 from flying within 50nm (nautical miles) of a thunderstorm and prompted it to switch 787-8 on its routes to Sydney and Delhi to the 777-200ER and the Hanoi and Singapore routes to 767-300ER.

Make no mistake, while the 350-seat A350-1000 is consistent with JAL’s strategy to focus on improving traffic mix and yields instead of volume, in addition to early availability of an aircraft that burns 25% less fuel than the 777-300ER in 2019, its 4-class “Sky Suite 777” only configures the 368-seat 777-300ER with 232 seats, let alone the smaller A350-1000. Therefore should Japan Airlines (JAL) seek profitable growth in the future, particularly after the slot allocation at Tokyo Haneda, it would have little choice but to seek a slightly larger aircraft such as the 400-seat 777-9X which may end up carrying only around 300 passengers in the “Sky Suite” configuration.

For the time being, though, this “lean and mean” strategy is paying off. It revised the full-year FY2013/14 operating income forecast by 10.7% to ¥155 billion from ¥144 billion and net profit to ¥128 billion from ¥118 billion, on higher operating revenues of ¥1.286 trillion from ¥1.272 trillion and a lower jet fuel price at US$119.8 per barrel, representing a decreased but still impressive 12.1% operating margin. JAL achieved a 15.8% operating margin in FY2012/13.

Airbus_JAL_A350_XWB_order_ceremony

Rebalancing network crucial to improved profitability
One may wonder, then, the reason why a depreciation of yen led only to a ¥23.2 billion impact on Japan Airlines’ FY2013/14 first-half operating profit, including a ¥16.9 billion or 13.7% higher fuel expense, but inflated All Nippon Airways’ (ANA) fuel costs by 24.8% in the same period as aforementioned and by 27.2% from ¥73.5 billion in FY12/13 second-quarter to ¥93.5 billion in FY13/14 second-quarter.

Furthermore, ANA’s fuel cost in the fiscal first-half was 27.8% higher than JAL’s in absolute terms, yet its capacity measured in available seat kilometres (ASKs) was only 21.3% larger at 51.1 billion ASKs versus JAL’s 42.3 billion ASKs. Similarly, ANA’s FY13/14 second-quarter fuel cost was 28.4% higher despite only having 21.3% more ASKs than JAL.

This could be attributed to All Nippon Airways’ substantially larger domestic operation, which, with jet fuel denominated in United States dollars but paid for by carriers in Japanese yen, is understandable for its disproportionate impact on ANA. In light of this, ANA will raise fares by 9% on flights during March 7-29th, which will increase operating revenue by 2%.

Indeed, by one measure using domestic capacity, ANA’s domestic operation in FY2013/14 first-half was 61.9% larger than JAL’s with 31.1 billion available seat kilometres (ASKs). Even measured in the number of domestic passengers and passenger traffic, it was still 35.4% larger at 21.37 million passengers and 57.9% larger at 18.95 billion revenue passenger kilometres (RPKs). Its fiscal first-half domestic revenue was 36.8% higher than JAL’s and 0.4% higher than FY12/13 first-half’s ¥343 billion at ¥344.3 billion.

Its FY2013/14 second-quarter domestic revenue was 1.6% higher year-over-year at ¥196.9 billion on 3.6% more passengers at 11.7 million. Though load factor declined by 0.5% to 64.4% as a 4.9% higher capacity at 16.2 billion available seat kilometres (ASKs) outpaced a 4.1% increase in passenger traffic to 10.45 billion revenue passenger kilometres (RPKs).

Looking ahead, All Nippon Airways (ANA) must seize the opportunity afforded by the 11 new daytime Tokyo Haneda slots – 1 extra each for United Kingdom (UK), France, Beijing in China, Singapore, Thailand, Vietnam, Indonesia, Philippines, Canada and 2 extra for Germany, to build Tokyo Haneda into a premium international hub to rebalance its network.

All Nippon Airways (ANA) has already announced the use of such invaluable Tokyo Haneda slots, estimated at US$20 million in operating profit per year per slot pair, with launches of new routes, such as deploying the Boeing 787-8 Dreamliner on the new route to Jakarta and 767-300ER to Vancouver, Manila and Hanoi. It also used the 1 new slot each to Singapore, Bangkok and London Heathrow to replace 1 corresponding flight from Tokyo Narita, whereas the new flights from Tokyo Haneda to Paris Charles de Gaulle and Jakarta also see the retiming of existing flights from Tokyo Narita.

On 18th December, ANA even announced new Tokyo Haneda-Munich and Tokyo Narita-Dusseldolf routes using the Boeing 787-8 Dreamliner while adding an extra Tokyo Haneda-Frankurt flight, given Duseeldolf has one of the largest Japanese communities in Europe and Frankfurt is Continental Europe’s largest financial centre.

“We are delighted to announce the expansion of our German network which, along with our joint venture with Lufthansa, will enhance our services to Germany and Europe as a whole. The new expanded network will enable us to offer our customers greater choice, connectivity and convenience in both Japanese and European markets,” ANA president and chief executive Osamu Shinobe said.

In doing so, such as launching its first international route to Canada, not only could ANA reduce its disproportionate exposure to the depreciation of Japanese yen beginning 30 March, 2014, when these new flights are introduced, but also address a more structural problem that is the pre-requisite of significantly improving profitability, namely the shortfall in unit revenue and passenger yield compared to its arch-rival Japan Airlines (JAL).

For the FY2013/14 first-half, ANA domestic unit revenue, measured in revenue per available seat kilometre (RASK), decreased by 4.2% year-over-year to ¥11.1 per available seat kilometre (ASK) from ¥11.5 per ASK a year ago, a staggering 18% shortfall against JAL’s domestic unit revenue of ¥13.1 per ASK. In the FY13/14 second-quarter, during which ANA’s unit revenue dropped by 3.1% year-over-year to ¥12.1 per ASK, this shortfall widened to 20.7% versus JAL’s ¥14.6 per ASK.

It does not bode well for ANA even internationally, where the unit revenue gap was smaller at 1% ¥10.3 per ASK in FY13/14 second-quarter, 0.8% higher year-over-year but 1% lower than JAL’s ¥10.4 per ASK. This gap is only going to worsen for FY13/14 as its full-year domestic and international unit revenues are expected to stay at ¥11.1 per ASK and ¥9 per ASK, respectively, versus JAL’s domestic figure of ¥13.0 per ASK and ¥9.28 per ASK internationally, both 17.1% and 3.1% higher than its oneworld counterpart.

This was exacerbated by the shortfall in yields, where ANA’s FY13/14 first-half domestic yield at ¥18.2 per revenue passenger kilometre (RPK), 2.9% lower than the prior year period’s ¥18.7 per RPK, was 15.4% lower than JAL’s ¥21 per RPK in the same period. The same holds true for the FY13/14 second-quarter, during which ANA’s domestic yield, at ¥18.8 per RPK, was astonishingly 17.6% lower than JAL’s ¥22.1 per RPK, although ANA fared better internationally, with a narrowing leadership in international yield as JAL’s “New Sky” products gain traction and attract considerably improved yields. At ¥13 per RPK for the FY13/14 first-half and ¥13.2 for the fiscal second-quarter, this was nonetheless marginally better than JAL’s ¥12.6 per RPK and ¥13.1 per RPK in the fiscal second-quarter.

Now that ANA is able to grow at Tokyo Haneda, an airport favoured by business travellers due to its close proximity to the city centre at just 14km (kilometres), it could feasibly widen its leadership in international yield and make better connections between international and domestic flights to close its domestic yield shortfall. This is important as business travellers can make one-stop flight to Europe, North America and Southeast Asia with minimal transit time for those who are willing to pay a premium to save time and access a broader international network from Tokyo Haneda, where ANA will be the only Japanese carrier flying to Vancouver, Hanoi, Munich, Frankfurt, Los Angeles, Jakarta and Manila from the downtown airport.

Image Courtesy of Franck Robinchon

Image Courtesy of Franck Robinchon

An overdue domestic rationalisation
However, the Tokyo Haneda slots are not a panacea to the challenges facing ANA’s domestic operation, particularly so given its dominant position in the market where a plethora of low-cost carriers (LCCs) is unlocking a pent-up demand for low-cost air travel in an economy plagued by a decade-long depression.

Spring Airlines from China is also starting its Japanese subsidiary in late-May 2014 from Tokyo Narita with 3 destinations being planned – Hiroshima, Saga and Takamatsu, using 1 189-seat Boeing 737-800, joining a low-cost cadre featuring Jetstar Japan, Peach Aviation and Vanilla Air.

At stake is the world’s 3rd-largest domestic aviation market with a population base 6 times the size of Australia’s, whose low-cost penetration rate of 23% is substantially higher than Japan’s 5% for the first 9 months of 2013, let alone 57% in Malaysia and 87% in Philippines. According to the Centre for Aviation (CAPA), the number of domestic passengers grew for the first time in 6 years by 8.7% in FY2012/13. As the Japanese economy improves following the loosening in monetary policy and a significant depreciation of the yen, which is at its weakest position since October 2008 against the US dollars devised by the island-nation’s prime minister Shinzo Abe, this bodes well for Japanese low-cost carriers (LCCs) with stimulating fares at a third of the bullet trains’, such as Peach Aviation’s thrice-daily Tokyo Narita-Osaka Kansai services with the lowest fares at ¥3,790 whereas the bullet trains cost 3.7 times as much at ¥13,850.

For ANA, it has to replicate Peach Aviation’s success where it now operates 10 aircraft from Osaka Kansai to a range of destinations such as Tokyo Narita, Sapporo, Seoul Incheon, Busan, Hong Kong, Taipei-Taoyuan, Ishigaki, Okinawa-Naha, Kagoshima, Nagasaki, Fukuoka, Sendai, Kaohsiung from 18th January, 2014 and Matsuyama on 1st February, on its Tokyo Narita-based wholly-owned subsidiary Vanilla Air.

The Peach joint venture (JV), 38.67% owned by ANA Holdings Inc., 33.3% by Hong Kong-based First Eastern Aviation Holdings and 28% by Innovation Network Corporation of Japan (INCJ), is successful not only because it operates international flights, but also of its detachment from ANA’s management where tickets can be paid at convenience stores and bought through global distribution systems (GDSs).

As the AirAsia Japan joint venture was shelved and now relaunched as Vanilla Air with 2 Airbus A320s (“AirAsia: Is love in the air?“, 19th Jul, 13), Vanilla Air should be given a free hand to emulate Peach’s success, with the next logical step being expanding aggressively against its arch-rival Jetstar Japan at Tokyo Narita, which solely operates domestic flights such as to Nagoya (Chubu), Osaka Kansai, Takamatsu, Matsuyama, Oita, Fukuoka, Kagoshima, Okinawa Naha.

Vanilla Air is already heading in the right direction with its early focus on international flights to Okinawa-Naha and Taipei Taoyuan on December 20th, Sapporo and Seoul in January 29th and March 1st 2014, respectively, given Jetstar Japan’s domestic focus led to a loss of ¥8.8 billion in the 12 months ending June 2013 on a revenue of ¥12.8 billion, according to a Nekkei report. It now plans to hold its fleet steady at 18 Airbus A320s with sharklets before starting international operations and becoming profitable in FY2014/15, following a ¥11 billion equity infusion by Qantas and Japan Airlines (JAL) that see their stakes in the LCC boosted to 45.7% each.

Intriguingly, for Vanilla Air to gain scale to compete against Jetstar Japan effectively, Aspire Aviation believes this is intertwined with the rationalisation of ANA’s domestic mainline network.

For instance, the struggling hybrid carrier Starflyer, which announced a restructuring programme in November with the withdrawals of the Kitakyushu-Busan route on 30th March, Osaka Kansai-Fukuoka route on 20th February, the voluntary retirement of 30 employees, a 15% cut in fixed costs, 15%-30% cut in production costs, is now being squeezed in the middle from the low-cost carriers (LCCs) and the mainline carriers. Its fleet of Airbus A320s is expected to shrink to 9 aircraft from 10 currently.

Given all but one, Tokyo Haneda-Kitakyushu, of Starflyer’s domestic routes overlap with ANA’s, it makes sense for ANA to acquire Starflyer, in which ANA Holdings Inc. owns 18.96%, in full in a number of ways. Admittedly, there is limited cost and revenue synergy to be gained from this take-over as Starflyer already uses ANA’s reservations systems and has an extensive codeshare with the larger carrier. And one may argue that ANA’s domestic codeshares with the AirDo and Solaseed Air as well as Starflyer provide a localised strategy to tap into the Hokkaido and Kyushu regions.

Unlike Solaseed Air and AirDo, however, Starflyer is not a full-blown low-cost carrier (LCC) but a full-service carrier with a low-cost base that has clearly struggled lately, with FY2012/13 net profit falling to ¥287 million from ¥966 million in the prior financial year. With its higher overlapping network, acquiring Starflyer could eliminate a competitor with which ANA still competes notwithstanding their codeshares and take domestic capacity out of the full-service segment of the domestic market, thereby increasing ANA’s domestic load factor and unit revenues on these overlapping, high frequency routes. On the Tokyo Haneda-Fukuoka route, for example, ANA and Starflyer operate 18 and 10 daily flights, respectively, whereas Japan Airlines (JAL) operates 17 flights. Taking out Starflyer’s capacity virtually eliminates around 20% of seats in the full-service segment on this single route, a highly favourable factor for the remaining players.

A noteworthy point is, even though Starflyer’s airfares are up to 55% lower than ANA’s, whether this is sustainable or not is utterly questionable with 150-seat A320s that feature leather seats, touchscreen in-flight entertainment (IFE) and original blended coffee – service levels that are akin to full-service carriers.

Most importantly, acquiring Starflyer could also fast-track Vanilla Air’s expansion by transferring the 10 Airbus A320 aircraft and its pilots and cabin crew to Vanilla Air, thereby slashing costs further and adopting the appropriate cost base for an airfare that customers are willing to pay for, rather than Starflyer’s existing business model of having high cost but low fares.

Image Courtesy of Abram Chan

Image Courtesy of Abram Chan

Conclusion
Lastly, All Nippon Airways (ANA) is in need to revamp its “Inspirations of Japan” products to catch up with its arch-rival Japan Airlines’ “New Sky” products. For example, JAL’s “Sky Suite 777” has a business class that features a 74-inch long and 25.5-inch wide bed, versus ANA’s 777-300ER that features a business class flat-bed seat with 62-inch pith and 21-inch width. JAL’s “Sky Premium” premium economy seats also have a 4-inch larger pitch at 42 inches than ANA’s whereas its “Sky Wider” economy seats are 2 inches wider at 18.5 inches.

Another urgent need is to slash ANA’s unit cost, the highest in the world, after its cost per available seat kilometres (CASKs) of ¥12.6 per ASK and ¥9.14 per ASK excluding fuel are 4.8% and 5.9% higher than JAL’s corresponding figures of ¥12 per ASK and ¥8.6 per ASK excluding fuel in FY2013/14 first-half. The need to cut cost only becomes more acute as ANA’s FY13/14 full-year CASK is expected to hit ¥12.7 per ASK and ¥9.21 per ASK excluding fuel, a 5.5% cost disadvantage to JAL’s ¥8.7 per ASK excluding fuel.

Surprisingly, ANA’s cost structure is quite efficient in terms of labour. ANA’s personnel cost of ¥83.3 billion in FY13/14 first-half, was 40.5% lower than JAL’s one of ¥117 billion albeit ANA has 33,467 staff and JAL just 30,882. In terms of revenue generation, ANA’s staff are also more productive with ¥23.83 million of operating revenue being generated per employee, versus JAL’s ¥21.35 million.

Therefore ANA’s fleet renewal programme is one of the last low-hanging fruits that could reduce its cost base considerably. A keenly watched decision surrounding the replacement decision of 22 Boeing 777-300ERs is now expected in January, Aspire Aviation‘s sources at the airline said.

Despite the earlier availability of the Airbus A350-1000s beginning in 2019, ANA is favouring the larger 400-seat 8,200nm (nautical miles) Boeing 777-9X as it is compatible with ANA’s future international growth profile under severe slot constraints over the next 20 years, and also partly owing to its cozy relationship with the Japanese government.

As the first 777-9X is not expected to enter into service until the second quarter of 2020, the availability of more, not fewer 787 Dreamliners is essential in winning ANA’s order, since the airline still has 50 214-seat 767-300 or -300ER passenger aircraft in its fleet despite having 23 787-8s in its fleet and another 13 on order. More of the domestically-configured 787-8s with 222 seats are required, while the 30 787-9s on order are likely to replace its fleet of 16 777-200s.

A combination of around 20 777-9Xs and a similar number of 787s is likely to be included in the package offered to ANA, Aspire Aviation understands, including the 320-seat 6,000nm (nautical miles) 787-10 that would be ideal for domestic trunk routes, Southeast Asia routes and even transpacific crossings replacing the 12 777-200ERs and 7 -300s.

Furthermore, with the announced 787 production ramp-up to 12 aircraft per month by end-2016 and 14 per month by the end of the decade, these 787s could be offered to ANA at steep discount without undermining the 787 programme’s overall profitability. For ANA, it could replace a majority of its widebody fleet before the end of the decade without bearing significant delay risks as the 787 programme will have been mature by the time the planes ANA ordered are delivered.

“In the past, aircraft development used to be more on schedule, but lately there have been delays. Possible delays is something we will consider,” ANA Holdings Inc. president Shinichiro Ito said.

All in all, these new aircraft will add to the ¥100 billion cost reduction programme that will bring its unit cost in-line with JAL’s at ¥8.35 per ASK excluding fuel by end-FY2014 assuming a 10% international capacity growth for ANA and a ¥10 billion cost reduction by JAL during the same period, Aspire Aviation estimates.

To make ANA great again, it must show “Inspirations of Japan”. Most importantly, it must continue to innovate and renew its core products, including a next-generation version of its “Inspirations of Japan”, in-flight Wi-Fi, while its partnerships in Asia – the US$25 million acquisition of a 49% stake in Myanmar’s Asia Wings Airways (AWA) and its fleet expansion to 10 A320s by 2018; the Garuda Indonesia codeshare that will see ANA passengers gaining access to 10 Indonesian destinations such as Jogjakarta and Denpasar; must be consistent with the strategy of building Tokyo Haneda into the premium hub for transpacific origin and destination (O&D) traffic.

Quite frankly, just as the Boeing 787 Dreamliner, ANA cannot afford to “over-promise” and “under-deliver”.

Image Courtesy of Bloomberg

Image Courtesy of Bloomberg

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    […] http://www.aspireaviation.com/2013/1...K9sOFU.twitter ANA is interesting the 777-9X model. They will have decision in January 2014. Hoping they will order…

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  1. […] http://www.aspireaviation.com/2013/1...K9sOFU.twitter ANA is interesting the 777-9X model. They will have decision in January 2014. Hoping they will order the 777-9X to be replaced the current 777-300. Let the speculation begin. __________________ https://www.facebook.com/scottweinbergpage?ref=hl Go to my new Facebook Page. Enjoy! […] Reply
  2. […] […] Reply
  3. "A combination of around 20 777-9Xs and a similar number of 787s is likely to be included in the package offered to ANA, Aspire Aviation understands, including the 320-seat 6,000nm (nautical miles) 787-10 that would be ideal for domestic trunk routes, Southeast Asia routes and even transpacific crossings replacing the 12 777-200ERs and 7 -300s."

    I guess the 787-10 will be good for regional flights up to 10 hours but I'm not sure we'll ever see a lot of 787-10 above the Pacific. 6000NM is without cargo From NRT to the US without cargo is not what ANA needs.The 787-9 or 777-8X seems better suited for that role.

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  4. […] of 777-9X as the Star Alliance carrier now shares a cozy tie with the Japanese government (“ANA must show ‘Inspirations of Japan’“, 20th Dec, […] Reply
  5. […] Qantas along with Japan Airlines (JAL) injected ¥11 billion into the carrier last year (“ANA must show ‘Inspirations of Japan’“, 20th Dec, […] Reply
  6. […] on stimulating air travel from their respective origin and destinations (O&D) markets (“ANA must show ‘Inspirations of Japan’“, 20th Dec, […] Reply

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