Japan Airlines flies into tomorrow with simplicity

  • ANA overtakes JAL as largest Japanese international airline for the first time
  • JAL now a full 32% smaller than ANA; doubling 16% in FY11
  • Employee productivity at JAL is 93% lower than at ANA
  • JAL CASK advantage against ANA widens to 7.36% in FY14 Q4 due to fuel
  • Peach makes Sendai 4th hub by mid-2017 as Skymark abandons focus city
  • Peach starts Tokyo Haneda night-time & Narita flights; cannibalises Vanilla
  • ANA assumes long-term lease for 5 ex-Skymark A330s; DBJ enters Skymark whilst exiting Solaseed
  • Talks on ANA inducting 6 A380s misplaced as Haneda bans operations 0600-2300
  • JAL & Jetstar Japan have 45% domestic share; ANA & affiliates 50%

It is a remarkable reversal of the David versus Goliath fight: 4 years since the “tsurumaru” morphed into a phoenix rising from the ashes and emerged from bankruptcy, Japan Airlines (JAL) has been playing second fiddle to its nemesis All Nippon Airways (ANA) with a widening gap. FY2014/15 not only saw their size difference in terms of seat capacity doubling to 31.58% from 16.04% over the same timeframe, but also witnessed the Star Alliance carrier becoming the largest Japanese international player for the first time in history.

This coincides with ANA reporting a 108.5% surge in FY2014/15 net profit to ¥39.2 billion, up from ¥18.8 billion a year earlier, as well as its successful pre-emptive strike in taking a 19.9% stake in beleaguered low-cost carrier (LCC) Skymark Airlines, thereby preventing JAL from laying hand on the LCC’s 36 Tokyo Haneda airport slots. Across the aisle, meanwhile, the oneworld carrier posted a 10.2% lower FY14 net profit of ¥149 billion against the ¥166.2 billion recorded in FY13.

This convergence in earnings, while not unexpected (“ANA marches on to achieve profitability parity with JAL“, 22nd Jan, 15), has been hailed by the Japanese media as ANA triumphing over the former national carrier.

But devil is always in the details. JAL has a much simpler, cost-efficient structure to capitalise on the low-cost travel boom with its Jetstar Japan joint venture (JV) while further differentiating itself in full-service travel over its “New Sky” products. As JAL is considerably less hedged in jet fuel than ANA, coupled with narrowing losses at Jetstar Japan now that it has commenced international flying, it is hopeful that the precipitous drop in net profits could be arrested in the foreseeable future.

Image Courtesy of Japan Airlines

Image Courtesy of Japan Airlines

Cost efficiency drives soaring operating profit
In fact, an unassuming comparison using the net profit metric could be deceiving. On an operating level, Japan Airlines (JAL) remains significantly more profitable than its arch-rival and has started improving once more, an important indication that the dissipating one-off rebasing effect from its restructuring has run its course and is now reaching a sustainable level.

FY2014/15 operating revenue grew by 2.7% to ¥1.345 trillion from ¥1.309 trillion in FY13, outstripping a 2.0% rise in operating expense to ¥1.165 trillion from ¥1.143 trillion in FY13, thus producing a 7.7% higher operating profit of ¥179.6 billion, up from ¥166.7 billion in FY13 and the first increase since FY11. The prior years have seen a perennial decline in operating profit from ¥204.9 billion in FY11 to ¥195.2 billion in FY12. As a result, operating margin expanded to 13.4% in FY14 from 12.7% in FY13, more than doubling the 5.3% figure at fast-growing ANA.

At ANA, operating revenue soared by 9.13% to ¥1.713 trillion in FY14 from ¥1.570 trillion in FY13, outpacing the 7.83% growth in operating expense to ¥1.622 trillion from ¥1.504 trillion in FY13. Operating profit grew by 38.8% to ¥91.5 billion from ¥65.9 billion a year ago with the operating margin improving by 1.1 percentage point year-over-year.

Domestically, JAL is exhibiting more capacity discipline than ANA, as the former only grew available seat kilometre (ASK) by 2.2% over a 4-year period to 36.306 billion ASKs in FY14 against the 35.523 billion ASKs supplied in FY11, whereas the latter grew its ASK by 7.56% to 61.05 billion ASKs in FY14 from the 56.756 billion ASKs supplied in FY11. JAL’s result represented a 2.14% cut in ASK in FY14 from the 37.084 billion ASKs in FY13 and led to a stable domestic revenue at ¥487.5 billion, as passenger traffic rose by 1.0% to 23.993 billion revenue passenger kilometres (RPKs) in FY14 from 23.745 billion RPKs in FY13, with a 2.1% higher load factor at 66.1% offsetting the 1% softening in domestic yields at ¥20.3 per RPK, down from ¥20.5 per RPK a year ago.

With the plethora of new low-cost entrants cannibalising the most price-elastic economy segment, JAL’s capacity discipline bodes well for its upmarket move, in shelving the JAL Express operation on October 1, 2014; commencing the JAL Express Tag service from 31st March onwards to expedite the baggage drop process; “JAL Sky Next” on a total of 77 Boeing 737-800s, 767-300s/-300ERs, and 777-200s with slimline leather economy seats that offer 5cm more legroom, mood lighting while upping the frequencies on routes from Tokyo Haneda to Itami, Okayama, Kita-Kyushu and Yamagata.

Take domestic yield and unit revenue, a gauge of revenue efficiency, as examples of the benefits that capacity discipline brings. Despite a 2.1% increase in ANA’s domestic load factor to 64.1%, primarily stemming from a 2.1% cut in capacity to 60.213 billion ASKs in FY14 from 61.046 billion ASKs in FY13, and a 1.9% soar in traffic to 38.582 billion RPKs in FY14 from 37.861 billion RPKs in FY13, the longstanding issue of a significant RASK and yield shortfall remains unaddressed. Domestic revenue per ASK (RASK) at ANA in FY14 was some 18.58% below JAL’s ¥13.4 and the yield some 14.69% below JAL’s ¥20.3 per RPK, versus last financial year’s 18.02% and 15.17% differences.

Internationally, ANA has stolen a march on JAL which is hardly a surprise given it was awarded 11 of 20 new Haneda slots in late-2013 with both airlines having the same RASK at ¥9.5 and the Star Alliance carrier enjoying a 3.82% higher yield at ¥13.1 per RPK versus the ¥12.6 per RPK at JAL. With one hand tied behind its back, there is so much JAL can do in terms of network development, as the new flights between Tokyo Haneda and London, Paris, Singapore, Bangkok and Ho Chi Minh City already exhausted its allocation of 5 new slot pairs at the downtown airport, just 15km (kilometres) from city centre.

Indeed, its international network development is shifting gear to non-Tokyo Haneda airports, with the Nagoya Chubu-Bangkok and Osaka Kansai-Los Angeles routes being launched on December 20th, 2014 and March 20th of this year, coinciding the doubling of flight frequencies between Tokyo Narita and New York John F. Kennedy, as well as Jakarta to twice-daily. The 3.9% increase in international revenue to ¥454.8 billion in FY14 from ¥437.5 billion posted in the prior fiscal year was significantly dwarfed by ANA’s 18.5% surge in international revenue to ¥468.3 billion in FY14 from ¥395.3 billion in FY13. Considering the growth constraints it is facing, as each Tokyo Haneda slot pair equates to ¥2 billion in annual revenue, the 1.9% improvement in international yield to ¥12.6 per RPK in FY14 from ¥12.4 per RPK in FY13 and the 3.0% enhancement in revenue per passenger to ¥58,362 were no small feats. These were, however, partially diluted by a 0.8% year-over-year lower load factor at 75.7%, as the 2% rise in international passenger traffic to 36.109 billion RPKs in FY14 from 35.39 billion RPKs in FY13 failed to match the 3.2% addition in capacity to 47.696 billion ASKs.

Yet it is JAL’s small fuel hedging exposure that is very likely to give it a tailwind in terms of cost competitiveness. It is approximately 40% hedged at US$80 per barrel at Singapore jet kerosene spot this fiscal year, versus ANA being 60% hedged at US$85 per barrel using the same benchmark in FY15. Financial results for the first 3 months of 2015 are already reflecting this, with a 6.6% year-over-year reduction in all-in unit cost, measured in cost per available seat kilometre (CASK), to ¥12.1 from ¥12.9 in the prior corresponding period. This gives JAL a widened CASK advantage of 7.36% against ANA’s ¥12.99 per ASK in FY14 fourth-quarter, inclusive of Vanilla Air.

Having said that, dissecting JAL’s FY14 cost performance highlights the need to improve employee productivity. Personnel cost per available seat kilometre (ASK) at ¥2.86, was 92.91% higher than ANA’s ¥1.48, the only cost item where JAL’s came in significantly higher than ANA’s. Other advantages, such as the 27.87% lower depreciation cost and 41.16% lower maintenance cost, will eventually narrow as ANA phases out the ageing A320s and 767-300s with deliveries of the former’s replacement, the A320neo, beginning next fiscal year. 3 Boeing 767-300s and 2 A320s are to be withdrawn in FY2015. Simply put, JAL must not rest on its laurels; it must do even more beyond maintaining its headcount at 32,000 and implementing the Amoeba divisional profitability system to 36 subsidiaries by end-FY15, in order to bring its non-fuel unit cost below ¥8.8 per ASK by end-FY2016, which is rather unambitious at 1.14% lower than FY14’s ¥8.90 per ASK, according to its “Medium Term Rolling Plan FY15”.

Once this succeeds, though, and assuming ANA’s stable unit cost performance of ¥9.20-9.30 per ASK by end-FY16, as its cost reduction effort slows down from ¥34.5 billion in FY14 to ¥25.0 billion a year in FY15 and FY16, this is going to produce a meaningful cost advantage for Japan Airlines more than the 5.4% advantage targeted.

ANA & JAL FY15 costs

JAL ANA ASK allocation 4 years

Complexity a winner’s curse in Japan; “Orange Liner” a much simpler endeavour
When it comes to the trait commonly shared by both All Nippon Airways (ANA) and Japan Airlines (JAL) in their glorious times, complexity is the one curse invariably waiting to take place in the winner’s fate, especially for ANA’s domestic strategy in this regard.

ANA’s longstanding strategy of having codeshare and equity partners on its stable made sense back when it was the underdog in the domestic market, with JAL holding 40% of Tokyo Haneda’s domestic slots even by now, leapfrogging ANA’s 37%, according to the country’s transport ministry. Once its partners are taken into account, though, ANA holds around 50% of the 465 domestic slots, compared to JAL’s 184.5.

But the times are decidedly different now, Aspire Aviation‘s calculation shows. During the Golden Week vacation period stretching 28th April to 6th May, ANA and Vanilla Air transported 1,164,475 passengers out of the 2,630,515 total carried by all Japanese carriers, equating to a 44.27% share. This was followed by JAL’s 869,769 passengers at a 33.06% share. Its Osaka Kansai-based low-cost joint venture (JV) Peach Aviation came in 5th with 92,300 passengers at a 3.51% share, whereas Air Do, Solaseed Air and Starflyer, have 2%, 1.97% and 1.49% of passenger shares, respectively. As ANA Holdings Inc. owns 80%, 8.56% and 18.96% of these carriers, ANA’s stranglehold of the domestic market is indisputable with a 49.73% market share by the number of passengers. Indeed, the competitive landscape will be further skewed when factoring in Skymark Airlines’ 166,081 passengers total carried during the Golden Week at a 6.31% market share.

Above all, it is questionable whether the strategic benefit these associates bring to ANA, namely the local focus of these carriers such as Solaseed’s Miyazaki base which is mulling a launch of international service and Air Do’s hugely successful Hokkaido operation, outweighs the potential downside of becoming a management distraction. Turning around Skymark Airlines would not be an easy undertaking, for instance, after taking a 19.9% stake in the bankrupt carrier. Skymark’s net debt quickly ballooned to ¥200 billion from ¥71.09 billion since declaring bankruptcy on January 28, including US$520 million owed to creditors such as GE Capital Aviation Services (GECAS) as well as a US$710 million cancellation fee over its scrapped order for 6 A380 superjumbos.

While assuming the long-term lease of ex-Skymark’s 5 A330-300s under a letter of intent (LOI) signed with Intrepid Aviation makes sense in diversifying ANA’s reliance on Boeing and enables an even faster retirement of ageing 767-300s, talks on a possible induction of Skymark’s 6 A380s for domestic low-cost use remain misplaced as A380 operation is banned at Tokyo Haneda 0600-2300, according to the Japan Schedule Co-ordination (JSC).

Worse still, the cannibalisation of subsidiaries within the same airline group is beginning to show.

Peach Aviation has launched the Sapporo Chintose and Fukuoka routes from Tokyo Narita airport on 29th March and is launching the Tokyo Haneda-Taipei Taoyuan route this summer. Whilst the Tokyo Narita-Sapporo service is the only overlapping route with different departure times, further significant cost synergies could clearly be gained by merging the two carriers with the integration of reservation systems, revenue management, network planning and senior management teams. This is especially true now that the 66,000m² low-cost Terminal 3 opened in April with a 40% lower passenger fee at ¥1,020 and Tokyo Haneda is offering a 50% first-year discount, 30% in the second, and 20% in the third to airlines using the 2300-0600 nighttime slots. Charges at these airports could be lowered with better bargaining power and aircraft utilisation could be maximised using a common A320 fleet, with Peach Aviation setting up a 4th base at Sendai airport for overnight parking and maintenance by mid-2017, according to The Japan Times, just as Skymark is abandoning Sendai as a focus city beginning October 25 this year.

On the contrary to this internal cannibalisation, Japan Airlines (JAL) has only one low-cost joint venture (JV), Jetstar Japan, focusing on two hubs at Tokyo Narita and the 24-hour Osaka Kansai International Airport, in which both JAL and Qantas each own 47.1% of the stake with 33.3% voting rights. Following the ¥5.5 billion injection in November 2013 and yet another ¥5.5 billion exactly 12 months later, as its net loss deepened to ¥11.1 billion in the year ending 30th June, 2014 from ¥8.8 billion in the prior corresponding period, the start of Osaka Kansai and international operations should enable Jetstar Japan’s aircraft utilisation to improve considerably and narrow its losses in so doing.

The “Orange Liner” in call-sign now has 20 Airbus A320s and flies the Osaka Kansai-Hong Kong route since 28th February with the Tokyo Narita-Hong Kong route being launched on 1st June. It has a 11.9% market share during the Golden Week, having hauled 869.769 passengers and Jetstar Group chief executive Jayne Hrdlicka was quoted as saying the “Orange Liner” witnessed an 8% higher unit revenue in revenue per available seat kilometre (RASK) in FY2014/15 first-half ending December 31st against the year-ago period, alongside an 11% higher yield and a 3% lower unit cost, measured in cost per available seat kilometre (CASK).

With longtime Jetstar Airways executive Gerry Turner now at the helm, the “Orange Liner” being a much simpler endeavour looks well positioned for growth in a market where the low-cost penetration rate remains 6%. A swift turnaround of the “Orange Liner” will hold the key to resolving the divergence between JAL’s improving operating profit and declining net profit figures.

Image Courtesy of The Yomiuri Shimbun

Image Courtesy of The Yomiuri Shimbun

JAL’s international growth essential to Tokyo’s hub status
There has been an intense debate in the industry on the diminishing importance of Tokyo’s two airports as transpacific hubs due to an advent in aircraft technology and the move to lessen the currency exposure to the depreciating Japanese yen. This saw the establishment of a West Coast hub in Seattle by Delta Air Lines, which will slash capacity to Japan by 15-20% in 2015 fourth-quarter and decommission 6 Boeing 747-400s whereas United is cutting 11% of capacity to Japan in both 2015 first and second-quarter, as well as 7% in the last 3 months of this year.

Hindering Japan Airlines’ (JAL) international growth unquestionably does not help matters. Even by now many of the newly created international slots at Tokyo Haneda airport remain unallocated which undermine economic efficiency and prevent the downtown airport from fully utilising the 447,000 annual slots, including 90,000 international ones available. The same is true for Tokyo Narita’s 300,000 annual slots, up from 270,000.

Going forward, the Japanese authority – the Ministry of Land, Infrastructure and Transport (MLIT) should start distributing these unallocated and the around 80,000 new slots expected to be created at Tokyo Haneda and Narita airports between now and 2020 even-handedly between All Nippon Airways (ANA) and Japan Airlines (JAL). This is because the previous round of slot allocation, coupled with the Skymark rescue, have more than compensated for the unfair advantages afforded to Japan Airlines during its ¥350 billion bailout in 2010.

Since then, JAL has been relegated to mainly strengthening and deepening alliances when it comes to network development, such as the joint business with British Airways (BA) and Finnair in Europe and with American Airlines (AA) in the transpacific market. In late-March/early April it started codesharing with TAM Airlines on its routes to Sao Paulo from London Heathrow, Paris and Frankfurt, picking up connecting passengers on JAL’s Tokyo Haneda-London/Paris and Tokyo Narita-Frankfurt flights. A similar arrangement to Sao Paulo and Rio de Janeiro for connecting traffic onboard JAL’s Tokyo Narita-New York John F. Kennedy flights also started on April 1st.

Other new codeshare accords include the one with Sri Lankan Airlines on its Tokyo Narita-Colombo route, Hong Kong-Perth with Cathay Pacific, Kuala Lumpur-Perth/Darwin with Malaysia Airlines and Sydney-Auckland with Qantas. An expanded codeshare partnership with Jetstar will also be in place, covering flights from Tokyo Narita to Cairns, adding to its existing codeshare with the Qantas low-cost subsidiary to Melbourne. Passengers can also use JAL’s Premium Economy fares to fly on Jetstar’s flight between Tokyo Narita and Cairns, Melbourne, Gold Coast and between Osaka Kansai and Cairns.

Make no mistake, while these profit-sharing joint business agreements (JBAs) and codesharing partnerships are important in extending JAL’s reach at minimal cost, it would be virtually impossible for Japan Airlines to enjoy profitable growth from a rapidly-expanding US-China transpacific market absent new Tokyo Haneda slots allocated to it.

Japanese carriers such as JAL and ANA are uniquely positioned to capture a slice of the growing transpacific pie, now that the US has relaxed visa requirements for Chinese tourists and businessmen and extended the length of these visas from 1 year to 10 years. According to a Centre for Aviation (CAPA) report, the number of weekly US flights operated by Chinese airlines will outnumber those offered by American carriers for the first time ever, at 2,028 to 1,853 in 2015 third-quarter.

Not only do JAL and ANA offer a considerably higher standard of service and superior cabin products, their Pros origin and destination-based (O&D) revenue management system (RMS) also augurs well for them to issue multi-city itineraries, combining the lure of Japan with the US in one fell swoop. The number of Chinese tourists visiting Japan from January to November in 2014 totalled 2.22 million, an 82.2% increase over the same period a year ago, the Ministry of Foreign Affairs said. This is poised to skyrocket as the country extended the validity of multiple-entry visa for high-income Chinese tourists to 5 years from 3.

Given a level playing field on which to compete, Japan Airlines could prevail against ANA with a more modern and luxurious cabin product. Its “JAL Sky Suite” business class seat boasts a pitch and width of 74 inches and 25.5 inches, versus ANA’s 62 inches and 21 inches specification. The “JAL Sky Premium” premium economy class seat has a 4-inch larger pitch than ANA’s at 42 inches and is 2-inch wider at 18.5 inches. At the extreme, its 787-9 “Sky Suite 787” (SS9) has only 195 seats with 44 business class seats, 35 premium economy seats and 116 economy seats in an 8-abreast or 2-4-2 configuration. This makes its “JAL Sky Wider II” economy seats easily the roomiest in the industry with an 18.9-inch width and 33-inch pitch at a time most 787 operators such as United Airlines opt for the 9-abreast option with 17-inch wide seats.

Unfortunately, the playing field is anything but equal, with the government’s decisions rendering it more unequal time and again. In the meantime, being nimble and simple, Japan Airlines is flying into tomorrow as a profitability leader.

Image Courtesy of Agence France Presse

Image Courtesy of Agence France Presse

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1 comment

  1. Great post bro


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