JAL sees severe operating environment - slashes profit outlook

Japan Airlines (JAL) reported a sizeable jump in profitability in 2007/08 (12 months to 31-Mar-08), thanks to its premium traveler focus, fleet and network downsizing and sales of non-core subsidiaries. But the airline’s margins are still extremely low, despite its impressive turnaround, and the carrier faces a business environment that continues to be “severe”.

JAL will further reduce capacity this year (to Mar-09), in particular by downsizing the fleet deployed on US routes. But the airline still sees steady increases in international yield, due to increased frequencies to destinations where business demand remains strong, such as New York, Moscow and Paris. The airline is continuing to roll out enhanced products and services, as part of its premium strategy.

This strategy is also expected to bolster JAL’s performance in the weak domestic market, where capacity continues to fall and competition with bullet trains and new entrant carriers remains “fierce”. JAL expects rising domestic yields this year, as a result of the introduction of domestic First Class and other service enhancements.

But high oil prices will take a heavy toll on the carrier. Operating profits are expected to fall by 44% this year to around USD480 million and the airline does not expect to pay a dividend for the year just ended, or 2008/09, as it aims to conserve cash.

All eyes now turn to Singapore Airlines (SIA), which reports its full-year and fourth quarter earnings today. The market is expecting a 10% decline in full-year profit on a lack of exceptional gains. Excluding last year’s gains, the underlying business is expected to have improved, due to stronger yields and rising demand.

But SIA's fourth quarter result will come under close scrutiny, in terms of the impact of higher fuel prices, as will the airline’s dividend policy. SIA is expected to be generous this year, but, like its regional counterparts, could seek to safeguard cash levels this financial year, as the business environment sours.