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Japan Airlines and Air Arabia at opposite ends of airline spectrum

10-Aug-2009

What do Japan Airlines (JAL) and Sharjah-based Air Arabia have in common? Absolutely nothing it seems. Reviewing their latest financial results, it is hard to believe the companies occupy the same industry segment and carry out the same basic function, transporting passengers and goods by air. Air Arabia has the DNA of a gazelle, JAL the DNA of a dinosaur.

JAL Group sinks in first quarter, Air Arabia soars

The JAL Group on Friday announced a USD1 billion net loss in the three months to 30-Jun-2009, as revenue collapsed by 32%. JAL’s domestic passenger numbers fell 13% during the quarter, while international was down 17%. JAL stated, “operating conditions compared to a year before were starkly harsher. First and business class traffic were significantly down due to cutbacks in the number of business trips or downgrades to economy class business travel, and leisure demands were weak especially after the outbreak of the influenza in May”.

Air Arabia also published its financial results on Friday, revealing a 10% rise in profit in the (second) quarter ended 30-Jun-2009, as revenue rose 6%. The carrier’s first half passenger numbers increased 20% to 1.95 million. The LCC stated the results “highlight the fundamental strength of Air Arabia’s business model in these challenging global economic conditions”.

JAL contracting, Air Arabia expanding

JAL is undergoing a massive restructuring exercise, trimming capacity and reducing staffing levels. The carrier is making further “drastic adjustments” to its network and fleet size, “so as to more closely match capacity to demand sooner, and allow the Group to improve profitability”. Frequencies will be further reduced on a total of eight international routes from 25-Oct-2009 and connections between Nagoya and Paris and Seoul (Incheon) will be discontinued. A major downsizing of aircraft in this period will affect 15 flights on 14 international routes, where B747-400s will be switched to B777/B767s, and B767s will be switched to B737s.

JAL’s First class service on routes to New Delhi, Singapore and Bangkok, which were key Asian business routes, will be “appropriately discontinued” with the downsizing, as demand for high-end business travel wanes in the poor economic situation.

Air Arabia meanwhile during the quarter launched Air Arabia (Maroc), a JV which operates from the carrier’s second hub in Casablanca, Morocco and currently serves nine European cities. Air Arabia also started operations to Goa, India and Athens Greece, from its main hub at Sharjah Airport.

Outlook: More of the same for both

The differences in the outlooks for JAL and Air Arabia are profound.

Air Arabia will announce a third hub in weeks and expects full-year profit to be positive, while JAL forecasts a (perhaps optimistic) USD650 million net loss this financial year.

On the issue of swine flu, Air Arabia and JAL are also divergent. Air Arabia CEO, Adel Ali, told Bloomberg, that swine flu is a bigger threat to the airline industry than the global economic crisis, stating “a lot of people are not traveling because of swine flu”. JAL stated, “leisure passenger demand shows sign of recovery, as fear of a [swine flu] pandemic recedes, and also supported by the removal of fuel surcharges for travel between July and September as well as the yen's appreciation”.

But on one issue there does appear to be a consensus: the need for efficiency. According to Air Arabia, “the coming period continues to add pressure on aviation sectors and we therefore remain focused on maintaining highest levels of operational cost efficiency”. JAL stated, “while business travel is projected to remain slow, JAL will persevere in the drastic adjustments to our network, down-sizing our aircraft, and implementing "nothing-off-limits" cost-cutting measures to improve profitability”.

The unwieldy JAL certainly has more scope to gain efficiencies than the lean and focused Air Arabia, but when it comes to earning a profit, the differences are stark. JAL, as a premium full service brand, is suffering the same past-generation malaise as many other flag carriers.

The depth and likely breadth of this downturn will demand that flag carriers take far more painful cost-cutting measures than ever before. The fundamental issue is whether the model itself has the durability to sustain another 18 months of these negative economic conditions.


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