ANA faces macroeconomic and fleet challenges in next stage of recovery
All Nippon Airways (ANA) expects Japanese outbound traffic will continue to recover slowly through 2024, although the airline's plans for next year (2024) have been complicated by fleet availability issues.
Japan's outbound travel was an important traffic flow for many airlines before the COVID-19 pandemic, so it has been closely watched during the post-pandemic period. It has not rebounded as quickly as in other markets, and a full return to 2019 levels is not expected to occur until well into 2024.
The Japanese government was slower than others to remove travel restrictions, and there was also some early reluctance in Japan to travel abroad. However, both these constraints have eased, and the main influence on demand now is the higher cost of travel.
Some overseas markets, such as Hawaii, are performing more strongly, and this is a positive sign for the overall international outlook.
ANA faces the extra problem of grounded aircraft due to the Pratt & Whitney engine issues that are affecting many airlines around the world. This impacts domestic more than international services for ANA, although it is occurring just when the airline is looking to ramp up its overall capacity and improve its earnings.
- ANA's international capacity is at 73.8% of 2019 levels, but growth rate is low.
- Japan's outbound demand is likely to move closer to full recovery next summer.
- Load factors on ANA's routes from Haneda and Narita to Honolulu are above 95%.
- More than 30 A320neo-family aircraft will be affected by engine inspection issue.
ANA's international capacity recovery is still slow to gain momentum
The chart below shows the slow recovery rate for ANA's international capacity, as measured in weekly seats.
The airline's international capacity reached 73.8% of 2019 levels for the week of 27-Nov-2023.
ANA's international capacity, as measured in weekly seats, 2019-2023
Monthly traffic figures show that passenger numbers for Sept-2023 were at 70.6% of the level in the same month in 2019.
While that is a relatively solid rebound - considering Japan had a later start than other countries - it does not reflect the fact that demand is heavily skewed towards inbound travel rather than outbound.
Strong inbound demand has helped offset the weaker outbound traffic.
ANA's monthly international passenger numbers, 2019-2023
Outbound demand recovery will likely stretch to at least next summer
Japanese international demand recovery is significantly behind many other Asian markets, according to Shinya Kanda, ANA EVP and manager for Asia and Oceania, speaking during the CAPA Asian Aviation Summit in Kuala Lumpur on 2-Nov-2023. This was due to Japan's delayed removal of its remaining travel restrictions.
Outbound international traffic is still sluggish, but it is improving, Mr Kanda said. There is likely to be more passenger growth through 2024, and outbound demand will probably be getting back towards normal levels in the 2024 northern summer season, he said.
When travel restrictions were first lifted, many Japanese travellers were still concerned about the risk of COVID-19 overseas. This was initially the major reason for the slow rebound in demand.
However, this hesitancy about overseas travel has largely disappeared, Mr Kanda said. Now the main factor is the higher cost of international travel, exacerbated by the weakness of the yen.
ANA is hoping that actions by policymakers will strengthen the yen by the time the next northern summer travel season begins, Mr Kanda said.
In addition to leisure demand, outbound business travel in economy class has also been slow to return, as many corporations are taking a conservative approach to business trips.
Hawaiian routes have been a bright spot for ANA
Some markets have been performing better than others, however. For example, outbound travel from Japan to Hawaii has been very popular, said Mr Kanda.
ANA's load factors are high on Hawaii routes, and the airline has now activated all three of the Airbus A380s that are dedicated to Tokyo-Honolulu flights.
Data from the US Bureau of Transportation Statistics confirms that load factors on ANA's routes from the two Tokyo airports to Honolulu are very strong.
For Jul-2023, the load factor on the Tokyo Haneda-Honolulu route was 95.6% - up from 91.9% in the same month in 2019.
For Honolulu flights from Tokyo Narita Airport, the Jul-2023 load factor was 95.3%, versus 82.9% in Jul-2019.
The chart below shows that ANA's capacity on Honolulu routes was actually higher than 2019 levels for a peak four weeks in July-Aug-2023. For the week of 20-Nov-2023, capacity was at 88.3% for the same period in 2019.
ANA's two-way capacity between Tokyo and Honolulu, as measured in weekly seats, Jul-2019 to 2023
Pratt & Whitney engine issue forces ANA to trim flights from Jan-2024
ANA recently revealed that it would have to reduce its schedule early next year due to the latest inspection requirements for Pratt & Whitney PW1100G-JM engines.
The airline said that 33 of its Airbus narrowbodies would be affected by the inspections, comprising 11 A320neos and 22 A321neos. This represents the airline's entire Airbus Neo fleet, according to the CAPA - Centre for Aviation Fleet Database.
The inspections are spurred by an issue identified by P&W earlier in 2023, related to powder metal parts manufactured during a certain period. Several airlines are affected by this.
Engine inspections will begin in Jan-2024 - the process will take place in phases, and 25 aircraft will be taken out of service in the Jan-Feb period.
ANA said it would have to cut some flights on certain routes to account for aircraft being out of action during the inspections. This will affect about 30 flights per day between 10-Jan-2024 and 30-Mar-2024, representing 3.6% of ANA's overall scheduled flights.
Domestic operations will be far more affected than international. For the period 10-Jan-2024 to 30-Mar-2024, ANA will reduce its domestic flights by 3.9%. International flights will be reduced by 1.6% for the period 12-Jan-2024 to 30-Mar-2024.
The effect on operations from 31-Mar-2024 are due to be announced in Jan-2024.
Reductions will mainly be made on routes where alternative flights are available on the same day. ANA's partner airlines Star Flyer and Solaseed Air will operate 134 additional flights on some domestic routes during the affected period, and those flights will be codeshared with ANA.
ANA estimates that its revenue will be reduced by JPY8 billion (USD53.5 million) in its 2023 fiscal year as a result of the engine inspections and schedule cuts. ANA's fiscal year extends through 31-Mar-2024.
Cost concerns have replaced travel hesitancy as the major outbound demand challenge
The fact that higher cost is now the main factor holding back outbound international travel highlights a significant change in industry dynamics that has occurred. Broader economic issues have overtaken pandemic-era travel restrictions and customer hesitancy as the main concern for airlines from a demand perspective.
This shows that ANA has done the right thing in not rushing back international capacity too quickly. Strong inbound travel can certainly offset some of the outbound weakness, but a greater recovery of outbound demand will still be needed for more capacity to be added on many routes.
Improvement in the outbound market to Hawaii is certainly a good sign. This is historically one of the most popular international leisure markets for Japanese travellers, so it could be an early indicator of a demand rebound on other routes.
The slower recovery of international traffic has put more importance on revenue from domestic operations. This is one reason why the grounding of the Airbus Neo fleet is coming at a bad time for ANA.
Although ANA has not adjusted its earnings outlook, the revenue hit from the groundings provides yet another challenge in the post-pandemic phase.