ANA returns to profitability but outlook for 2011 is murky


Japan's All Nippon Airways (ANA) has reported profits for FY2010 (ended 31-Mar-2011), returning to the black after net losses in FY2008 and FY2009. But impact from the 11-Mar-2011 earthquake resulted in the group falling short of its forecast operating profit for FY2010 and is creating uncertainty in its outlook for FY2011.

  • All Nippon Airways (ANA) reported profits for FY2010, reversing losses from the previous two years.
  • The impact of the March 2011 earthquake resulted in ANA falling short of its forecast operating profit for FY2010.
  • ANA's revenues for FY2010 were up 10.5%, driven by traffic growth and expansion at Tokyo Haneda airport.
  • The earthquake led to a sudden decrease in passenger demand, particularly leisure travel demand, causing ANA to miss revenue targets.
  • ANA's international business and tighter cost controls contributed to the improved fiscal year result.
  • ANA's outlook for FY2011 is uncertain due to factors such as rising oil prices, exchange rate fluctuations, and the impact of the earthquake.

ANA Group recorded net income of JPY23.3 billion and operating income of JPY67.8 billion for FY2010, reversing net and operating losses of JPY57.3 billion and JPY54.2 million respectively in FY2009. Its operating income fell JPY2.2 billion short of the company's previous FY2010 operating income forecast of JPY70 billion. ANA credits this shortfall to the estimated JPY19 billion in revenues that were not generated the last three weeks of the fiscal year as a result of the earthquake. ANA, however, surpassed its forecast for net income by JPY17 billion, due to lower than expected taxes.

For the year ended 31-Mar-2011 operating revenues were still up 10.5% to JPY1.3576 trillion, driven by traffic growth and expansion of ANA's Tokyo Haneda operation. Revenues had been previously forecasted in Oct-2010 to reach JPY1.377 trillion. ANA would have reached this target if it were not for the "sudden decrease in passenger demand, particularly leisure travel demand" following the earthquake.

ANA's revenues also feel slightly short of the company's initial FY2010 forecast of JPY1.36 billion. This initial forecast, made in Apr-2010, also projected operating income of JPY42 million. But both projections were increased when ANA reported profits for its fiscal 1H2010 in Oct-2010. At the time ANA's outlook for 2H2010 and beyond were bright as the Japanese economy was showing signs of picking up along with recovery in the global economy, giving ANA optimism it would be able to take advantage of the opportunities made available by the expansion at Haneda.

When reporting fiscal 3Q2010 profits in late Jan-2011, ANA decided to retain its Oct-2010 forecast as market conditions remained favourable. Three weeks later, the earthquake and tsunami struck, leading to the unexpected and sudden change in market conditions.

ANA's initial and revised revenue projections for FY2010 (JPY, billions): Oct-2010

ANA's actual consolidated financial performance for FY2010 (JPY, billions)

The sudden reduction in the number of passengers travelling to Japan and last second cancellations of trips during Mar-2011 resulted in ANA being back in the red for its fiscal 4Q2010. For the three months ending 31 Mar-2011, ANA recorded a net loss of JPY14.2 billion and an operating loss of JPY9.8 billion. But in both cases the losses were not as steep as fiscal 4Q2009.

Revenues were still up in fiscal 4Q2010 by 4.6% to JPY318.5 billion, although this pales to the double-digit revenue gains in the first three quarters of FY2010. ANA also had recorded operating profits in each of the first three quarters of FY2010. On a net basis, profits were only recorded for the middle two quarters.

Overall, ANA CEO Shinichiro Ito credits the improved fiscal year result to the group's expanded international business and tighter controls in costs. Operating expensed only increased by 7.2% to JPY1.29 trillion despite higher fuel costs.

ANA says demand recovered across all its international markets after a tough FY2009. International capacity was also up 11.4% as ANA took advantage of the opening of Haneda to long-haul flights by launching routes from the Tokyo airport to Los Angeles, Honolulu, Bangkok and Singapore. Flights from Haneda to Taipei Songshan were also launched while capacity on the Haneda-Seoul Gimpo route was increased. At its main international hub at Narita, services were launched during FY2010 to Munich and Manila while the Jakarta route was resumed.

Until the earthquake struck, ANA was able to fill the extra seats added as a result of the international expansion. For the entire fiscal year, ANA's international load factor slipped 0.3 percentage points to 75.3% as international RPKs were up 10.9%, falling just short of the 11.4% ASK increase. But through the first 11 months ANA's international load factor was up because in Mar-2011 it slipped 16.3 percentage points to 64.8%. International RPKs were down 3.6% in Mar-2011 due to the earthquake while capacity was still up by 20.7%. For the entire year, ANA's international revenues surged by 31.1% to JPY280.6 billion.

ANA also recorded significant improvements in its domestic business. The group's domestic revenues were up 3.4% to JPY652.6 billion although domestic capacity was slightly down. Domestic passenger traffic was up only 1.7% to 40.574 million passengers.

Cargo also showed marked signs of improvement, particular on international routes. ANA's international cargo revenues were up 54.4% to JPY86 billion, fuelled by the global economic recovery and the expansion of ANA's international network. Domestic cargo revenues were also up 1.8% to JPY32.4 billion.

Prior to the devastating earthquake, ANA was clearly on track to remain profitable in FY2011. But the group now warns that its outlook for FY2011 is uncertain. Ito says while economic growth in Asia continues, the rise in oil prices, fluctuations in exchange rates, an uncertain outlook for the global economy and the impact of the 11 Mar-2011 earthquake make predictions very difficult. The company says it will wait until it has more clarity regarding its outlook before announcing a forecast for the fiscal year ending 31 Mar-2012. Typically an initial forecast for the new fiscal year is given by ANA in late April when the results for the just-concluded fiscal year are announced.

While it is too early to quantify the impact of the earthquake on future demand, ANA points out it has already introduced several measures to mitigate this impact. This includes capacity reductions and JPY30 billion in new cost reductions. The capacity reductions are being achieved by decreasing frequencies and switching to smaller aircraft on certain routes. Promotional fares also have been introduced to stimulate demand although this could have an impact on yields.

While ANA's normal operation was impacted by the earthquake, particularly at Sendai airport, Ito points out the carrier "played an important role in helping support recovery efforts by operating relief flights to Fukushima and Yamagata, and providing transport of relief supplies and relief workers".

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